When external service providers and their customers share facilities, equipment and other enterprise assets, the parties need to structure the tax rules. To some extent, tax liability is shifted and contractually allocated by agreement. But some taxes cannot be allocated in advance because governments impose the taxes on one or the other of the two parties, or impose joint and several tax liability. Prudent tax planners therefore negotiate for:
- Allocation of tax liability.
- Identification of the roles that the parties will play when a tax audit occurs, and when taxing authorities act adversely to one or the other of the parties.
Protection of the tax revenue is a major public policy. Tax policy may be focused on individual ways in which outsourcing and international trade in services might affect governmental tax collections.
On one hand, outsourcing may generate tax revenues based on value added taxation or sales taxes. But it may also reduce revenue from employment taxes and social charges. Reduced tax burden might be used to purchase more goods and services, with a resulting multiplier effect on creating new employment and taxable profits.
International outsourcing can involve differing tax regimes. For example, Brazil taxes the importation of services. Enterprise customers and their service providers should identify how to allocate tax burdens.