With the increased focus and scrutiny of taxing authorities on expatriate compliance, employers need to be sure that payroll income reporting and taxation requirements are addressed in both the home and host countries.
One of the most complex areas that employers grapple with when handling international assignee payroll is that of a shadow payroll (a non-cash payroll). This is typically required in host locations that call for payroll tax withholding and home locations that tax on worldwide income.
Shadow payrolls can create some challenges with currency exchange protocol, determining which compensation items should be treated as taxable in the shadow country, and tracking when the shadow payroll requirement threshold is triggered in various countries.
Here are a few best practices for running shadow payrolls:
- Consistently collect and record compensation so that information is up-to-date
- Make sure to know and document which compensation elements are taxable for each country
- Maintain a global payroll processing calendar to ensure deadlines are met
- Update payrolls monthly, with all compensation changes and benefits-in-kind
- Thoroughly audit your data for integrity to ensure the appropriate data is complete and captured accurately
- Review payroll and tax program annually for enhancement
Edie Stensby, Plus's Senior Manager of Global Compensation Services, advises that, "It is also very important to close the shadow cycle by reporting shadow payroll taxes paid to the global compensation accumulation program administrator."
While shadow payroll may be difficult to undertake, the fact is that companies should be aware of the need to operate a shadow payroll to remain compliant, said David Leboff, founder and president of Expaticore, a third-party aggregator of expatriate and host-country payroll services. Companies “engaged in expatriate programs that are mature in any way operate shadow payrolls because otherwise they're likely not compliant,” Leboff told Bloomberg BNA. “Whether they're doing it or doing it well is another issue.” When setting up and managing a shadow payroll, it is worth bearing in mind that “you are going to pay for compliance either up front by setting up proper processes or on the back end in penalties and interest,” said Michele Honomichl, executive chairman and chief strategy officer of Celergo Global Payroll.