Dec 15, 2017
From the KPMG TaxWatch
In this video, Jill Hemphill, partner in KPMG LLP’s Compensation and Benefits practice, the changing landscape for global payroll operations and why more and more organizations are moving towards global payroll operations solutions.
We know the landscape for global payroll operations is changing...can you tell us what that means for employment and wage taxes?
The landscape is indeed changing. We see more and more organizations moving towards global – or at least regional – payroll operations solutions. These solutions tend to be driven by HR or Finance, and often involve shared service centers and regional outsourcing. Shared service centers and regionalization tend to drive standardization and often involve the physical relocation of payroll resources into centers or hubs…and with these changes, we often also see a reduction of in-country payroll specialists. Historically, these in-country payroll specialists – while perhaps not tax people by training - have housed a lot of the country-specific employment and wage tax expertise.
While these changes can drive a lot of efficiency and economies of scale, they do raise some risks on the employment/wage tax front and often highlight the issue of employment & wage tax governance within global organizations.
“Wage tax governance,” can you tell us more about what that means?
When we examine global payroll functions, there are at least two distinct components that emerge: pure payroll operations and wage/employment tax compliance. So when I say “employment and wage tax governance” I’m referring to an effort, among many global organizations, to clarify the distinct roles and responsibilities between pure operations and tax compliance, within the overall payroll function.
For example, I often get the question “who should own global employment tax”….my standard answer is “someone” … there needs to be clear ownership, which historically was often not the case, but the changes occurring around global payroll operations often re-emphasizes this need. The discussion is usually around whether wage/employment tax should be the responsibility of the Corporate Tax Group or whether the ownership should reside in Payroll (often owned by HR or Finance).
- The real key to success is not necessarily which function takes responsibility, but that whichever function takes the lead, the organization has the right resources in place and roles and responsibilities are clear amongst the groups.
- These resources need to understand the organization’s overall tax risk profile as well as have a deep understanding of the various compensation and benefit policies in order to ensure wage tax compliance.
- They also need to be very close to the day-to-day payroll operations.
- But whether they sit in Tax, HR or Finance, may be a secondary issue.
What are some of the specific risk areas that you see around global employment tax?
There are a couple general areas where I’ve seen companies struggle with the global employment tax compliance…first, non-cash fringe benefits as category tend to raise reporting and withholding challenges. The rules for these type of items vary dramatically from country to country and certain items are often managed outside of HR. For example, personal use of company cars (and the associated including fuel, insurance, parking and other related costs) is always top of mind when we think about global employment tax compliance. Cars are challenging for a few reasons – while the tax rules are often clear that personal use is taxable, in many countries the rules defining how to track, measure and value personal use are not well-defined. Company cars can be a relatively high-value item, and therefore quite an emotive topic with employees as well. Mobile technology is another area that is increasing more challenging for employers. We are more dependent than ever on mobile devices, yet the tax rules in many countries have not fully addressed these technology changes. Like cars, personal use of a phone or tablet is often considered a taxable benefit, but tracking and valuing personal use is not only tricky but it can be time-consuming and unpopular with employees.
Another big area of concern are those items that never make their way to payroll. For example, certain expense reimbursements may be taxable. Expense reimbursement policies may allow for certain types of meals or transportation reimbursements for example, but in some cases, tax laws may view these items to be of a personal nature and therefore subject to employment/wage tax.
In some countries, offering gifts to employees or customers (often paid through Accounts Payable) may be part of the cultural norm, but in many cases, these may also carry the risk of employment/wage tax.
You’ve given us some interesting food for thought, any final suggestions to help our clients enhance their global employment/wage tax governance?
Yes, I’ll leave you with a couple suggestions for the employment/wage tax governance model:
- First, the Tax and Payroll functions need to work closely together to define roles and responsibilities, with key focus on employment/wage tax positions for various employee populations (local employees, expatriates and business travelers, for example).
- And second, the governance model should ensure completeness of the wage tax reporting base; facilitate the monitoring and implementation of legislative changes and establish a framework to ensure review of new compensation/benefit programs for proper wage/employment tax treatment.
Once agreed, these roles and responsibilities should be documented, then tested and revisited periodically for sustainability.
For more information on Compensation and Benefits services, contact Jill Hemphill at firstname.lastname@example.org.
This information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
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