International Payroll Processing Can be a Challenging Task for Global Employers

Introduction

Today technology allows international companies to streamline their operations by creating a global center of excellence to manage specific functions. These centers of excellence can be either operated in-house or outsourced. A business unit centralizing certain processes has the challenge of keeping that process relevant for all the local offices while keeping the benefits of running it centrally.

Payroll operations are regulated locally, and every country and state will have its guidelines that must be adhered to remain compliant. Payroll and HR must abide by local regulations, privacy laws (e.g., GDPR in Europe or CCPA in California), and issues related to managing data in a different jurisdiction. Taken to an extreme, some of these issues may de-facto prevent implementing a centralized payroll in some jurisdictions.

What is International Payroll Processing

International payroll processing refers to ‌paying employees in countries other than the organization's place of domicile. International payroll processing includes the payment and monitoring of payroll for employees at offices your company maintains overseas, as well as for contractors and people hired through agencies.

A more streamlined and effective payroll procedure translates to managing the payroll of all employees through a single system, regardless of their location.

Challenges faced by an international organization trying to run payroll centrally

An international organization trying to run payroll centrally has two different sets of challenges:

(1) Paying staff that has been temporarily posted to locations that do not have a local office. This still requires some awareness of local regulations since people can pay taxes in different countries where they work only for a limited period. The length of this time depends on each jurisdiction. Moreover, there is the need to coordinate with HR to cover non-tax-related components of the payslip, for instance, health cover.

(2) Running the payroll of a local office/subsidiary from headquarters.

According to EY’s new survey, more than two organizations out of three (68 percent) say that using a single payroll system is vital to them. Yet, only a third (34 percent) believe that a single vendor can globally handle all of their payroll needs.

A centralized payroll helps companies create accurate global reporting. It also gives a better insight into international payroll requirements. Using specialized local companies may result in delays in reporting and a certain complacency in understanding local rules. That may prove expensive in ‘delicate’ HR situations, like, for instance, redundancies, death in service, or when rules change for some other reason (headquarters may not be notified in time).

Operating a global payroll system implies achieving a healthy balance between getting it optimized and retaining the necessary flexibility at a local level. There’s no point having software running global payroll if your operators have to go outside that system for a high proportion of their activity because of local legislative and cultural peculiarities or rapidly fluctuating employment terms.

Awareness of local rules is critical. Non-compliance can be very costly. The Asia Pacific region is very complicated because they have different laws in different jurisdictions; for instance:

In Singapore:

• No income tax is withheld via payroll. Income taxes are assessed by the Inland Revenue Authority of Singapore (IRAS) at the end of the tax year. Employees are responsible for paying their tax obligations directly to IRAS.
• Tax clearance is required for foreign employees.
• There are no reporting requirements for a Singapore Citizen or Permanent Resident leaving their company but not leaving Singapore. Their earnings will be reported by their previous employer, to IRAS, at the end of the tax year.
• Singapore’s Social Security System, the Central Provident Fund (CPF), is a mandatory contribution from both employee and employer. CPF applies to Singapore Citizens and Permanent Residents but does not apply to foreigners.

In Malaysia:

• Income Tax is collected through Payroll via Scheduler Tax Deduction (STD).
• Main social security deductions are ZAKAT (Muslims only), the Provident Fund, the Social Security Organisation (SOCSO).
• Tax clearance required for foreign employees.
• New employees can use their earnings & tax deductions from their previous employment for the current financial year.

In Indonesia:

• Salaries taxes are withheld via payroll.
• Mandatory social security payments from employees and employers are the BPJS Manpower and BPJS Health contributions.
• Employers must pay an equivalent of one month’s salary to employees for Tunjangan Hari Raya Keagamaan (THR) Allowance – also known as the Religious Holiday Allowance. THR must be paid before the religious holiday.

In Vietnam:

• Personal Income Tax (PIT) is collected through payroll.
• There are four types of mandatory social security: social insurance (SI), health insurance (HI), unemployment insurance (UI), and the Mandatory Provident Fund (MPF).
• Many Employers in Vietnam pay an automatic, one month’s salary Annual Bonus at Chinese New Year – although a Performance Related Bonus trend is replacing this.

In Hong Kong:

• Tax year starts from 01 April and ends on 31 March.
• No income tax is withheld via payroll. Income taxes are assessed by the Hong Kong Inland Revenue Department (IRD) at the end of the tax year. Employees are responsible for paying their tax obligations to IRD.
• New hires and leavers are reported to the IRD through IR56 forms.
• Tax clearance is required for foreign employees.
• Hong Kong’s Social Security System, the Mandatory Provident Fund (CPF), is a mandatory contribution from employees and employers. This applies to all employees, including foreigners, unless there is a valid exemption.
• MPF schemes are administered by various approved MPF Trustees.

Challenges in keeping updated with local rules of payroll

Awareness of changes to local rules is also essential, which is why a centralized payroll office needs a ‘local representative’ to keep them up to date. For instance, some examples of recent and forthcoming challenges are:

• California Consumer Privacy Act (CCPA) – became effective in 2020. Businesses based outside California are also within the scope of the Act if they have employees based in California on their payroll
• The European Union is talking about a European minimum wage.
• Brexit may have implications on the payroll for employees paid out of the UK but currently working in the EU or the other way round. The transition period will end on 31 December 2020.
• The Netherlands has introduced an employee bike scheme to encourage people to commute by bicycle. The scheme includes an allowance of €0.19 per kilometer for cyclists. The employer must pay this allowance.
• In Singapore, most of the government provisions to support the business during the COVID-19 pandemic will end in March 2021 to be replaced by a Job Incentive Scheme.

Technology has made remote operations more straightforward than ever, and therefore, made it possible to concentrate specific functions in one location. A centralized payroll office has a lot of advantages, but it also has a lot of complexities. This is why outsourcing payroll to a specialist company may make it more efficient. You would still need an internal employee as a point of contact with the company you have outsourced your payroll to, but you remove the need to be constantly up to date with local regulations. In this way, you can be secure in your compliance with local rules, deal with the more personal side of HR, and have all the advantages of centralized reporting. It will be up to the Global Payroll specialist to date with all the aspects of local payroll.

Conclusion

The two key ingredients to successfully outsourcing payroll are communication and internal awareness.

There must be the same level of communication between HR and the specialist company that HR would have with an internal international payroll office. An internal resource that is generally aware of the issues and process can help control the quality of the work of the specialist company and, hopefully, become aware of issues before they create real problems.

Last but not least, a specialized company should be able to guide the client in managing exceptional events such as redundancy, retirement, sick leave, maternity/paternity leave, etc.

This is not strictly payroll, but they may end up having an impact on the employee payslip.

Ultimately, it would be best if you outsourced to a company that suits both your business needs and the needs of your regulatory environment.