Global tax advisory market slumps by more than US$3bn in 2020


- Market to recover quickly – with forecasted growth of 7% in 2021

- Strong demand for compliance with regulation work to continue

- Fee rates set to fall – say over 60% of tax advisory clients...

The global tax advisory market hasn’t escaped the impact of the COVID-19 crisis, with revenues contracting by 9% (over US$3bn) in 2020 to result in a market size of US$33.4bn, finds a new report by Source Global Research.

However, despite the slump, demand for tax advisory work has actually held up better than many other areas of the wider professional services market, with the global management consulting market shrinking by 13% (US$21bn) in contrast. At the same time, Source is forecasting that the global tax advisory market will recover quickly, with a growth rate of 7% expected.

Compliance services faring well
The Covid crisis has changed the shape of the tax advisory market significantly, with M&A activity and international tax work stalling. M&A-driven tax work contracted by 21% in 2020, reducing total revenues from US$1.6bn to US$1.3bn. In stark contrast, compliance-related tax management fared relatively well throughout the pandemice, despite organisations initially trying to do more of this work in house, with only a 5% contraction in revenues on the back of efforts to shore up cash reserves by taking advantage of tax deferrals and other government support schemes.

Fiona Czerniawska, Managing Director and co-Founder of Source Global Research, said:
“The pandemic has radically reshaped priorities, with many different concerns all vying for space at the top of the corporate agenda. Finance and tax functions are having to balance the demands of tax compliance with the ability to respond to new and unprecedented risks. That balancing act saw attempts to reduce reliance on external support early in the crisis, only for demand to recover as clients recognised that they lacked the capacity and/or capability to carry out compliance work by themselves.”

Brint Ryan, CEO and Chairman at Ryan LLC, added:
“We’re seeing lots of requests for compliance services, which is driven by the fact that many clients just weren’t prepared for this.”

Variation at the sector level
The pandemic has also had a dramatic impact on growth rates at the sector level, with only the pharma and healthcare sectors experiencing growth in tax advisory work in 2020 (19% and 4% respectively). However, looking below the surface at the industry-level, a clearer theme about regulation emerges. The high-tech and telecoms industries experienced significant growth of 22% and 16% respectively, and tax advisory work in the insurance industry also grew by 4%. Regulation is becoming an increasingly significant issue in all of these industries and sectors, and as such is making itself felt through increasing demand for compliance-related support.

Fee rates coming under increasing pressure
For those tax advisory firms that do win work, fee rates are coming under increasing pressure, something that will represent a significant challenge throughout 2021. Just 3% of clients surveyed in March 2020, before the pandemic had truly taken hold, believed that fee rates would fall across the industry; however, by September 2020, that had risen to over 60%. Though the pandemic itself is no doubt the biggest driver of this pressure on fees, it’s also a consequence both of the growing demand for compliance work which, although complex, is not an expensive, highly specialised service, and clients’ belief that a wider range of tax services have been similarly commodified.

A bounceback expected in 2021
Although the market is set to recover quickly this year, growth is likely to be focused in specific areas. The continuing pressure on organisations’ own in-house tax functions will contribute to growth in compliance-related work: Source’s research revealed that once the crisis is over, the area of tax where clients are most likely to increase their use of outside support is compliance (70% of those surveyed said they’d increase the use of third parties for doing this work).

There is also likely to be a resurgence in M&A-related tax work, as many expect the prolonged crisis to result in a surge of restructuring and transactions.

Lisa Stott, Global Lead for Tax Advisory Services at Deloitte, concluded:
“We anticipate a higher uptick [in tax work associated with M&A] because the pandemic has caused executives around the world to reflect on what it is they’re trying to achieve within their business. They’re reflecting on whether they have the right strategies, and how to introduce resilience into their business so they can cope more effectively if anything like this happens again. Therefore, a lot of clients are already making decisions about divestments, expansions, and acquisitions to make their supply chains more resilient.”

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