18 March 2021
It’s no secret that there’s a lot to consider when it comes to calculating international employment tax for shadow payroll.
Mobility, Finance, and Tax teams are excited about an improved way of calculating shadow payroll and streamlining their tax planning by optimising each country’s tax positions.
This is a solution that significantly reduces shadow payroll overpayments and underpayments, simplifies the entire process, and enables both transparency and visibility at a global level.
In this blog, we look at how automated shadow payroll can potentially save you millions in international employment tax overpayments, while removing human error, reducing man-hours, and ensuring compliance.
What is a tax position?
Tax positions enable best practice in the production of shadow payroll calculations by applying the correct tax treatment depending on the employee’s facts, circumstances and wage payments in each host country. This allows for tax planning through payroll where possible, and ensures accuracy month-on-month.
Despite incredible advances in process improvements and technology, end-to-end fully automated shadow payroll is often an elusive goal.
This is an important question to consider. A fully functioning seamless payroll process will help reduce overpayments and reduce costs elsewhere in the business operations.
There’s a lot of moving pieces when it comes to calculating international employment tax for shadow payroll – from a lack of specialist tax experts in the host country payroll teams, knowing whether something is taxable or not, to differences in how tax is calculated in different countries.
Yet, the expansion of many companies’ globally mobile workforces will continue to bring increasing challenges as they grapple with ever-changing tax, legal and cultural environments.
Not to mention that it’s usually not just one person or one function’s job (either in a centralised or local function); it’s one piece of what you do every day. For example, it can often take 20 times the effort to process payroll for one of your hundreds of assignees than for any of your tens of thousands of other employees. Meaning, days or even weeks can be spent pouring over spreadsheets in an effort to ensure payroll compliance for your assignment population in each host country.
“The biggest challenges for global mobility and/or global payroll teams will include: centralising systems and process, embracing automation, staying accurate and compliant, and keeping track of the payroll requirement of a globally mobile workforce.”
Moreover, with compensation taxed differently from one country to another, local and global payroll teams are not always familiar with all the nuances of expatriate taxation nor with tax gross ups.
There are major differences in expat regimes through payroll and what needs to be claimed back (including special deductions and allowances). What tax positions are in place and what do local payroll instructions look like in such circumstances?
Managing all of this manually isn’t ideal: Say you don’t understand what reliefs are available and what you could be claiming. Many hours are spent with the consequence that not all the available reliefs are claimed through payroll, incorrect reporting in the home and host countries and the administration to reclaim overpaid taxes mounts up.
In addition, to reclaim overpayments from the Authorities may prove difficult or will take months or even years tying up cash. Obtaining the employees’ cooperation, especially if that employee has left the company, to refund overpayments can also be problematic.
From the limitations of information access through to the frustrations with siloed information and fundamentally flawed manual approaches to shadow payroll – global mobility along with payroll teams have suffered a lack of automation for some time.
Add to this translating the information from many more different sources – expenses reimbursements, tax gross-up, and determining what becomes taxable – consolidated and reported on a local payroll. And you can quickly see the challenge of bringing together all the different calculations and how time-consuming and error-prone it can be.
While it’s far from ideal, it’s common for companies to accept that they’re going to have to overpay, and they’re going to have to have a rebilling process for corporate tax or project billing purposes where overpayments, and underpayments, will have an impact. Thus, leaving it a highly inefficient and costly process to run a shadow payroll with possible knock on effects.
If you’ve not planned in costs for employment taxes when you’re sending someone to work in a certain location, it could cause your project to go over budget – and significantly so, because the tax piece is often a very high percentage of the overall cost of the assignment. When costing the income taxes plus the social and payroll taxes, depending on which country it can be upwards of 50 to 100% in addition to the compensation package.
When companies don’t get it right each month, at the end of the year when an assignee files a tax return (because they didn’t include an employee on shadow payroll or shadow payroll is underestimated), the business gets hit with huge and unexpected costs – instead of it being spread out throughout the year and planning for in budgets.
“Not getting it right one year can create a recurring effect of interest and penalties and if underpayments or overpayments are enough, it can create more audit red flags.”
Below is our recommended shadow payroll best practice approach. This list is not exhaustive, and in our experience, most companies will require a specific and tailored experience.
While manual processes have been used for many years, the shift to a more remote workforce and cross-border employees is exacerbating the complexities of this costly approach.
Although automation is part of the process for some companies, often it doesn’t flow to a regional level for shadow payroll.
Yet, an automated approach to shadow payroll can significantly simplify the process.
Shadow payroll automation removes human error, reduces time spent, and ensures accuracy of compliance. It significantly reduces costs not just tax and payroll costs but also across all departments involved in shadow payroll processing.
So, you enjoy peace of mind that you’re paying the right amount of tax in the right place, at the right time.
The typical shadow payroll process is often highly disparate. There’s significant value in driving towards a solution that provides a single version of the truth across the entire company, at a global level in order to:
There’s an abundance of technology solutions for global mobility available at the moment from relocation tools to tracking compensation and assignments management, but so many of them are not joined up.
An end-to-end automated shadow payroll approach should slot in seamlessly with those tools as necessary such as global tracking and compensation gathering tools, or even replace or supplement such tools. In conclusion, there are many operational and cost-saving benefits.
Learn more about how you can streamline and automate shadow payroll processes and optimise tax positions by booking a demo today.
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