When Should Tax Functions Be Brought In-House?

By Brad Weisert

As with all businesses, life sciences companies come in a variety of sizes – from small startups to large public companies. However, it is unclear at what stage of a company’s growth does it makes sense to bring on an internal tax function. Of course, the answer varies depending on the circumstances, and those people making the decision often hear one or more of the following scenarios:

• when the company becomes profitable and begins paying income tax
• when your fees for external tax service reach the $200,000 to $300,000 range
• when you are implementing a complex international tax structure
• when a controller or other finance person designated with coordinating tax services demands that it be done so they can get back to their day job.

There is validity to each of the above answers, but as a general rule, a company should focus on its core mission and not divert resources for internal support until it makes strategic sense to do so. Specifically, when the company’s tax situation has become more complex, you will need an internal lead to coordinate taxes within the company and to manage external advisors and other tax service providers. This may occur prior to a company reaching profitability and paying taxes.

When a company has significant operations in foreign jurisdictions, it should develop and implement a tax-efficient international tax structure. This may trigger the need for an internal resource to make sure not only that it is in compliance with the various tax authorities, but that the company’s day-to-day operations are in compliance with its planned international tax structure.

In other situations, companies may be subject to indirect taxes such as sales and use tax, value-added tax, and excise taxes. While the routine compliance can efficiently be outsourced to external providers, when the amounts become significant, management will want to ensure that it is not only in compliance, but that it is taking advantage of all tax-saving opportunities.  For example, many jurisdictions have full or partial exemptions for items used in clinical trials and other research. Without someone looking at the big picture, these opportunities could be missed.

So what skill level should you look for when hiring your initial tax-focused employee? In the past, many companies would look for candidates with five to 10 years of experience. Their goal was to save money by having this in-house employee take over the tax compliance function and also provide some strategic assistance to the company. This seldom works out as expected, though, as the company will continue to have an external spend (e.g., tax advisor) in addition to the new hire’s wages. That’s because the world of taxes has become so complex that no one person can be proficient in all areas. Consequently, companies often still need to consult with external subject matter experts to have their internal employee’s work reviewed. Furthermore, unless the employee has other responsibilities outside of taxes, they may be idle for periods of time and not achieve optimal productivity.

The tipping point occurs when the business activity reaches a point that only someone inside the company will have the breadth of knowledge needed to oversee the company’s tax policies. Ideally this should be a senior-level person who has a general tax background and who can identify issues and opportunities and coordinate with external tax-service providers. Until a company reaches this point, it’s often more cost efficient to leverage any existing relationships with tax advisors.

Brad Weisert is a partner – tax services – in the San Francisco office of OUM & Co. LLP. He has over 25 years of experience providing tax planning and compliance services to businesses in the fields of technology, life sciences, hedge funds, manufacturing and distribution, private equity, and real estate.