Complexities in Expatriation Compensation Data Management BY HEATHER RANGEL, KEVIN ALSUP, AND ALGERNON WADSWORTH, GMS The challenges presented by compliance and reporting obligations generated by administering and tracking compensation to employees abroad remains one of the most involved responsibilities for human resource and mobility professionals. Rangel, Alsup, and Wadsworth offer a comprehensive look at the complexities involved in managing expatriate compensation data. Employees who move across international borders, whether on a permanent basis, for long-or short-term assignments or just for frequent business travel, pose a particular set of compensation considerations and challenges for their employers. In fact, between the extremely complex and varied rules governing these mobile employees and significant increases in scrutiny from tax authorities around the world, compliance and reporting obligations surrounding compensation are some of the most difficult areas for organizations to get right. Failing to do so, however, can be costly. Integrated Compensation Data Management Collecting comprehensive compensation data from various global sources and determining it is treated properly from a reporting and remittance perspective can be extremely challenging. For one thing, it requires the ability to capture all elements of compensation related to expatriates or international assignees. In addition to home or host payroll, compensation may include a variety of off-payroll payments; for example, payments on behalf of an assignee such as those made to vendors associated with the international move, tax payments, and/or various compensatory expense reimbursements. At the same time, compensation 34 MOBILITY/OCTOBER 2011
paid to or on behalf of globally mobile employees typically involves multijurisdictional reporting requirements and is subject to varying taxation rules. What may be taxable in one country may not need to be reported in another, or it may need to be reported in a specific way depending on the situation. Accordingly, companies need to understand all of the home and host requirements associated with each cross-border assignee. This requires strong multi-functional cooperation within the organization. While many companies begin to think about this subject at the end of the year in preparation for issuing W2s, effective compensation data management should begin during the planning stage of an assignmentand it should involve clear, welldefined processes at every stage of the assignment life cycle. Defining compensation payment arrangements, data tracking processes, and reporting requirements up-front will almost certainly lead to fewer problems at the end of the year, including time-consuming efforts to backtrack and capture necessary data. More - over, year-end wage reporting (e.g., U.S. W2s) may not be sufficient in all cases. Many countries require ongoing wage reporting and payroll tax remittance, even if the employee is not on that country s payroll. Some countries, such as China, have monthly income tax filing requirements that require inclusion of all income sourced within that country. Think about effective global compensation data management in terms of annual activities to be addressed on a monthly or quarterly basis: January through March Debrief year-end activities by collecting year-end pay statements, assess ROLE Business advisor Centers of excellence Shared services Outsourcer/Vendor VALUE any gaps or unexpected variance and remediate; begin consolidating data by country for provision to calendar year tax return preparers; meet with tax return preparers to validate compensation reporting requirements, agree on dates, and address any gaps or anticipated issues; and address any monthly filing countries needs. April through June Assess fiscal year filing countries and determine reporting needs, validate current-year list of mobile employees with stakeholder groups, review first-quarter data and begin to identify gaps or issues, and address any monthly filing countries needs. July through September Review second-quarter data and address gaps or issues, start planning for year-end activities by assembling stakeholder groups to confirm needs, dates, and anticipated concerns; meet with tax return preparers to confirm understanding of multijurisdictional taxability; and address any monthly filing countries needs. October through December Review third-quarter data and address any gaps or issues, communicate with stakeholder groups to raise awareness to payroll cutoff dates, Provides executives and line managers with strategic services and consulting on people-related issues Supports employees through significant employment events (global mobility) Establishes centralized teams of specialists that focus on strategic areas, such as compensation, global mobility, global payroll, and benefits Focuses on designing processes and programs and assists with resolving strategic day-to-day challenges Processes routine standardized transactions in centralized centers Increases compliance through standardization and consistent interpretation and application of policies and programs Provides key capabilities or technology that your organization may not have internally Increases efficiency and compliance and, in some cases, provides transfer compliance services finalize any calendar year-end additional reporting needs, and address any monthly filing countries needs. How Can Such A Small Percentage Of The Workforce Cause Such Complexity? Achieving compliance with respect to global mobility is very difficult. With the ability to work from anywhere via laptops and PDAs, simply keeping track of where employees travel, live, and work is becoming increasingly difficult. For some organizations, compensation data management for mobile employees is characterized by: Inefficient, decentralized data gathering, tracking, and sharing processes, with data disparities and versioning issues and no consolidated reviews. Labor-intensive processes. Even with some level of automation, organizations still must be prepared to understand the data and decide how to act on it. Potential omissions and/or duplications of data. The potential exists for organizations to miss categories of data for the population of assignees. 36 MOBILITY/OCTOBER 2011
Lack of clear accountability and responsibility for specific process steps. Limited management reporting capabilities and no single place for executives to look at relevant data. Lack of centralized understanding of global requirements. Some global companies may place undue reliance on vendors to complement their internal knowledge. Data privacy and security risks. While many organizations have robust processes in place to protect data, there is always the continuing risk for any organization of inadvertent data privacy violations. In short, it is an environment in which you don t know what you don t know and that means greater tax compliance risk. Risk Overview What happens if you do not get it right? Companies with mobile employees face: Financial control risks. Although many companies carve out expatriate payroll for the reasons described above, it is important to avoid treating it as an exception to an integrated, automated financial reporting solution. Increased risk of identification of noncompliance and audit due to increased scrutiny. Potential tax regulatory penalties in both home and host locations, and possible prohibition periods for both assignees and management with responsibility for underreported withholding. Assignee dissatisfaction with the program due to errors on W2s or tax regulatory notices. Reputational risk and/or adverse publicity resulting from underreporting compensation or from potential Personal Identifiable Information (PII) disclosure. Excessive costs for researching questions and for rework associated with incomplete data. Moving From A Decentralized Approach To An Integrated, Global Solution Organizations can increase consistency and compliance by addressing four areas of their global human resources (HR) model: Consistent global HR policies and processes for HR administration and compensation, international assignment management, and payroll administration. These should provide the ability to track which employees are on some type of assignment, their home and host countries, and responsibilities for administering those employees and managing their assignment data. A HR service delivery model that considers integration compensation data management and addresses some of the complexities and risks involved. This exercise includes documenting how processes are delivered to the organization and who has responsibility for managing mobile employees. A global human capital management (HCM) platform that encompasses the technology used to track employees. A global payroll administration approach and platform. Policies and Processes Many organizations have tried to tackle HR policies and processes but mostly on a country-by-country basis. This approach generally has the potential to result in global consistency and may create process and administrative complexity for managing mobile employees. A global approach, on the other hand, sets minimum expectations for all countries and defines certain processes for tracking employees worldwide. The first steps for moving toward a global approach are to identify your organizational priorities; to establish guiding principles for managing your mobile employees; and to define the core requirements for HR administration, compensation, and international assignments. With those steps as a foundation, you then can: Assess global requirements. What does your business need from HR? What are your integrated compensation data management requirements? How will you deliver global processes? What do you need in order to support globally mobile employees? Design the global process and data standards related to HR administration (personal data management and employment transactions), compensation (merit, incentive, allow - ances, and bonus), and international assignments. It is also important to account for payroll integration, identify data needs, and determine the extent to which you can make data consistent. Identify and address in-country needs. How can you extend the global processes and data to account for unique in-country requirements? What exceptions are driven by legal, regulatory, or contractual requirements? HR Service Delivery Model With policies and processes defined, you can begin looking at how your HR service delivery model can support and reinforce them. Four MOBILITY/OCTOBER 2011 37
Global HCM System Illustrated areas of the service delivery model, in particular, may add value to integrated compensation data management (see chart on page 36). HCM And Payroll Platforms Many organizations leverage a third party for process or technology solutions that track detailed global assignment data, and many vendors and outsourcers continue to evolve their capabilities for doing so. In fact, the HCM marketplace has matured substantially during the past five years, and leading HCM vendors now provide global capabilities that can drive process and data consistency. HCM vendors also continue to advance their payroll capabilities. In addition, many leading payroll vendors are now focusing on developing a global platform that provides consistent payroll delivery and reporting. As noted earlier, one of the specific risks surrounding mobile employees is data privacy. Any type of global solution must account for data privacy and protection to make sure that you are addressing the regulations or directives to which your organization is subject to. One potential scenario for bringing all four of these areas together is to organize processes and solutions on a regional basis. In the example illustrated above, there is one global HCM system that allows all processes and tracks all data associated with employees. This system is integrated with regional shared services and payroll solutions that track, manage, and comply with detailed pay-related data and taxing authorities. If it makes sense for your organization, you may consider adding a global mobility administrative system that enhances compliance and data quality, and facilitates tracking on a global basis. Other Considerations For Improvement The visual on page 40 illustrates a centralized approach that includes one global depository for compensation data. This approach addresses many of the issues and risks outlined earlier by reducing the number of touch points significantly, standardizing the data exchange process and eliminating duplication of effort. It, however, does not alleviate your requirement to understand regulatory requirements around the world 38 MOBILITY/OCTOBER 2011
and know what to do with the data. How can you bolt on processes in order to achieve your objectives? These are several additional considerations for facilitating an integrated solution: Stakeholder education. This is, perhaps, the single most important aspect of getting integrated compensation data management right. It involves talking to all stakeholders involved in this complex issue, understanding their needs, and helping them understand how working together to meet reporting requirements is beneficial to all. Site visits. To develop a mutual understanding of risks and create a solution that meets both global and local needs, you will need to involve the payroll managers and HR player who are involved with managing expatriates and business reporting. Cross-functional risk meetings. Global mobility is one area that sits among various functions, including tax, finance, payroll, human resources, and compensation and benefits. By assembling a crossfunctional group of people who care about risk, developing a comprehensive list of risks associated with compensation data management, and then assessing those risks as a group, you can move toward improvement. Current-state assessment. This is a country-specific or global snapshot of what you think is being reported today versus your understanding of reporting requirements. From it, you can identify and begin to address key process gaps. Peer groups. Because global mobility represents a small portion of responsibility for many professionals, it can be helpful to network with others who also deal with these complex issues. Industry groups often provide opportunities for conversation about improvements and effective practices in this area. The Benefits Of Getting It Right A consolidated, integrated compensation approach for your mobile employees can improve efficiency within your organization and strengthen your compliance profile with external tax authorities. For one thing, accurate expatriate compensation reporting for tax and social security reporting purposes is essential to managing exposure in cases of tax authority audit. In addition, the right supporting platforms and common processes allow you to import data from home, host, and relocation of vendors into a single database reducing time spent on local payroll, as well as potential turnover and/or retraining costs should a key payroll manager leave. Conversely, these platforms and processes can also export data back to home and host payroll, when and how they need it, thereby increasing accuracy and consistency. This also allows the company to analyze data and improve reporting capabilities. A consolidated approach also eases communication among stakeholders around the world and restores confidence in your global mobility function and program. Finally, it allows more effective budgeting by allowing your managers to see the overall cost of mobility and make better informed decisions. Heather Rangel is senior manager for Deloitte Tax LLP, San Jose, CA. She can be reached at +1 408 704 4228 or e-mail hrangel@deloitte.com. Kevin Alsup is senior manager for Deloitte Consulting LLP, Chicago, IL. He can be reached at +1 312 486 2622 or e-mail kalsup@deloitte.com. Algernon Wadsworth, GMS, is partner Deloitte, Parsippany, NJ. He can be reached at +1 973 602 6352 or e-mail algywadsworth@deloitte.com. 40 MOBILITY/OCTOBER 2011