Tag Archives: international payroll

Two Tax Planning Strategies to Reduce Expatriate Costs

Eric Loff – Global Tax Network

The tax cost of an international assignment can be significant and companies struggle to find ways to manage these costs.  This article outlines two straightforward strategies for reducing the tax costs of your expatriate program.

Where do those excess taxes come from anyway?
Excess tax costs associated with an international assignment include the actual taxes paid by the employer on behalf of the employee which exceed the employee’s tax burden as calculated under the company’s tax equalization policy. But don’t worry. There are a variety of tax planning techniques that can reduce these excess tax costs. Two common ones are:

  • Paying benefits-in-kind in lieu of cash payments
  • Proper timing of the assignment

Read on to learn how these tax savings strategies work. Continue reading

International Payday Rules – Even More Countries

Jacque Vilet – Vilet International

Last month’s article entitled “International Payday Rules from A to Z” was well-received by our readers.   Many of you requested the same information for some more countries.   This post is a follow-up, with even more countries!

As a reminder, we will focus on some basics:   legal rules affecting paydays and legal currency allowed for payment of wages.  These provisions are for local national staff, not expatriates. Everyone knows that the most important employee relations issue is to pay employees correctly and pay them on time.

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International Payday Rules from A to Z

Jacque Vilet – Vilet International

Have you ever wondered about the legal requirements that impact how your employees are paid around the world?   Or, if you have an employee(s) in a start-up operation in a new country, do you know how they should be paid?

This article addresses a few facts about country payrolls that you might like to know.   We will focus on some basics:   legal rules affecting paydays and legal currency allowed for payment of wages.  These provisions are for local national staff, not expatriates.

Below is a table showing the requirements for one country from A to Z with the exception of “X” and  “W”.   There are no countries starting with those letters.

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Employment in France – A Quick Checklist for Employers

Guest Author:
John Tinsley – Compandben.com

Editor’s Note:  This post is written by John Tinsley, Managing Director and Owner of Compandben.com, a Geneva-based HR consultancy.  John is an HR practitioner with over 25 years of experience in Europe and the Middle East.  John’s company offers assistance to employers in finding reliable local payroll partners in over 100 countries.  He also provides consulting services in areas such as labor contracts, employee handbooks, benefits, and compensation.

Employment in France has some unique requirements and challenges.  For employers establishing businesses in France for the first time, the following checklist is a handy guide of what to consider:

  1. All employees in France are notionally attached to a “Convention Collective” or Collective Agreement for their industry. The agreements are very similar but there are variations between industry in terms of vacation, social charges, and termination indemnities, so employers need to define what their business is. As an example,”Telecoms” wouldn’t be detailed enough. “Provision and implementation of routers for wide area networks” would be ok.
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Base Salary – Not So Basic!

Chuck Csizmar – CMC Compensation Group

Ever find yourself confused when asked to provide an international employee’s annual rate of pay?   Compared to the US, you will find scant uniformity between countries as to when and how monies are paid to employees, and this diversity can lead to confusion, misreporting of data and the potential for internal equity squabbles.  It is especially a concern when a US Manager attempts to hire a foreign local national without being certain of country-specific pay practices.

To a US employer, the term “annual base wage” or “annual salary” is simply the cumulative amount of payroll dollars (regular paychecks) dispensed over a twelve month cycle.  However, in many parts of the international community, it’s a bit more complicated.

Numerous countries consider statutorily required or common practice holiday (vacation) pay and Christmas (December) payments as part of what they term “basic salary” – which they report as a monthly calculation.  So what is the annual salary?

Defining Your Terms

In the US, annual salary is a common reporting term, an identifier to the company and the employee of the value paid to each position. To quote an annual salary is common practice.

The trick when considering global practices is to remember the distinction between the two annual terms:

  • Base pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed
  • Basic pay – the amount of non-incentive wages or salary paid out over a twelve month period for work performed, but including additional payments (usually in monthly increments) not directly related to the work effort

Some US companies prefer not to deal with the issue, relying instead on the US model of quoting an annual salary – then dividing by the total number of monthly payments due in order to calculate the monthly gross paycheck.

A client of mine once insisted on offering a candidate 75,000 euro, but no more for a key position.  When informed that in Belgium an extra month (13th) is common, and in fact mandated in many collective agreements, the response was “fine, as long as the total base pay isn’t higher than 75,000 euro.”

That candidate did not accept the position.

Here are a few representative examples to illustrate the diversity of practices across the globe.

  • Singapore:  While a 13th month payment (Annual Wage Supplement) is not mandated, it is common practice.  Executives typically receive 1 to 2 months pay as an additional bonus.
  • Mexico:  Companies are mandated to give employees a Christmas bonus equal to 15 days pay.  Common practice is to grant 30 days.
  • Peru:  Employees are entitled to a 13th and 14th month bonus; the 1st extra month is paid in July and the 2nd in December
  • Italy:  In December, employees are paid a Christmas bonus equal to a month’s salary.  In many contracts a 14th month’s salary is included and is paid in June.

The extra payments are not rewarding work performance, but typically provide extra monies for either vacation time or Christmas.  These practices are not commonly followed in the US.

What to do

To avoid confusion when dealing with local national employees it is helpful to talk in terms of monthly pay, the term commonly used by the employees.  No matter how many monthly payments are made, for whatever reason, simply multiply the payments to reach the annual figure.  To your international employee that is considered an annual pay entitlement, though not an annual salary as practiced in the US.

When reading compensation surveys make sure to check the definitions used; oftentimes the survey will report both an annual salary and a “guaranteed annual cash” – the latter inclusive of holiday bonuses and extra month’s pay.

Avoid setting a US-style annual salary and then dividing by the number of required payments to derive a monthly pay.  Instead, determine what you will pay on a monthly basis and multiply those payments by country-specific statutory requirements and common practice to derive (build-up) the annual salary.  It’s a bit more confusing for US companies, but it will be more meaningful for your international employees and likely save you employee relations issues down the road.

More About Chuck:

Ten Tax Tips for Twelve-Thirtyone: Year-End HR and Payroll Actions for Global Mobility

Claudia Howe – Global Mobility Tax, LLP

Wow!  Where did the year go?  Now that it’s almost over, HR and payroll professionals are working hard to finish out the year.  In the world of expatriate compensation and taxation, here is a reminder list of 10 things to do before December 31 (for our international readers, I realize this will be a bit US-centric, but hopefully useful nevertheless):

Tip #1: Pay all taxes due for jurisdictions that do not have a 12/31 year-end
Some countries have different year-ends, for example:  Australia = June 30,  Hong Kong = March 31,  New Zealand = March 31,  UK = April 5,  South Africa = February 28.

If taxes are not paid throughout the year or by 12/31 (especially in the first year of assignment), the employee or the company (for tax equalized assignees) may lose out on claiming important foreign tax credits on the US tax return and could have a nasty surprise at April 15.  This is due to the fact that the US only allows tax credits on the US return against taxes paid or accrued during the tax year.

For example:  Suppose you have an expat from the US in the UK since June 2009 and have not quite been able to get regular monthly UK tax payments set up.  If  UK taxes have not been remitted to Her Majesty’s Revenue and Customs (aka UK tax authorities) before 12/31, they cannot be claimed as a credit on the US return, causing temporary (and potentially permanent) double taxation!

Tip #2:  Pay all US taxes due through payroll
Perhaps you are aware of a very large January bonus that was not withheld at the top marginal rate and on which a US tax payment  should be made to avoid the underpayment penalty.   What are the options to make the payment?

  • Option 1:  send a check in the mail to the IRS with an estimated tax payment voucher (1040-ES – Q4, due January 15).
  • Option 2:  make the payment through payroll before 12/31.

Best choice?  Option 2.  When making payment through withholding, the IRS will treat it as evenly paid throughout the year and this will minimize/eliminate estimated tax penalties that could otherwise apply.

Tip #3: Update your tax accruals
Year-end budgeting is in progress.  If there are liabilities out there – be it US or foreign tax liabilities that will come due, it is important to accrue for them so that the financials are correct and also to avoid surprises later on.

Tip #4: Review relocation Gross-ups
For folks that were relocated during the tax year but are not tax equalized, a relocation gross-up should be processed if the company promised to pick up the taxes on the taxable items such as temporary lodging, temporary transportation, etc.  Many major relocation companies will do this for you, or will at least give you the amounts to be grossed-up.  Tax professionals can also be useful here especially if you are relocating an executive with the expectation of no tax detriment:  your 25% supplemental rate would likely not cover that tax bill and you could end up with a disgruntled exec at tax time in April.

If you process gross-ups at year-end, don’t forget to send a courtesy email to the employee informing him/her why the last paystub or the W-2 looks so much higher all of the sudden.  And be sure to process the payments of withholding through payroll (see Tip #2, Option 2 above!).

Tip #5: Review expatriate compensation details for W-2 inclusion
The tricky part of expatriate compensation is that it is usually not delivered all from one location;  many items such as housing, children’s education, local tax payments, etc.  are paid from the host location and are not channeled back to US payroll for inclusion in the W-2 (which, of course is required by law:  all compensation no matter where or how paid must be reported to the IRS on the W-2).

It is especially at year-end that I am reminded that our colleagues in payroll are indeed the unsung heroes of corporate America:  they are expected to deliver correct payroll on-time with 100% accuracy all the time – talk about stress! And no-one stops by to say:  “Thanks, Andrea, for getting my W-2 right – I know it must have been a challenge”!

Tip #6: Review withholding on US bonus, commission and equity compensation payouts
For US expatriates on assignment in a foreign location, remaining on US payroll, usually federal (and sometimes state) withholding will be turned off.  In lieu of the actual withholding, a hypothetical tax withholding for tax equalized folks is implemented or a fixed withholding amount for the foreign jurisdiction is taken out of the pay.  Since oftentimes these are fixed dollar amounts per paycheck, the withholding on bonuses or commissions are easily overlooked. Better late than never – now is a good time to review and ascertain that the correct amount of withholding has been taken out of these type of payments to ensure that the employee does not owe the company or the governments any underwitheld amounts.

If actual federal/state taxes are withheld from executive or high-income taxpayer’s bonus and commission payments, and if the person is tax equalized, you will want to ensure that taxes were withheld at the highest marginal rates, not the 25% supplemental rate.

Tip #7: Finalize your Authorization List
Make sure to finalize the list of employees that are eligible for tax services and let your tax service provider know before 12/31.  Delays beyond that date could delay the kick-off for the tax season.  Then your employees could be left wondering if their taxes will be taken care of – or not?

Tip #8: Sign your Engagement Letters

Your tax firm may not be able to provide services until they get that signed engagement letter back from the company.  So better check with the person who signs the letter to make sure it get out and not hung up in legal or procurement.  Again, delays could cause problems for your employees.

Tip #9: Solicit the completed 2009 travel calendars from all assignees
This can be coordinated with the tax firm you are using; the travel calendar is one of the most important items in the tax preparation process.  Most will supply you with an automated calendar at the beginning of the year to make this process easy, but of course, your assignees have to use the tool!  Tax firms spend almost half of the tax preparation time on reporting compensation in the correct format and sourced to the correct jurisdiction.  The travel calendar is a key item needed for this exercise as well as to determine tax residency status, qualification for tax exclucsions, etc.  The earlier the tax professionals can get their hands on it, the better!

Tip #10: Don’t forget to enjoy the holidays!
We all tend to get very stressed at year-end – it is a hectic time, after all!  But sometimes we do have to remind ourselves that we need to take a deep breath, sit back, and relax…and enjoy the Season!

Happy Holidays!

More about Claudia:

Can We Employ Them HERE When They’ll be Working THERE?

Alan Freeman – LOF International HR Solutions

We recently addressed a colleague’s question that echoed one we hear fairly often.  “We have an operation in Country A and want to hire our first employee in Country B.  He is a national of Country  B, will  continue to live there while working for our company, essentially all his work activities will be conducted in Country B and he will not be an expat.  Can’t we simply put him on a Country A  contract, enroll  him in Country A social insurance and our company benefits schemes, pay him through the Country A payroll and all will be well?”

Indeed, it is a true story (I am NOT making this  up!) that a senior executive once told me that he intended to hire seven employees in France under UK contracts and payroll from the UK.  His rationale?,  “We don’t want to have the extra burden of  setting up new administrative capacity in France and, besides, I don’t want to get tangled up in those restrictive French employment laws.”

While the desire to avoid the costs and efforts of establishing operations and additional administrative burden in “new” countries is understandable, it is not wise.  Here’s why.

What are the key issues?

In most countries, a person resident in the country and performing services in the country is considered an employee in that country.  It doesn’t matter where the payroll is paid, where the contract is issued, or what country the employing entity is located in.

In our example above, the likely circumstances would be:

  • The government of Country B would assert that the employment relationship must be governed by Country B’s employment laws.  This means that a local contract, and any additional “work rules” and requirements, must be executed in accordance with Country B’s rules.  This also means that, on an ongoing basis, the employer is required to manage the employment relationship under the terms of Country B regulations.
  • The employer and employee would be subject to Country B social insurance and, potentially, other mandatory program requirements, such as funded termination plans, 13th and 14th month payments and mandatory benefits.  Social insurance and other contributions usually must be withheld from payroll and remitted in accordance with Country B regulations.
  • The employee will be subject to income tax in Country B, not only on income generated related to his work in Country B but, potentially, on his worldwide income.  Many countries require regular ongoing income tax remittances as income is being earned (so-called Pay-As-You-Earn or PAYE arrangements).  In such cases, payroll once again is required to properly withhold, remit and report on income taxes in a manner akin to what must be done for social insurance.
  • If based upon Country A parameters, the employee’s compensation and benefits package probably will not conform to Country B legal requirements and market practices.  The employer could easily be paying too much or too little and if currencies are different, and there are exchange risks to consider.  Each country has unique practices for mandatory and supplemental benefits, and the latter are usually integrated with local social plans in some manner.  In the end, the inappropriately designed plans could be quite problematic and the employee would have the burden of dealing with them.
  • Finally, although it is not a purely an “HR” issue, there is a significant corporate risk that HR professionals must be aware of when setting up employment in additional countries.  Simply put, if an employee engages in business activities in a given country, especially if these activities produce revenue, the local authorities could rule that those activities create a “Permanent Establishment”, or PE.  A PE is an ongoing business that is subject to local country corporate income taxes.  If the company has not carefully established a local business entity that serves both as the employee’s “employer of record” and as a means for putting limitations around in-country business activities, then the authorities may assess corporate income taxes against the employer’s revenues both in-country and elsewhere.  To illustrate a worst case scenario, if our example employee is on contract with the Country A entity and triggers a Permanent Establishment ruling in Country B, not only could the company’s Country B revenue be subject to Country B corporate income taxes, but Country B might also demand taxes on all of Country A’s company global revenues.

Is there a simple solution?

Yes. Local employees must be employed on local terms and conditions, in accordance with local market practice, by a local employer-entity, and paid via local payroll services that ensure compliance with employment, social insurance and income tax regulations.  Oh, and by the way, if per chance the target employee doesn’t already have the appropriate immigration status, Work Permit and Residency Visa requirements come into play as well.

Exactly how the above can be accomplished is dependent upon what’s possible and appropriate in each country.  It isn’t overly difficult or expensive to “do it right the first time” and it is much less expensive and disruptive to the business than not doing it correctly.

More about Alan:

LOF International Human Resources Solutions, Inc.

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Payroll for Expatriates – How Hard Can This Be?

Dave Leboff – Expaticore Services LLC

Why does it seem that expat payroll administration is so hard to get right? Why is it so hard to deliver pay correctly and timely to this class of 50 or 150 important employees when it seems so smooth for the other 10,000 or 100,000? The answer lies in the reality that payroll for expatriates often seems to be the second job of those involved.

Expat policies are developed with care and designed to compensate the employee fairly, facilitate mobility, be competitive with peer companies and are sensible economically. Policy development usually sits within the HR function. Executing that policy always requires the involvement of your payroll function which has to deliver and record expat compensation and benefits correctly and compliantly, in one or two countries concurrently – and often multiple two-country permutations.

Payroll professionals are talented, hardworking experts who handle thousands upon thousands of domestic pay transactions with 99+% accuracy. But their success is dependent upon the efficient application of rules to situations – many of them coded in the software they use. For example, limits for FICA or 401(k) contributions in the US require no effort by the payroll professional. They correct limits and computations are part of the tools they rely on.

With expatriates, the rules are not built in. For example, a US employee working on assignment in Mexico may have US payroll running every two weeks. In Mexico it may run every month. In Mexico there may be requirements to deliver 13th month and vacation pay as well as other legislated perquisites. How should this be reflected on the US payroll? Should the expat receive the extra Mexican benefits or should the payroll delivery be manipulated to eliminate them from the gross deliverable? There are foreign exchange interplays. Splitting pay is often involved. Paycodes and general ledger coding relevant to expat benefits need to be organized so that the underlying accounting gets done correctly.

As you can see from this simple example, payroll professionals must not only clearly understand how the company wants to address compensation and benefits for expats, they need to drive many decisions relating to how the compensation and benefits are delivered, how they are accounted for, how changes will be authorized and instructions presented to them. They need to ensure that there are proper codes set up so that items that may be exempt from tax in another jurisdiction show up as taxable in theirs if appropriate. They must understand when and how to “gross up” for taxes, which is not a simple process in many cases and software managing payroll around the world does not often have grossup capability built in.

So the next time you ask “why can’t the payroll department get the expats right?” understand that they are handling expat concepts that are unusual and complex. There are ways to reduce the burden on payroll professionals who deal with expatriates. We will continue to address these issues over time within this International HR blog.

More About Dave:

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