How Going Global Impacts Payroll Teams
Having spent more than a third of my career as a practitioner or in managing global payrolls, I have witnessed a shift in corporate perspectives on the feasibility and complexity of global operations. Over this time, companies across many industries have deliberated the pros and cons of two primary models—offshoring and onshoring.
Offshoring involves moving a segment of operations to another country, usually to capitalize on cost savings such as labor or overhead. In contrast, onshoring involves moving your operations back within the United States or within your organization’s home country.
As these decisions are made, often at breakneck speeds in order to capitalize on some market advantage, payroll teams are usually thrown into some uncharted territory and forced to navigate unfamiliar payroll regulations, pay types, accounting standards, and compliance challenges. During one short period in my career, I recall going from overseeing small payrolls in Canada and Mexico (each with a fair amount of complexity) to suddenly managing pay in more than 30 countries. From my experience, I’d like to offer you an idea of what “going global” means today and how it impacts payroll teams.
How Global Expansion Has Changed
In a relatively short time, the internet and social media have dramatically transformed what it means to be global. Just two decades ago, going global meant establishing physical infrastructure in a host location and learning how to circumnavigate sometimes murky political red tape and bureaucracy. Today, while building a physical presence in a desired market might still be necessary, tools and services exist to enable companies to conduct business, interact with suppliers, and reach customers with greater ease, speed, and with minimal to no resources on the ground. However, even if you do not have a significant presence in the host country, it does not mean you can always avoid challenges.
I have been fortunate to work for clients willing to make a significant investment in advisory or international expansion services to help navigate complex business terrain, as well as with smaller firms focused on a single country or territory and minimal complexity.
Determine Level of Presence Your Company’s Product or Service Require
This decision is usually made above your pay grade but the decision making should include payroll’s input on projected impact and compliance challenges. If, after a cost analysis is performed, your company decides it wants to have employees in a host country, ask some fundamental questions, including the following:
- Where is this talent being sourced?
- How long will they be there?
- What will they be doing?
- How do we intend to pay them (contractors or employees)?
- Will we need to adopt a different workflow to remain in compliance with the host country’s rules?
- Do we need to invest in a tax advisory or international expansion service?
Yes, some of these questions are HR-related in nature, but the goal here is to put the items on the table, as they will require thorough vetting of cost implications. Usually, decision-makers unfamiliar with payroll either assume international associates can just roll into regular payroll or that payroll will just figure out what to do on its own. If you say something, they will assume they are right.
Define Who Will Be on Your Payroll
In order to know who will be on your company’s payroll, you first have to understand the different types of workers. Expats, or expatriates, are employees who are leaving their home country to work for the same company in another country where they have operations. Expats are usually U.S.-based employees working overseas, sometimes referred to as outbound employees. Expats might carry home- and host-country tax responsibility.
Inpats, or inpatriates, are like expats, except these are usually employees coming into the United States, sometimes referred to as inbound employees. These employees may also have home and host tax responsibilities based on any income tax treaties or totalization agreements between the countries.
Foreign nationals are employees working in a country where they are residing but are not citizens, usually due to the short-term nature of their assignment or because they have chosen not to break residency with their home country. Here in the United States, we might refer to these as resident aliens or green card carriers. In other countries, these workers carry some legal documentation allowing them to work or reside in that country.
You may already be asking what the difference is between an expatriate and a foreign national. The answer is not always straightforward between countries, but the classification can impact tax treatment. The totalization agreements are usually excellent resources to better understand the differences, but this is also a reason to hire a tax advisory service.
To muddy the waters even further, there are also third-country nationals. The simplest definition is that these are employees of an international organization who do not originate from either the organization’s home country or from the country where they will be working. Think of a nurse from Mexico working for an organization based in Brazil but performing services in Cambodia. These arrangements can happen depending on where the needed talent can be found and/or where the services are most needed. They also carry tricky tax implications, which is another reason to hire a tax advisory service.
To Tax Equalize or Protect?
Most of the designations above will require some form of tax protection or tax equalization agreement to ensure that the employees are correctly taxed in each country and are not financially disadvantaged by taking these assignments. You need to know what the common pay elements in the host location are as well as taxability differences between common elements in each country. Employees will usually have many questions on the different incentives or allowances included in any compensation package, including taxability.
Your organization could also take the step of hiring locally sourced talent from the host country. However, even in this case and depending on the country, there are likely rules regarding fund sourcing, tax payments, and minimum salary requirements that would need to be followed to maintain compliance.
It is not unheard of for some countries to take the extraordinary step of either restricting your entrance into or out of their country if you are not in compliance with payroll or tax rules. I have seen this firsthand.
The essential task for payroll teams is to research the payroll standards of their intended host country or markets. Even if you ultimately decide not to hire a tax advisory service or international expansion firm, it is crucial to ensure you are getting reliable regulatory information from a trusted service provider like the APA and GPMI. Below is a list of some reputable organizations or services I have used throughout my career:
- Ernst & Young
Other payroll-impacting decisions include the following:
- Yes, some of these questions are HR-related in nature, but the goal here is to put the items on the table, as they will require thorough vetting of cost implications. Usually, decision-makers unfamiliar with payroll either assume international associates can just roll into regular payroll or that payroll will just figure out what to do on its own. If you say something, they will assume they are right.
- Determine which currency employees will be paid and how to handle any resulting currency fluctuations
- Think of how to manage collection of social insurance (some countries allow expats or inpats to participate in their social insurance schemes; the totalization agreements can provide helpful information on which ones and what is required).
- Determine how payroll transactions are to be booked to your general ledger
- Think about how tax reporting will be processed, including paying tax and preparing filings for both the company and employees
I also recommend that payroll be part of the planning discussions so you can be sure to ask questions, even if all your questions accomplish are to raise concerns that need to be addressed. Sometimes, no matter how much research you do or advisory support you invest in, things come up unexpectedly. Proper planning includes creating a routine for handling unexpected situations.
Establishing operations globally is not as daunting or scary as it used to be. However, the payroll team must do their homework and be prepared to answer the challenges each country represents.
Daniel Thompson Jr. is Senior Payroll Manager for Ross Stores, Inc., and a member of the Board of Contributing Writers for PAYTECH.