How to achieve payroll compliance: Best practices for multinational organisations

Payroll is affected by rules related to tax, social security, labour, benefits, benefits in kind and more. Ensuring that these rules are reflected in payroll runs is a large task for any organisation, and the larger the organisation — and its global footprint — the greater the costs and risks.

These high stakes are compounded by the fact that employees depend on accurate and timely payslips. Failure to account for compliance obligations can result in incorrect withholdings that can in turn lead to additional administrative burdens, fines and a disgruntled workforce.

Unfortunately, there is no one correct way to achieve payroll compliance on a global scale. Every organisation’s situation is unique, from its resources to its risk tolerance to its reporting practices and internal controls. As an organisation grows across borders, however, it will want to at least consider working with a global payroll provider to reduce burdens and risks. This article outlines some key elements of maintaining payroll compliance that multinational organisations should know when reviewing their own practices and vetting global payroll providers.

Two general truths of payroll compliance

Providing even a high-level outline of common compliance obligations that affect global payroll is outside the scope of this article. That said, there are a couple of general truths about payroll compliance.

The first is that each country has its own rules that affect payroll. These include labour laws, income tax and social security rates and deadlines, and withholding and reporting requirements. Those are more or less universal, but there are also myriad obligations affecting payroll that may apply in one or more countries but not in others. These include meals and transportation allowances, thirteenth-month bonuses, mandatory salary increases and more. All rules must be followed in each country of operation or fines, penalties and/or other negative consequences will follow.

The second great payroll-compliance truth is that rules change. So organisations must not only understand and follow current laws and regulations, they must keep abreast of new and changing ones in every country where they have a payroll.

Some payroll pitfalls

Just as there are too many payroll-related compliance obligations to list in a short article, there are countless global payroll pitfalls. Here are just a few examples we’ve seen trip up our clients:

• Stock options. This form of compensation is increasingly popular as employers look to retain talent in a tight labour market. It’s not uncommon for withholdings on stock options to be calculated incorrectly. For example, if an employer offers company stock at a reduced price relative to the market, in some countries, the difference between the market value of the benefit and the reduced price must be taxed through payroll. Often, the employer does not know that it must research the market value and use that amount when calculating withholdings.
• One-time payments. Sales commissions, work anniversary payments (such as a bonus for five years’ work at a company), performance bonuses and similar one-time payments may be taxed at different rates than regular salary payments under local law.
• Travel reimbursements and allowances. Rules for the taxability of travel and other business expenses vary by country, sometimes significantly. For example, certain eligible travel expenses are not taxable in the US; furthermore, US-based employees can request reimbursement on a per-expense basis. In Germany, by contrast, the government sets fixed per diem rates for travel (along with setting additional travel expense regulations), and many reimbursements are taxable.
• Company events. Some countries have strict rules related to company events, and if a threshold is met, then subsequent events may be taxable to employees. To again use Germany as an example, local rules stipulate that an employer may only host two company-wide events per year, and those must fall under an expense threshold. If that amount is exceeded, or if there are more than two events in a year, the additional expenses are considered benefits in kind and in some situations may be taxed through payroll.

Cologne-based Sebastian Fuß, manager and tax advisor at Vistra, has seen clients incur payroll-related fines because they didn’t understand the nuances of local tax laws. He emphasises the importance of working with advisors to understand local rules. He also urges clients to be proactive if they make a mistake.

“In Germany,” Fuß says, “when you forget to tax any benefits in kind or any employment income at all, then you need to declare the omission to tax authorities for prior years. If an employer self-declares in this kind of situation, they’re not liable for tax fraud. But if an employer makes payroll-related infractions repeatedly and fails to correct the problems and self-declare, then at some point they may be liable for tax fraud, even if the amounts involved are small.”

The importance of accurate data, clear communication and prompt notification

If the two great truths of payroll compliance are to follow local rules and keep abreast of rule changes, then it follows that an organisation must collect all relevant data to effectively apply those rules.

In short, a company must provide its payroll provider(s) and any advisors with all the data they need to ensure compliance. It should go without saying that the data must be accurate. Anyone who has ever worked in payroll or any kind of reporting role will understand why the term “garbage in, garbage out” is so widespread. No payroll provider can keep its client compliant if it has incorrect or incomplete data.

“The stock-option example from Germany we discussed earlier is relevant here,” Fuß explains. “If my client sends me a spreadsheet showing only the stock amounts to be deducted from certain employees’ payslips, with no other data, then I can’t tell if the payroll will be compliant. I’ll need the market value of the stock and any discounts provided to the employees. I know this as a German tax expert — and I’ll know to go back to the client if I seem to have incomplete data — but not all payroll providers will have that expertise.”

Clear communication between an organisation and its payroll provider, then, is just as important to maintaining compliance as accurate data.

Allan Harness, global employment solutions director at Vistra, adds that there is another critical element to maintaining global payroll compliance: prompt notification.

“All global payroll providers should have a clear processing schedule showing required data and related deadlines. There are predictable situations where payroll changes must be made, such as with starters, leavers, bonuses and so forth. But maybe 5 percent of change requests are complex, such as Sebastian’s stock-option scenario. As a global payroll provider, if we get those kinds of requests just a few days before a payroll is run, we’ll likely not have time to gather the relevant data and make our determinations. This may seem obvious, but not giving your provider enough advance notice is one of most significant payroll compliance risks there is.”

Working with experts to lower risk

As Harness’ and Fuß’ comments make clear, global payroll compliance is complex and contains many grey areas that are best negotiated by experts.

“Many organisations may say they have compliant payrolls,” says Harness, “but how do they know? If a local or global payroll provider doesn’t have experts on the ground in each jurisdiction, there’s a good chance some compliance obligations are falling through the cracks and the client may never know it. But if your payroll provider has experts like Sebastian in Germany and other countries, and you get them the information they need in a timely manner, you can sleep at night really knowing that you’re compliant.”

Harness adds, “An elite global payroll provider shouldn’t just own the process of payroll, it should own the compliance.”

Working with global payroll experts can provide other benefits. For example, experts can help a multinational organisation develop and implement a global payroll framework that incorporates best practices, which (like compliance rules) are constantly evolving. This will include developing global and country-specific payroll policies and practices. Sound policies are critical to lowering risk, especially if any of your payroll practices — for example, those related to termination — are challenged by an employee.

Finally, experts can conduct payroll health checks and internal audits, such as wage tax audits. These can be performed annually or as requested to ensure that your payroll practices are compliant and that you have the proper controls in place.

It should be emphasised that external payroll audits performed by local authorities are inevitable. Ensuring that your organisation is prepared through regular third-party health checks and audits can significantly reduce the risk of fines and penalties. And if your provider uncovers any instances of non-compliance, you may avoid or significantly mitigate fines and penalties by proactively notifying local authorities.