Shadow payroll


What is shadow payroll?

For a business to be successful, it needs to have the right people in the right place at the right time. Increasingly, this needs to be achieved with full compliance. This is no small challenge, but when it involves the movement of employees across international borders, those challenges multiply and impact across the entire organisation.

Historically, the focus has been on the pre-assignment and deployment phases through activities such as selection of individuals, cost estimates, building efficient processes for mobilization, supporting the employee (and their family) through the relocation process.

More recently, organizations operating internationally have placed greater emphasis on being compliant with the laws of the territories in which they operate. But with the focus on getting the employee to the host location, compliance efforts have been primarily focused on immigration requirements and on obtaining work permits where they are required.

However, there is still little focus on proactive management of employment taxes which represent one of the largest costs associated with moving staff across borders; typically, around a third of the total employment costs of an international assignee. This is what’s commonly known as your ‘shadow payroll’.

Many organizations ‘muddle through’ believing that the annual tax return process is sufficient, but by then it is usually too late to take steps to minimize tax liabilities; and always too late to comply with monthly withholding and reporting requirements.

The challenges of managing shadow payroll

Notwithstanding internal business drivers to reduce costs and optimize the use of resources, external pressures are increasing each year:

Real time tax settlement

Tax authorities are increasingly requiring real time settlement of tax liabilities rather than accepting settlement through the year-end tax return process. Penalties for late payment will only increase.

Reputational risk

There are greater demands on country tax authorities to maximize revenues, and targeting organizations that move employees across borders offers rich pickings. Improvements in technology enable closer alignment between immigration and tax authorities, increasing the risk of non-compliance being identified and penalties imposed.

Questions you should be asking

  • How much do we pay in employment taxes for our international employees?
  • How do we know this is the right amount; what steps are we taking to minimize it?
  • What resources are involved in the tax calculation process; what is the cost?
  • Are we sure that we are up-to-date and comply with the local employment tax laws?
  • How do the costs associated with international employees get recorded in the books?
  • Do our accounts match the employment tax filing; what future liabilities are building up?
  • How many internal resources are involved in inter-company rebilling and accounting; what is the internal cost?




savings on international employment tax costs



savings on the cost of managing the tax



imposed by tax authorities for non-compliance

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