What are the risks when increased global workforce mobility meets stricter payroll requirements?
Often when an employee goes on a work assignment where the host nation requires that worker to join the local payroll, this triggers the process known as shadow payroll. That is, the employer needs to run parallel payroll processes, one at home to continue paying the employee, and another “shadow payroll” in the host country to meet tax filing obligations.
The trend is more
Shadow payroll has always been complex. But today, instances where it becomes necessary are increasing. Not only is a greater percentage of today’s workforce globally mobile, but host nations are becoming increasingly more demanding regarding who must join their local payrolls.
Local tax jurisdictions are recognizing they can significantly reduce their own operating costs by shifting the burden of taxation onto employers. So instead of an annual or quarterly reconciliation and payment process, tax authorities are demanding their share be automatically withheld through payroll. Which means – host nations want more and more workers harnessed into local payrolls sooner rather than later.
What can go wrong?
The question becomes, what are the risks when so much mobility meets stricter payroll requirements; when companies aren’t keeping a tight rein over the tax issues relating to their mobile workforce?
The answer: there are lots. A key risk is that of fines. One employer sent numerous employees traveling on a myriad of short-to-medium international assignments, simply assuming they could work out the payroll tax issues in due course. When tax authorities took a closer look, they told the company that it needed to enlist visiting staff onto local payrolls much sooner than expected, and topped it off with a substantial fine.
Another company failed to keep home-country Social Security payments up to date while their employees were working abroad – creating more than minor headaches for key employees.
Then there’s the risk of overpaying. We’ve seen many cases where a company winds up paying their workers’ payroll taxes both at home and in the nation where they’re temporarily assigned. In many cases the overpayments are never recovered.
Getting it right
There are ways an employer can avoid the pitfalls of shadow payroll:
- Stay up to date: Already complex rules are in continuous evolution. Meanwhile, ignorance of changes is not a valid defense, meaning compliance lapses can lead to fines or worse. Consequently, employers must make certain they have reliable, up-to-date sources ready to advise as needed.
- Develop a global policy: Make certain the organization understands these issues and in turn, knows who to contact when such assignments or travel are imminent or in planning. The big mistake employers often make is playing wait-and-see, responding only when an issue arises – which can quickly become a costly mistake. It is far better to develop a standard approach to be taken wherever cross border assignments or business visits arise.
- Know what matters: A variety of factors can trigger the need to sign on to a local payroll. What job is this employee doing and who is paying for the assignment? Are they staying in a hotel or a leased or purchased residence? Learn to capture this information routinely and where appropriate, share with the local payroll and tax team to help make the right decisions.
- Be alert for changes to plans: Projects can fall behind schedule, see their scope expand – or both. A trip that had been expected to last less than 30 days could morph into a three-to-six month deployment. Make certain that in such cases you keep track of developments and are ready to respond where needed.
- Invest in technology: Shadow payrolls in an era of so much global mobility lead to processes with multiple moving parts amid a tremendous volume of data flows. For companies where such management tasks and compliance risks become significant, it is likely time to use software to help.
A deeper dive into technology
Any such software is going to be highly specialized. Essential features include sound data security – we are dealing with sensitive and highly-regulated personal data – but coupled with ease of two-way information flows between the host and home nations.
It also pays to find a tool that can assist with tax determination. That is, the system should feature current tax calculation logic helping local payroll teams who may be less familiar with the needs of a shadow payroll. Additional valuable tools include dashboards that can provide alerts such as: this person is in danger of overstaying; or another will need to be added to payroll shortly.
Ultimately, those businesses with a robust, data-rich mobility process and tools will be in a position to benefit greatly from advanced data analytics. Such companies will be able to conduct intricate cost analyses leading to significantly greater effectiveness in optimizing global human capital. They will also have little to fear from the tax risks associated with a globally mobile workforce. The time to act is now.