how effe ctive shadow payroll management makes a big ... · is far better understood; however,...

February 2018

How effectiveshadow payrollmanagement makesa big differenceto your business

Foreword byRichard McBride

At Certino, we have identified the shadowpayroll as a massive challenge for internationalbusinesses with complex mobile workforces. Our business was set up specifically to helpcompanies address this challenge. In our first white paper we define shadowpayroll and identify the challenges involvedin managing your international employmenttax liabilities. We have discussed the implications ofmanaging the shadow payroll with a number ofindustry experts to bring you recommendationsfor best practice and how to avoid the pitfalls ofgetting it wrong. I would welcome the opportunity to discusshow Certino can help reduce your costs andcompliance risks with you in person.

[email protected]

03

he internationalemployment environmenthas changed beyond

recognition in recent years. Traditionally, it was

characterised by periodic and pre-defined expatriation assignments.Expats would move abroad formedium to long-term time lengthsto a particular country, and besituated in a specific officeworking for their chosen company. However, with the advent of

technology and the evolution ofmulti-national organisations –together with the rise of neweconomies – the expat culture isgiving way to more fluid, fast-moving and far-reachingprofessional landscape. We areliving in an age of total globalmobility. There are no barriers tobusiness. Employees work acrosscountries and continents. As theybecome more readily mobile, thepace of this change accelerates inturn, with shorter-termassignments, greater geographicalspread, borderless financialtransactions, and so on.This brave new world of

mobility is delivering hugecommercial benefits, with evenbigger opportunities still to berealised. However, it has createdsignificant challenges foremployee management.Moving people around the

world is a hugely expensiveoperation. Historically, hiringexpats has been vastly much moreexpensive than employing local

people. The same is true today.Uprooting someone andrelocating them and their familyincurs a wide array of overheads,in packages and relocation costs.But organisations have to maintainfreedom of movement tomaximise commercial advantage.As such, as companies

continually look to reduce costs,the expat model is giving way toshorter-term, fluid migration. In aworld where the relative cost ofrelocated labour is far higher thanusing local employees, and thecompany has to pay considerableassociated relocation costs – suchas living away from homeallowance, relocation allowance,schooling, hardship allowance, airfares and tax equalisation – moreenterprise organisations are nowreconsidering their 'Buy, build orborrow' strategy: where buymeans hiring someone, buildmeans training someone, andborrow means outsourcing them.

How effective shadow payroll management makes a big difference to your business

Managing mobility:enabling today’s globalworkforce

04

T

or a business to besuccessful globally, itmust have the right

people in the right place, at theright time.Moreover, it must achieve this

affordably, while always remaininglegally and financially compliant.This is a considerable challenge,but when movement of employeesacross international borders isfactored in, it can become aminefield – with the potential toimpact the entire organisation.To be clear: when we refer to

an international employee, weare talking about an individualworking on a traditional long-termassignment (‘expat’), someonepartaking in a formal short-term

assignment abroad for a specifiedperiod of time, or those workingon informal assignments (‘loanedlabour’) – as opposed to short-term business visitors or foreignnationals transferred or hiredon local terms and conditions.Employment taxes represent

one of the largest costs associatedwith this process – typically aroundone third of the total employmentcosts of an international employee. What’s more, international cost

management, in the form of payrolland taxes applicable between therelevant countries, is extremelycomplicated. It’s also scrutinisedmore closely than ever before.In a bid to address these

demands, many organisationshave progressively addresseddifferent aspects of these taxes.In the past, employee

experience was the overridingpriority when relocating. So, allfocus was on the relocationprocess and ensuring theemployee settled in well totheir new host country. As aconsequence, immigrationcompliance and taxes were ignored.Today, immigration compliance

is far better understood; however,taxes are still relatively ignored.Little time to date has been spentproactively managing foreignemployment taxes, otherwiseknown as the ‘shadow payroll’. This has to change…and fast.


International employees:an expensive affair

05

How internationalemployee taxesworkTypically, an internationalemployee will be responsiblefor their actual or deemed(‘hypothetical’) employmenttax in their home country.This liability is limited to theemployment tax due ontheir standard ‘stay at home’remuneration package. Theiremployer is then responsiblefor actual taxes in their hostlocation, plus any additionalor reduced taxes in the homelocation which arise as a resultof the particular assignment.

“Shadow payroll hastraditionally been seenas just a complianceprocess, with notangible commercialbenefit or advantageper se, and zeroinfluence on a positiveemployee experience.To get shadow payrollright, your compliancemust be completelyunder control, butnow there are clearcommercial benefits tomanaging it effectivelyas well.”Chris DebnerFounder, Strategic GlobalMobility Advisory

F


Shadow payrollexplained – and redefined

06

et’s be clear aboutwhat we mean by anorganisation’s shadow

payroll: shadow payroll managesthe employment tax liabilitiesrelating to overseas employeeswhen they move to another countryon a temporary basis. This includespersonal income tax and socialsecurity. Functionally, it runsalongside the standard payrollprocess, so it ‘shadows’ it, as such.Traditionally, shadow payroll has

been defined as:

A method of maintaininginternational tax compliancewhile an employee works abroad.A process in which a USemployee working overseas, forexample, receives compensationand benefits in the host countrythat are shadowed, or mirrored,in the US for calculating,reporting and remitting taxes.Bloomberg BNA

In contrast, Certino definesshadow payroll as:

A comprehensive employmenttax management system thatcovers everything from pre-moveplanning, monthly income taxand social security calculations tointer-company rebilling andposting of transactions in accounts.

A challengingcalculationThere are several challenges withaccurately calculating shadowpayroll. Probably the biggest liessimply in determining whichfactors should be calculated,reported and remitted, as wellas how and when to do so.To make things more

complicated, these various incomesources come from a range ofdifferent places. For example, an employee’s

payroll might be managed by onesource; their benefits by another;their expenses by another, stockpayments by another, locationtracking by one more, and so on.Identifying, following andmanaging this long trail is difficultand time consuming, especially asmost organisations’ mobility teamsare small in number.It’s also constantly changing

due to the large number of datainputs, which makes it complex formost organisations’ existingpayroll systems to cope. Shadow payroll also requires

broad familiarity with a numberof specific issues which fall outsidethe remit of the average,domestically-orientated payrollprofessional. Issues includingexpatriate tax regimes, split pay,hypothetical tax, tax equalisationand tax protection. In short, shadow payroll

represents an enormousadministration burden within the

context of a traditionalorganisation’s payroll set-up.So, most simply do the best theycan. They believe that the annualtax return process is sufficient tomanage everything, not leastbecause they’re not aware of anyalternative process. Many outsource shadow

payroll to their chosen specialisttax partner or rely on their localpayroll or finance functions tomanage as best they can.While this seems logical

enough, the lack of shadowpayroll specialism often preventsorganisations from trulyminimising their tax liabilities inthis area. Usually, by the time theannual tax return is prepared, it’stoo late to comply with monthlywithholding and reportingrequirements, and unnecessarytaxes and fines are paid along theway. There is also the relativelyhigh price of outsourcing in thefirst place. Despite this, organisations

struggle on – because they’re notaware of any better way, and theyhave an obligation to be compliant.

L

How effective shadow payroll management makes a big difference to your business 07

s mobile workingincreases and compliancedemands intensify,

governments expect everyorganisation to manage its payrollactivity tightly, regardless ofgeography.This creates pressure to

maintain effective tax systems.However, many existing HRsystems are not inherentlydesigned to cope with the highvolumes and fast speed of peoplemoving locations. They cannottrack them accurately, or on time. Too often, they simply generate along list of invoices, a paper trailthat attempts to track employeesdown and that remains one stepbehind the real-time situation.Not only can this lead to

incorrect tax calculations, but itcan have more wide-reachingimplications.Incorrect financial statements

may mean that costs are retainedon the company’s balance sheet,rather than in its P&L.Valuable resources are tied up

and poorly used in managing thewhole process, and ultimately

these inconsistencies can put theentire company at risk of failure inthe event of tax audits.This is a headache for shadow

payroll compliance. It runs the riskof substantial fines, wasted man-hours and resources, a lack ofindividual accountability andneedless additional tax paymentsin the form of double or multipletaxation. Not to mention potentialreputational damage. Government tax authorities

around the world are being urgedto maximise revenues to takeadvantage of today’s globalmobile workforce.Naturally, they are targeting

organisations that move employeesacross borders, as they offerpotential rich pickings withrelatively low risk. The objective is clear:

businesses must get shadowpayroll right, in real-time.

Tax compliance: a riskybusiness

BEPS – and what it means for‘globally mobile’ organisations Base Erosion and Profit Shifting (BEPS) aims to taxthe profits of companies based on where they areactually conducting their business and creatingtangible value, rather than where they choose to filetheir tax returns. BEPS is set to majorly impact the

way in which organisations manage and report ontheir globally mobile workforce; and shadowpayroll will be a key factor.

As BEPS gains momentum, organisations must(a) know where employees are, what they’re doing,and to be able to report thereon; and (b) makedecisions on where tax liabilities arise foremployees who cross international borders.

“Reputationally, theconsequences of notgetting employmenttax right are great – andcan extend beyond thetax sphere. So, shadowpayroll simply has torun on rails. It can’tbe an afterthought.It must be resourcedproperly, given clearaccountability and becompletely joined up.”Andy SeearGlobal Head of Employment Taxes,AIG

A


Recommendationsfor best practice

08

bove all, shadow payrollbest practice is about‘getting it right first time’:

through the effective planning,deployment and tracking ofemployees as they move fromplace to place. With existinghardware, personnel and processesseemingly lacking, this might seemlike a mountain to climb, and evenimpossible to achieve in thetimescales required. But there isgood news. Organisations do not need

to invest money in advancedinfrastructure, expensive systemsand manual processes to makeshadow payroll work for them. Instead, they can automate

the entire function – removing thechance of human error, reducingmen hours, ensuring compliancein real-time…and saving money.

Ultimately, this automated solutionprovides peace of mind thatyou’re paying the right amount oftax in the right place, at the righttime. All of which significantlyreduces your overall employmentcosts (including administrative andcompliance expenditure, and‘excess’ taxation).An automated shadow payroll

solution can consolidate yoursystems and run data on yourbehalf, scrutinising its accuracyand authenticity to provide reliableoversight for consistency andcompliance purposes. Becausethis process is ongoing, you’renever left vulnerable and alwaysenjoy an optimised tax positionwith minimised tax liabilities.

How it worksEmployment tax is an environmentexperiencing heavy compliancedemands and constant costcutting. Existing processes arerather fragmented. Policies andprocesses are managed by HRrather than tax experts; payroll isoutsourced (along with shadowpayroll); re-billing and accountingprocedures are handled by thefinance department; and annualtax returns are also outsourced tosomeone else. Tasks are disparate,and difficult to track and manageas a whole.Therefore, the ability to

automate the entire end-to-endprocess represents an incredibleopportunity to save significant

A

“Automating shadowpayroll solutionreduces your businessrisk and cost, ensuresyou report the rightinformation in real-time from day one,and enables you tomake better businessdecisions.”Damian WalshPartner, Heidrick & Struggles

“When someonerelocates, the lastthing they want toworry about is tax.They’ve got so muchelse going on – a newjob to start, a newproperty to move into,a different culture andenvironment, possiblyschooling for the kids…but with an automatedpayroll system,employers don’t haveto worry about the taxprocesses either.”Simon RogersManaging Partner,Talent Mobility Search

AVOI

D DO

UBLE OR MULTIPLE TAXATION

REDUCE COSTS

AVOI

D CO

STLY FINES

ENHANCECOMPLIANCE


time and money across the board.Now, at a glance, you get anoverview of all your tax liabilitiesand everything you need to pay inevery market you're working in. This information updates as it

happens, with changes recordedaccurately in a format that’s easyto understand. When you need to pay tax,

this is managed better too. Automation optimises your

payment calculation by taking aglobal perspective of your taxlandscape across all active marketsyou’re operating in, as opposedto a local, market by marketapproach which someone basedin an individual tax office wouldusually do.

“In HR, an industrywhere value isnotoriously difficultto measure, shadowpayroll automationprovides a tangibleway to categoricallyrecord the commercialvalue of what you’resaving the business –day by day.”Didier CharretonChief HR Officer, Anglo American

The key benefitsof automating yourshadow payroll


Executive summary

lobal workforce mobilityis creating exciting newpossibilities for

organisations all over the world. As technology advances and

economies evolve, employees aremoving faster and further thanever before. But alongside thesubstantial commercial benefits,there are increasingly complexchallenges for those tasked withmanaging this migration.International employment is

vastly expensive. From an HRperspective, there is a wealth offactors to consider. As legislationincreases and compliancedemands intensify, HRprofessionals must strike a balance

between legal practice andfreedom of movement, all whilereducing costs. Failing to achievethis can put an organisation atgreat risk, ethically and financially. With employment taxes

representing one of the largestcosts associated with employeemobility, innovation in this areacan pay large dividends.Shadow payroll is a great

example. But unfortunately, it’s notwell understood. That mustchange – but how?Above all, organisations need

to ‘get it right first time’: bytracking employees accurately andpromptly as they move from placeto place. This is hugely time-

consuming and expensive usingconventional approaches. However, there is a better

alternative.Shadow payroll automation

removes human error, reducesman-hours, and ensurescompliance while saving money. So, you enjoy peace of mind

that you’re paying the right amountof tax in the right place, at theright time.

G

Certino gives you the tax intelligence you needto manage your shadow payroll. We enable ourcustomers to understand and manage the taxliabilities of their global mobile workforce byautomating the entire process. As a comprehensive employment tax

management system, Certino looks after theentire spectrum of international employeemovement, from pre-move planning throughshadow payroll calculations and intercompanyrebilling, to the posting of transactions in relevantaccounts. Our fully integrated approach includesglobal mobility, employment taxes, and payrolland finance.

• Reduce costs and minimise tax compliance risks, consistently and easily.

• Stop investing money in manual systemsand processes for shadow payroll.

• Consolidate your existing systems and run data using automated processes to ensure accuracy and authenticity.

• Fulfil compliance demands, in real-time.

About Certino

To find out more, call +44 (0)20 7118 1405 or email [email protected]

how effe ctive shadow payroll management makes a big ... · is far better understood; however,...

Documents