Business Ethics - Compensation Management of International

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1 The Mobility & Compensation Partnership: Pitfalls & Solutions Executive Summary This article highlights potential pitfalls in the relationship between Compensation and Mobility. It also conversely examines how a good relationship can ensure effective communication of the assignment package, compliance in reporting tax liabilities and consistency in the application of policy. This article serves to probe readers about their company s management of international compensation and suggests possible solutions so hopefully if your tax department or an external consultant conducted an audit next week, they would find a streamlined process in place. Anything contained in this article is not intended to act as tax advice, so if required such advice should be sought. Introduction The modern 21st century company, big or small, can be a multi-tiered global organisation that operates in different countries. Add internationally mobile staff to the mix and you can have multiple compliance obligations coupled with compensation information that is disparate amongst cost centres and offices. Needless to say, the correct management of compensation items is crucial and cannot be stressed enough in order to avoid a fate of penalties or even worse, for example, reputational damage and in some countries, imprisonment! To demonstrate how complexities can arise, consider this: ABC Ltd has a UK outbound to China and the processing centre in India will be handling compensation payments. Let s say the International Assignments (IA) team have checked the Balance Sheet (Compensation Worksheet for an Assignee) was received in India and UK hypothetical tax will be deducted with salary payments grossed-up for Chinese taxes and instructions sent to Chinese payroll for actual withholdings. However it would be naive and incorrect to think this is where the story ends in fact this is only just the beginning of considering all the compensation items paid to, or on behalf of, the assignee. Ask yourself this question: are you confident all steps are in Page 1 Copyright Santa Fe Group 2014

2 place to ensure the expenses or benefits paid to the assignee in China have been a) reported and b) reported correctly and captured by the team in India? Can you, if asked, demonstrate that benefits were calculated correctly and unnecessary gross-ups not performed on non-taxable items? Did Finance, Reward, HR, Tax and Payroll in all three countries amalgamate their data and is everyone up to date with the latest legislation? What if the assignee s PA in China submits some taxable expenses for payment will these be captured by the team in India? Who is keeping the receipts and who is managing this process? If you can answer positively to all these questions, then your company is managing risk in this area very well. If not, then I suggest you read on. Pitfalls Knowing what s taxable and non-taxable: correct codification To define every taxable and non-taxable item in each country would of course take up several chapters. However it is important that everyone involved in the expatriation process can refresh themselves with some general principles and terms pertinent to the countries they commonly encounter. The taxability of employment items, and hence their codification in systems is usually determinable on a number of factors including (in no particular order): an individual s residency status the company s corporate status domestic legislation double tax treaty provisions. Looking at each of these in more detail: An individual s residency status: how a country defines residency (and where relevant domicile) varies from country to country but if it is a common assignee destination for your company, it pays to know what these rules are and keep abreast of relevant changes. As we know other than paying someone to advise you, the best place to look is arguably the tax authorities own website, although often clarity is still needed. Some countries look at physical presence of the individual whilst others also look at family ties or factors such as property ownership. As an example, in the Czech Republic resident individuals are taxed on worldwide income and residency is individuals who spend 183 days in a calendar year subject to any existing double tax treaties with the home country. Corporate residence this may be determinable by the place of management (headquarters) or the location of the office of incorporation. These 2 pieces of corporate information will be a fact and should be known by all involved without reference to assumption. Domestic legislation another specialist area and professional help is often sought here. Domestic laws should never be considered in isolation to residency and concessions for qualifying assignees in the world of international mobility. It is worth having familiarisation de minimis with the treatment of compensation items included in each of your international assignment policies. These can typically include: accommodation benefit home leave health/dental care premiums benefits in kind any other expense payments reimbursed relocation expenses/lump sums reimbursement of taxes and payment of taxes cost of living allowances educational fees and related items. Page 2 Copyright Santa Fe Group 2014

3 Getting it right means the correct codification of items when payment is made. As well as ensuring compliance this can serve to alleviate unnecessary grossing-up and therefore accumulating cost where it is not needed. For example: in China rental accommodation for foreign nationals can be exempt providing amounts are reasonable and substantiated by relevant documentation such as receipts. Getting codification wrong can mean more dire consequences maybe penalties or paying further fees to external consultants for corrective work. Assumptions and blanket codifications should be avoided in identifying items as taxable or non-taxable as there are several elements to take into account as touched on above. Double Tax Treaties their impact on costs and cash flow is potentially huge for companies with numerous assignees. Treaties essentially are a way for governments to facilitate the cross border movement of workers as well as trade. Where two or more countries are entitled by domestic law to tax the same income, relief can be given if a treaty covering provisions specifically in this area exists. Some, but not all countries follow the UN model double tax convention so it is advisable for mobility staff to be familiar with the provisions in this for reference. Treaty relief can usually be given by 2 means: a credit applied, for tax already withheld so typically performed by the tax return preparer, or exempting the income at source by instructing payroll. Expense Payments to/for assignees As demonstrated in an earlier example, it is now commonplace to have offshore centres for data and overseas third party providers since globalisation has business advantages in reducing costs. However on the flip side, this carries compliance risk as payments are coming from multiple sources and multiple locations at different times. Another consideration are executive remuneration structures that include share options which vest over time and for the international executive this can have implications in several jurisdictions. Thus the commercial advantage of being a global community is great but so potentially is the compliance burden. Information sharing and clamping down by tax authorities Authorities are also seemingly increasing rather than reducing compliance burdens for example the advent of Real Time Information in the UK. Authorities are now clamping down and one way of doing this is the information share with each other as an example the UK HMRC (HM Revenue & Customs) as recently signed such an agreement with the Isle of Man. These types of agreements are becoming increasingly common and although we may not need to know the detail, knowing they exist is daunting enough. Tax knowledge Today s Global Mobility professionals are expected to be subject specialists in HR, Talent management and international taxation, which is perhaps not realistic. They certainly do not need to all be tax experts and indeed international companies most likely have expatriate tax providers but does the mobility team know when to involve the providers? Does your corporate tax department, who may have a compliance responsibility for the IA team actually have relevant international tax knowledge for example; are they au fait with modified PAYE (Pay As You Earn) in the UK? For your information, in brief this is an application made and agreed with the UK HMRC that the employer can operate PAYE on a gross-up of cash earnings and non-cash benefits for all included eligible employees. The employer also commits to their employees to pay any residual UK tax liability on earnings based on each employee s self-assessment tax return. Ask yourself also, is there a global network of offices to openly support and give time to the IA team? Is any country missing in-house expertise or a willingness to work together? A team based in one country may lack knowledge in other jurisdictions and without a global specialised network to rely on this could result in undesirable consequences. For this reason, leading edge Global Mobility teams have in place robust processes to ensure that both internal and external parties are fully cognisant of the assignee s status. Page 3 Copyright Santa Fe Group 2014

4 Solutions Above may have painted a rather murky picture and the list is not intended to be exhaustive but all said and done, I have come across organisations who have these areas covered through some control processes to minimise risk both in their home country and globally. How to ensure a Global Compliance Partnership A strong partnership between employing departments, HR, Payroll departments and Tax service providers will help ensure the correct codification of taxable and non-taxable items in accordance with the tax status of the employee involved. There should not be a culture of, oh that s for the IA team to sort and I d better get back to my day job. However compliance is a job for us all as non-compliance can affect our profits and hence our jobs. In today s world, non-compliance is not an option and should not be tolerated; it is a fundamental that is the responsibility of management and assignee alike. Your company may not have the scale of assignment programme to justify all the required expertise in-house, and therefore may consider alternative resourcing options by partnering with Global Mobility organisations that can provide the specialist support you require. System Integration It would be an ideal world if all computer software spoke the same language but unfortunately this is not often the case. Thus, you need to ask can our compensation systems talk to each other and are they understood by those who need to? In my experience of discussing data transfer with organisations, the key question is how can we accumulate and share the correct data on a real-time basis? This is often a large and expensive project to do so is there a work around? What is the alternative? Do you have a mechanism to track every payment and every expense into a single system? This can be performed by a single team providing they have feeds from their ever alert colleagues globally. As discussed previously, your resourcing decisions will drive how you configure your systems and processes to ensure compliance. As an example, when our organisation partners with a global company, discussing which systems will be used, establishing accurate tax codifications for home and host locations and capturing appropriate tax payment cycles are all critical events. If you do delegate codification of expense items, whether to an internal service centre or an specialist external provider, are the providers transparent about their process and their accuracy rates to give you the utmost confidence and transparency in this area. Also, you should look for an audit trail and a four eye checking process so if you ask a question it is substantiated with an evidenced answer. In the same way for companies managing this process themselves, ensuring that their business units and external tax providers have the appropriate compensation and non-compensation information available is critical to successful compliance. Clearly technology will make it easier for international assignees to be compliant, for example, by being able to scan and upload their expenses via an app rather than keeping receipts in a shoe box for the tax preparer to analyse at year end. Processes, processes, processes Processes should not be unnecessary complicated but clearly understood by all involved crucial when you are working pan-culturally. The first process is how is the compensation data all collated, secondly whom by, for ownership, with management required both regionally and globally. The correct codification of items on a timely basis then comes into play. Escalation processes should also be identified, e.g. if an expense comes up from a different service centre, what steps does the receiver take? Knowledge should not lie with one person, with succession planning built in. Processes work better when they are streamlined and automated rather than relying on manual input and human error so automation should always be the goal by the end team. Page 4 Copyright Santa Fe Group 2014

5 Conclusion We have explored in this paper the complexities of managing a globally mobile workforce and the need for all stakeholders involved to take ownership of their responsibilities. Money paid to tax authorities is a high proportion of any assignment s costs yet can perhaps prove an area where some savings could be made because of items that were perhaps not taxable it is worth seeking advice if this has not been looked at recently. Costs paid to tax return preparers are much less but if we can avoid consultants fees for re-workings because data was incorrect, then I m sure we d all like to. Penalties and reputational damage is something we must all avoid full stop. Compliance remains a highly risky and expensive area if not done properly. However, as some companies have already begun to do, embracing this through innovation and some simple controls is the answer. Your goal should be as far as possible to have a robust and holistic approach to compliance and a self-audit is the best place to start to demonstrate this should the Compliance Inspectors come knocking at the door at any given moment. Your feedback is really important to us or if we can be of any assistance, please contact john.rason@thesantafegroup.com John Rason Head of Santa Fe Group Consulting Services Santa Fe Group, Central Way, London NW10 7XW, United Kingdom. T: john.rason@ thesantafegroup.com Page 5 Copyright Santa Fe Group 2014 About Santa Fe Group Santa Fe Group is a worldwide provider of Global Mobility solutions that support multinational businesses and their international growth. Our network of own offices enables us to provide services that matches your own company s network at a local, regional or global level. In a world where the search for talent is not confined by geography, and where the transfer of these skills is key to achieving competitive advantage, Santa Fe Group provides mobility services that enable organizations to transfer their employees between their multinational business units as efficiently and cost effectively as possible.