CGI Group’s acquisition of Logica for $2.6 billion suddenly thrusts the company to a more prominent role among multinational consultants doing business in Latin America. The one edge CGI appears to bring to the table are solutions focused on improving the efficiency of tax collection – a notorious problem that widely afflicts governments in the region. While CGI has done business in Latin America it had not setup permanent offices because of the lack of domestic market size in most Latin countries. With the purchase of Logica, CGI will be gaining offices in Argentina, Brazil, Chile, Colombia, Peru, and Venezuela. “It was not the primary driver of the deal, but it is a nice opportunity to have over time,” said Lorne Grober, senior vice-president of global communications & investor relations at CGI.
Latin American Tax Collection
Before CGI Group bought Logica it derived 42 percent of its business from government clients which will now be reduced to 18 percent as reported by Cormark. CGI has received criticism for such exposure to government, but they have a lot of interesting products for governments, including strategies and software for better tax collection, which is a pertinent issue in Latin America.
The Inter-American Development Bank reports that, “Since tax rates and transaction costs are high, it is not surprising that tax evasion is widespread in Latin America. Tax evasion among both small and large companies is rampant, with the great majority of small and micro companies paying no taxes and formal companies underreporting as a much as 40 percent of sales in some countries, such as Brazil and Panama…”
That lack of tax collection does not only hurt government budgets, but also the businesses that governments have to disproportionately lean on that actually do pay their taxes. Tax rates as a percentage of profits are high in Latin America and the Caribbean, 48 percent on average, while they are 41 percent on average in high-income countries.
CGI recently did a deal with the state of California potential worth $550 million dollars if CGI’s strategy works and the state can collect three billion dollars it would not have been to collect without CGI’s help.
“We take our software and lay it across various tax streams to detect fraud or just make sure money is not paid out in one area if it is owed in another. It is great for governments because they can collect more tax revenue without having to go to the pulpit and demand more,” explained Grober.
The model seems like an easy sell to a Latin American governments – CGI doesn’t collect their percentage if the government doesn’t in fact generate more tax revenue.
Global Delivery Reach
“We like to go deep into markets. The trend is very much focused on global delivery and we approach that not in a strict labor arbitrage sense but instead focus on value while considering risk mitigation and quality. With the acquisition of Logica, our nearshore assets here in Canada and now Latin American, combined with our offshore resources, we have a balanced menu of global delivery options.”