GE GE Aerospace

By Michael Rapoport and Vipal Monga 

General Electric Co.'s novel tax outsourcing-like arrangement with PricewaterhouseCoopers is the first deal of its kind, but it may not be the last.

In the days after the Jan. 12 announcement that GE would move most of its in-house tax staff to PwC by April 1, more than a dozen other Fortune 100 companies "contacted us saying we want to know more," said Mark Mendola, PwC's vice chairman and U.S. managing partner.

That suggests other, similar deals could follow, as complex tax issues mushroom for big companies and the pace of global change pushes them to seek outside expert help.

Companies generally are reluctant to discuss such shifts in their operations before they occur. Several multinational Fortune 100 companies contacted by The Wall Street Journal declined to comment or didn't respond to questions about whether they might be considering such a change.

Among companies, "there's a lot of interest in outsourcing that function to someone who'll take it over," said Ellen MacNeil, a managing director at Andersen Tax, a global tax-advisory firm.

This type of move stems from a "make-versus-buy decision," she said "There's various ways companies are meeting the need for high-quality services."

PwC declined to name any of the companies that have expressed potential interest in such an arrangement, but the GE agreement "validated" the idea for them, Mr. Mendola said.

Tax issues facing big companies today make the timing of the arrangement "ideal," he said. The Trump administration is reviving discussions of corporate tax reform and floating proposals for a "border adjustment" to tax imports, but exempt exports, and it may pursue a tax break to encourage repatriation of corporate profits held overseas.

The type of cost savings GE expects to realize could encourage other companies to make similar arrangements. Jeff Bornstein, GE's chief financial officer, says the PwC deal would save about $100 million a year for the five-year term of the PwC agreement.

The 600 GE employees moving to PwC will do tax work for both GE and other PwC clients, and GE will receive a share of revenue that the unit generates for PwC. The deal also gives PwC proprietary accounting software GE had developed. The GE employees, who work in New York and Connecticut, will be shifting to PwC offices in those areas but won't be relocating.

Besides the cost savings, GE says the agreement furthers efforts to slim down the organization. The company has shed several units during the past few years, most notably the divestiture of most of its finance arm, GE Capital, which it announced in 2015.

Mr. Bornstein said the company didn't need as big a tax team after the GE Capital separation, and the PwC deal was a "more creative" solution to that issue than layoffs, which would have cost GE $50 million.

Still, outsourcing a company's tax functions isn't new per se -- many smaller companies have done it for years. But it is rare for a company such as GE, which is large enough to be capable of handling its tax functions in-house.

In fact, some observers suggest GE's circumstances may make it a unique case because not many companies of GE's size suddenly slim down and find themselves with more tax employees than they need.

Other accounting and professional-services firms indicated that clients are seeking more assistance for tax and other services. Kate Barton, Americas vice chair of tax for EY, or Ernst & Young, said the firm is "certainly seeing more companies hire organizations like ours to handle tax, internal audit and many other business functions they have often done internally."

It is "the direction things have been moving in for quite some time now, " she said. Companies are trying to cope with "an increasingly complex environment" and are driven by factors such as the pace of change around the world -- legislatively, digitally and financially.

Globalization is a key driver of such arrangements, Ms. MacNeil said. It is "very difficult" for a company to maintain the tax expertise it needs when it operates in many global tax jurisdictions. Industrial companies, where tax work is far removed from their core operations, also are prime candidates, Mr. Mendola said.

Some accounting firms offer a partial variant known as "co-sourcing," in which a firm takes over some of a company's tax work, such as compliance. The financial firm handles tax functions that aren't central to a company -- European value-added tax matters for a U.S.-based company, for instance -- to enable the company's tax personnel to focus on more-important areas such as tax strategy.

McDonald's Corp., for instance, has had a tax co-sourcing arrangement with Deloitte Consulting LLP since 2009. The fast-food chain has restaurants in 120 countries, and Deloitte handles hundreds of foreign tax returns and U.S. state and municipal returns for McDonald's, according to Deloitte's website.

McDonald's didn't respond to requests for comment.

Write to Michael Rapoport at Michael.Rapoport@wsj.com and Vipal Monga at vipal.monga@wsj.com

(END) Dow Jones Newswires

January 30, 2017 08:14 ET (13:14 GMT)

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