Prior to the pandemic, increased globalization and cross-border projects led a growing number of companies to send employees on short- and long-term global assignments. While this offers benefits for both employers and employees, it can also complicate payroll, as well as income and tax reporting. Adding to the complexity, global assignments include relocation-related benefits that may or may not require reporting. Employers bear responsibility for ensuring that employees receive adequate compensation in a timely manner while complying with local income and tax reporting regulations.
Regulatory compliance and timely, accurate tax reporting remain vital in protecting both the employer and its employees from potential issues with revenue services. This is especially true for employers managing assignments in multiple locations, with varying durations, types, pay scales, and employee nationalities.
Why Companies Choose to Outsource Global Compensation Services
For employers with employees on global assignments, navigating the complexities of international regulations and reporting requirements may place a significant burden on their payroll and bookkeeping departments. Many do not have staff with the required expertise.
An employer might have seven employees on assignments in four different countries. If these employees have varying levels of seniority, their wages and benefits will differ. To enable accurate reporting, payroll staff need to understand the regulations and employment tax laws of all four countries. If the employees come from different countries, the situation grows even more complex. Additionally, the duration of each assignment impacts the taxability of compensation items such as household goods storage.
Even if a company has professionals with the required expertise on staff, the time and investment needed to ensure correct and comprehensive reporting may drain needed resources.
For this reason, a growing number of companies outsource this process to global compensation services providers. These third-party service providers assume responsibility for collecting, controlling, and reporting all employee compensation data on the employer’s behalf. They assist employers from the beginning of an assignment, ensuring transparency, and correct, complete documentation. Furthermore, they provide comprehensive compensation administration and reporting that complies with all applicable regulations.
Working with a global compensation services provider offers companies a cost-effective way to gain access to the expertise, manpower and resources needed to maintain centralized, organized payroll and tax reporting.
A global compensation services provider can develop comprehensive, high-level estimates of expected costs specific to the global assignment. Projections are based on the employer’s mobility and compensation policies and any additional assumptions. Beyond the employee’s base compensation, which consists of his or her salary and any bonuses, the projection includes all estimated assignment expenses and hypothetical expenses.
Cost projections create data-driven estimates that employers can use to make strategic decisions. With an accurate understanding of the investment required, employers can perform cost-benefit analyses for potential assignments.
Letter of Assignment
A letter of understanding or letter of assignment outlines the details and benefits of an assignment. This legally binding document serves as an addendum to the assignee’s regular employment contract and lays out any varying or additional terms that apply for the duration of the assignment. As such, it must be signed by all parties. In addition to the start and end date of the assignment, job title and location, the letter of assignment must specify all contractual agreements, code of conduct, compensation and benefits, assignment-specific benefits such as moving expenses and repatriation allowance, tax equalization and other fiscal matters.
The letter of assignment should lay out all pertinent assignment details and leave no room for interpretation. Any lack of clarity could lead to costly misunderstandings, draining resources, creating a distraction for the employee, and impacting the success of the assignment.
Initial Balance Sheet
The initial balance sheet is typically affixed to the letter of assignment. It provides details regarding the assignment allowances the employee will receive.
Certificate of Coverage
When an employer sends an employee on an assignment to another country, they may be required to pay social security taxes in both the home and host locations unless those countries have entered into totalization agreements. These are bilateral social security agreements that eliminate dual taxation by assigning coverage to only one country, typically where the work is performed. Currently, the U.S. has totalization agreements with 26 countries. The country assigned coverage of the employee’s work issues a certificate of coverage.
Employers need to know the exact social security regulations each country requires before sending employees on assignment, and if applicable, apply for a certificate of coverage before the assignment starts. This will protect both the company and its employees from dual taxation. Moreover, it will safeguard the company from compliance issues.
In general, a certificate of coverage has a duration of five years. A country’s social security administration may grant extensions, although there is usually a processing period of four to six weeks. Compensation services providers can track expiration dates and apply for certificates of coverage on behalf of their clients, preventing any lapse in coverage.
Employers must develop payroll instructions for each assignment based on the financial data detailed in the assignee’s letter of assignment and initial balance sheet. These instructions ensure that payroll accurately incorporates all elements of the assignee’s compensation, that all components are accurately recorded, that necessary withholdings are made, and that the funds are sent to the appropriate governmental bodies.
Payroll departments both at home and in the host locations need to receive and understand each assignment’s payroll instructions. Some compensation services providers not only prepare payroll instructions but will also offer training on payroll file content and the data needed for payroll file returns. Instructions regarding payroll reporting allow for flexibility. Some employers prefer to receive instructions for full payroll details each cycle while some prefer only updates about any applicable changes.
Payroll reconciliation ensures that payroll instructions are carried out correctly. It verifies correct amounts and dates, directed to the correct accounts. When completed by a global compensation provider, this reconciliation provides an additional layer of protection against errors.
During payroll reconciliation, compensation services providers may also collect all payroll detail as a part of the compensation accumulation process.
A critical component of a company’s global mobility reporting, compensation accumulation is the collection of all assignment-related, off-payroll costs made to, or on behalf of, assignees through accounts payable (e.g., for housing) or finance (e.g., for taxes). Compensation accumulation includes reconciliation of all reports to the relevant assignee’s letter of assignment and balance sheet, as well as to company policy.
Compensation accumulation can present challenges for companies with assignees in multiple countries. Collecting the required data often requires interacting with multiple locations and departments, or even service providers to whom a company has outsourced business processes. Nevertheless, employers must report all of these expenses accurately to remain compliant.
A compensation services provider collects the reconciled payroll data needed for compensation accumulation monthly and stores it in a central location. This keeps the process streamlined and eliminates issues that may arise from decentralized, untimely data collection.
Global Statement of Earnings (GSOE)
The global statement of earnings (GSOE) provides a comprehensive, detailed overview of an employer paid to (or on behalf of) each assignee. Tax providers use the GSOE when preparing tax returns. It also becomes a data source for shadow payroll. The GSOE is reconciled to the U.S. Box 1 Form W-2 at year’s end.
The GSOE ensures that the company remains in compliance both at home and in the host country with properly recorded taxes for reporting purposes. Furthermore, it ensures assignees pay taxes as needed and enables the employer to provide assignees with tax return preparation assistance benefits.
Shadow payroll, also referred to as “ghost payroll,” reports compensation paid to an assignee from another country. Running a shadow payroll concurrently in the host location simplifies income and tax reporting and facilitates compliance.
Compensation reporting can prove complex, because the various components of an assignee’s total compensation package may originate in different locations. Typically, employers pay base salary and any bonuses from the assignee’s home country while paying many assignment-related costs such as housing allowances, dependents’ allowances, and taxes from the host country.
Keeping records in both countries ensures timely and accurate reporting. For this reason, compensation services providers send shadow payroll reports that show all payments made to the host location and/or the company’s tax provider. They also send an “add to earnings” file to the payroll department in the home country for the payments made in the host location. This ensures a full and accurate report of all costs associated with an assignment in each location.
Balance Sheet Updates
Balance sheet updates adjust the initial balance sheet created at the beginning of the assignment and affixed to the letter of assignment. A variety of circumstances may require balance sheet updates during an assignment including changes to salary or family size. They also facilitate cost-of-living adjustments (COLA) revisions as needed. Compensation service providers work with the company’s data provider to obtain updated COLA indexes and exchange rates.
Tax equalization ensures that the assignee will not suffer financial hardship nor experience a financial windfall due to tax consequences of a global assignment. Tax equalization plays an important role in helping employees make a balanced decision about accepting an global assignment. Without it, employees may not want to relocate to Finland, where the income tax rate is currently more than 56%, or they may line up for assignments in countries with low tax rates like Saudi Arabia.
During the tax equalization process, the company’s tax provider calculates the assignee’s hypothetical tax liability in his or her home country. This accounts for base pay but not items such as cost-of-living allowances, education allowances, relocation costs, and other similar costs. The resulting sum indicates whether to adjust the assignee’s compensation up or down. The tax provider prepares a settlement while the compensation services provider processes the payment.
Year-end reporting involves the collection of all payroll and tax reports for assignees, as well as the subsequent filing with all relevant national and state entities. A compensation services provider coordinates the tax eligibility list with the employer and its tax provider. Throughout the year, the compensation services provider also sends preliminary reports to the tax provider to facilitate any safe harbor (estimated tax) payments. With all compensation data collected, the compensation services provider sends the GSOE to the tax provider. This can be done in the currency of the home country, host country, or the country where the company is headquartered.