International Assignment Payroll: Compensation Collection Made Easier via the Web

by Tim Lung, KPMG LLP, Philadelphia and Leann Balbona, KPMG LLP, New York
(KPMG LLP in the United States is a KPMG International member firm)

Perhaps the most challenging aspect of international assignment program administration is providing timely and accurate payroll processing while maintaining compliance with local tax withholding and reporting obligations. By now, many reading this article have lived (or perhaps better, "survived") the year-end payroll collection process for their international and local assignees, which starts typically in late October and ends in January for most countries with a tax year-end of December 31. There are many people to coordinate with and many compensation elements to consider, including home country payroll, host country payroll, offshore payroll, executive compensation, deferred plans, and home and host accounts payable.

While taking the "what's paid locally approach" may seem like the easiest method (and correct in some countries where the remittance basis is used for taxation), typically, reporting only compensation items paid locally is not enough for many countries. Further, administering various payroll methodologies, such as split delivery of compensation payments, computation of assignment allowances in multiple currencies, and home and host mandatory tax withholding requirements and payments complicate matters even more. Consequently, developing and streamlining a process to effectively collect and report compensation on a global basis is the ultimate goal for many organizations.

Compensation Collection – Process Limitations

Some organizations save this collection exercise until year-end when payroll departments are concerned with other domestic payroll issues; while others collect information on a more regular basis such as quarterly, monthly, or even per-pay period. Knowing what to collect and when to report it for home or host compensation purposes can be a bit tricky based on all of the factors listed above. But, collecting the necessary compensation information is just one step in the process. Of equal importance are:

• Determining when and if an item is taxable based on such factors as residency, length of stay, special tax concessions or tax filing positions, and
• Method of payment.

The problem is further exacerbated by the fact that many organizations do not have on staff full-time employees who:

• Have international payroll expertise, and
• Deal with international assignment payroll issues on a regular basis.

Usually, third party assistance is needed. If dealing with assignees in many tax jurisdictions, this process can be quite a costly and time-consuming exercise as tax rules change and turnover within the internal HR/payroll positions can also occur.

Indeed, understanding the compensation collection and reporting process is important in identifying effective procedures to implement. A key element is a flexible compensation collection tool that limits data input points to the extent possible resulting in more accurate and complete information. In addition, having an effective compensation collection tool and a streamlined process will minimize an organization's exposure to penalties and interest related to under-reporting of compensation. Cost savings from an actual tax perspective can also be addressed by minimizing the possibility that compensation is over-reported in any particular country.

Most organizations make a concerted effort to collect compensation payments or imputed income by location for international assignees electronically. For example, companies typically use a stand-alone spreadsheet or a small database created to collect compensation-related information. While this method may seem to be the least expensive, it does lend itself to errors and re-work, since there is typically a lot of "back and forth" communication between the headquarters location and the host locations, as well as numerous points of manual input of information. Such errors might involve converting local payments to another currency, inconsistently applied exchange rates, and just not knowing what payments to collect.

All of these factors combined lead to amended earnings statements and delays in remittance of payroll taxes and income tax filings. More troubling is the wasted time and related cost of the entire process.

What Functionality and Features To Look for in a Payroll Collection Tool

Whether the organization has 10 or 1,000 international assignees, having an effective electronic, or automated, tool to collect payroll information is invaluable. And, "electronic" means more than just an excel spreadsheet distributed via e-mail by the headquarters location to the various host locations.

Some of the key features in the design of the product to look for include:

• Simplicity – Simple to implement, train, rollout, and understand.
• Web-based – If the tool is web-based and accessible 24/7, it will "scale" with the volume of assignees and transactions, and the data entered is updated immediately to the database.
• Appropriate security and access – Is it really necessary for an HR manager in France to see or work with all assignees in all countries? Maybe if the manager was the Head of Global Assignments, but not if he or she was the HR manager for assignments in the European region or only in and out of France. The security should allow for these types of roles.
• Limit data input points – The tool should allow for only a single point of input at source for the compensation information, thus limiting the possibility of human error due to multiple inputs of the same information. The tool should then allow the user to manipulate compensation information as required, such as converting from one currency to another without the requirement for additional manual inputs, thus minimizing the human error factor.
• Handling of multiple assignments – For the cross-border employee or a career assignee, this functionality is critical as there can be an employee who takes several assignments within a 12-month period or over his or her career.
• Hosted with the organization's IT or another vendor – Whether you host or a third party hosts, these costs should be quantified and who the host is of the application should be determined.

Features and functionality to consider in a payroll collection tool would include the following:

• Integration of multiple payrolls – Having the functionality to assign more than one payroll to a single assignee is critical because usually there is more than one payroll involved. Assigning payrolls to the assignee is critical as there can be more than one payroll system involved during any particular year (split payrolls are common for international assignees).
• Identification of sources of payments or benefits – Having the ability to accumulate payments from many sources and then summarize them in the appropriate currency and reports. Since international assignee payroll items can come from many sources — home and host payroll, home and host accounts payable, vendors, and imputed income, to name a few — knowing to whom and where to reach out for compensation information is very important.
• Categories of compensation items – Having a starting point for the types of compensation elements is helpful, along with the ability to change or add more categories as necessary so as to accommodate all the items paid to the organization's employees. The tool should include a set of standard compensation categories, yet should be flexible enough to allow for the organization to add more categories as required.
• Identification of taxable vs. non-taxable compensation items – Companies need to work closely with their tax advisors to effectively allocate collected compensation information into taxable vs. non-taxable buckets. Again, it is important to understand that the treatment of certain items may differ depending on location. The key is to ensure that only amounts that are subject to tax are reported.
• Flexibility of exchange rate management – Users should be able to enter compensation information in any currency. The tool used should then be able to convert the inputted amounts into the currency required without further manual intervention. Whether your organization requires use of a corporate treasury rate for financial reporting purposes, an average monthly rate, or the spot rate — the tool should accommodate all of these options.
• Reporting flexibility – By assignee, by pay period, by month, and by year are just a few of the formats one could need and want. Format types commonly seen are comma separated value (CSV) or Microsoft Excel formats that are generally accepted by payroll.
• Calendar vs. fiscal year ends – The Web-based tool should be flexible enough to enable manipulation of compensation information to support calendar versus fiscal year reporting.
• Gross vs. net – Whether the item was paid gross or net, the ability to track this attribute is another important feature to look for.

Planning the Implementation

There are several areas that should be considered when planning the implementation of a global compensation collection tool. Among them are: the approvals, buy-in from upper management, timing of the implementation, funding of the project, and the identification of necessary resources. A "gap analysis" approach comparing the current state to the desired state is an effective tool to use for process improvement purposes. Not only will the "gap analysis" identify necessary work streams, it will also identify areas of exposure and potential cost savings that will assist in "selling" the project to management.

Funding and resources should be identified prior to approvals. HR, Payroll, IT, Tax, Finance, or some combination thereof, typically fund such projects. The team on these projects can also vary based on the size of the international assignee population. Involving a tax advisor in the project is very important as he or she can guide you on what the local rules are for payroll reporting, identify technical issues and exposure areas, advise on items to collect, help in setting the thresholds of when to begin reporting certain items of compensation (e.g., when residency begins), and suggest improvements to the process, which will make for improved compensation reporting and a smoother tax return filing season.

In addition, watch for hidden costs. Some examples include:

• Data load of initial information about the assignees
• Historical data load interface costs
• Annual maintenance
• Training in multiple locations
• Internal IT charges
• Hosting fees
• Ongoing administration fees.

Other implementation and post-implementation considerations are:

• External implementation team – A Web application usually means a global implementation crossing all time zones and many departments within your organization. Leadership buy-in and support is key to providing the resources and commitment needed to complete a successful implementation.
• Post-implementation support – While the external implementation team may be very good at managing the global implementation and helping go into production mode, it is important to confirm what happens after the 'go live' date. With users globally, it's a good idea to have support in each region (e.g., Europe, Americas, and Asia). It is important to remember that technology support is different than tax technical support. Technology support is typically ensuring that the application is operating as designed and implemented. An example of tax technical support would be determining what items of compensation to collect for each location. Technology support and maintenance fees typically cover the former and not the latter.

Adequate time should be allowed for approvals, which may include HR, Payroll, Finance IT, tax, and legal. Since the type of data contained in the application is personal in nature — name, identification numbers, compensation, etc. — and the fact there may be certain restrictions on data transfers between countries (i.e., EU data privacy rules), it may be prudent to have your data privacy officer involved in the project as well. And, with the Sarbanes Oxley Act, processes and procedures around financial statements are required to be documented. This area is where Finance may have a say as to how the project is implemented.

Timing of the implementation is also an important consideration. Since most countries have a calendar tax year, it is advisable to time the project so that completion of the implementation is around the September/October time-frame, or even earlier if possible. Early completion of the implementation during the year will allow a process to get established with the organization's global user group prior to year-end, enabling any 'kinks' in the process to be addressed before the year-end crunch time.

The internal team for the implementation should include a subset of the eventual end-user groups. This team should be become the 'super users' of the application, located in each region or division depending on the size and dispersion of the international assignee population. If interfaces to HRIS (Human Resources Information Systems) or payroll systems are required, an IT representative from these systems should also be part of the team. An overall project manager is also recommended to keep the team focused on reaching the production date and bringing to the table the resources at the right time.

Finally, a representative from the organization's IT department should be involved from the start if the organization is hosting the application. Even if a third party is hosting, typically IT should validate ownership of data, service level agreements, and disaster recovery prior to going live with the application.

Summary: Advantages of a Web-Based Payroll Collection Tool

There are several advantages in automating and streamlining the payroll collection process and adopting and deploying an effective Web-based compensation collection tool:

• Simple to implement and use on a regular basis
• Access to system 24/7
• Decrease in need for manual data entry both in the home and host countries
• More frequent updates to payroll of items that should be included in earnings providing for more current and accurate information
• Improved accuracy leading to better compliance with home and host payroll laws
• More frequent collection enabling earlier review and identification of errors prior to the year end
• Control over what is updated into payroll allowing for appropriate procedures and approvals
• Opportunity for process improvements or process reengineering around the payroll collection process
• Decrease in amended earnings statements and tax returns
• Decrease in professional fees related to the collection process and year-end process
• Reduced cycle time required for overall process
• Minimize exposure to tax penalties and interest.

Considering the many advantages, now (rather than when the crunch-time comes again) may be the right time to review and analyze your organization's processes and capabilities, and determine if a Web-based payroll tool is right for your organization.

This article featured in the Spring Issue 20 of "Expatriate Adviser", a magazine for international human resource professionals worldwide. It is republished with permission. For further information, please e-mail assunta@expatriateadviser.com.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.