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With a business expanding globally, comes the responsibility of global payroll compliance. It is one of the critical aspects of managing an international workforce. GPMI Survey 20191 reveals 72% of the respondents stated that compliance was their biggest global payroll challenge among the others like operating model and cost involved. 87% of organisations experienced adverse consequences due to their low compliance maturity or a reactive approach to compliance, as per Accenture Research Report2 issued in 2022.
Globalisation is making significant impact on businesses and economies with increased growth, but its challenges including varying tax structures, differing employment laws, and the need for accurate and timely. Organisations understand the criticality of managing payroll compliance globally and making it a strategic priority as one miscalculation or missed filling deadline can quickly turn into a fiasco. According to a global payroll benchmarking survey report by Deloitte2, 88% of respondents of the survey either have a payroll strategy or have plans to develop a strategy.
The challenges of global payroll compliances are vast and varied, so let us delve into six most faced challenges and how to overcome them.
Top 6 Challenges in Global Payroll Compliance and Their Solutions
Ever-changing Regulations
Change is the only constant. Tax regulations, labour laws and other payroll related regulations are constantly evolving and staying on top of all these is a Hercules’ task. Moreover, interpretation and implementation of the same is equally cumbersome. While some countries provide detailed implementation guidelines on the other hand there are countries where interpretation is left to end user leading to ambiguity.
Each country has its own unique economic conditions and legal framework. To illustrate, China has social security compliances at city level and India’s complex tax system witnesses frequent changes whereas different states of the U.S. have their own nuances.
So, a company operating across countries need to adopt different approaches ranging from hiring experts in house, involving consultants to review or take advises, or use software’s having inbuilt compliances or simply outsource the payroll.
Deloitte survey3 shows 73% of participating organisations outsource some aspect of payroll. Although, the need to retain payroll expertise in-house has not faded away. As a result, several global companies adopt to technology tools, invest in in-house payroll teams in different countries.
Tackling Privacy Concerns
Payroll requires to gather personal data of employees; any mishap or security breach may cause the company with a huge reputation loss and penalties of millions of dollars. This is a zero-tolerance area for most of the countries.
Post the data protection law of European Union gets decided by Global Data Protection Regulation (GDPR), many countries are bringing stringent laws on Data Privacy and Protection.
According to the Cost of a Data Breach Report 2023 by IBM4, the global average cost of a data breach in 2023 was USD 4.45 million. So, investing now in an increased security will save millions in future. Companies need to have all these in check with cutting-edge technology and regular monitoring.
Financial Turbulence
Conducting business across globe means being exposed to multiple currencies and therefore facing exchange rate risks. If exchange rates shift and companies don’t have specialised vigilance over it, they can end up overpaying or underpaying their employees. As seen in recent news, X (formally Twitter) has accidently overpaid 6 former Australian employees due to an error in currency conversion from US dollars to Australian dollars. payment ranged from $1,500 to $70,000 per employee.
To mitigate this risk, companies need to implement a currency risk management strategy that will include hedging tools. Companies also need to choose carefully between paying workforce in the local currency or the company’s country currency. Another way to control the financial risk is by keeping track on the inflation rate of countries where employees are hired.
Avoiding double taxation
Global companies also run the risk of becoming permanent establishment (PE). It’s another complex subject and can lead to payment of taxes by business in a country where the company doesn’t even have the operations. It can happen merely when key personnel are sent to another country or while signing deals with any customers. The Companies must keep a close check for any transactions done in other geographies and ensure it is monitored regularly. If a business misses to take right steps, it could end up paying taxes twice on the same income.
To abate the effect of PE, multinational businesses take different measures like managing employees through Employer of Record (EOR) to legally engage with employees across international borders without a local entity, keeping a check on the days employees are travelling. With these steps, Companies can take precautionary steps to ensure that the legal and tax obligations are met and helps avoid litigation for the company.
Standardisation
For multinational companies, the data of different regions, running through diverse systems is a huge hurdle in the road of global compliance. Companies may choose a single global payroll platform that helps to consolidate the data of al the key metrics such as, payroll costs, headcount etc for accurate records and consistency.
Accuracy
This entire process of unifying data comes with the risk of errors, duplications, and data integrity problems. So having a dedicated technology system to upload accurate data is another important step. The same report by Accenture2 found out 93% of their survey respondents agreed that AI and cloud-based compliance systems cut down the chance of human mistakes, streamline processes by automating routine work.
Conclusion
In a nutshell, to navigate the complexity of global payroll compliance, businesses need to invest in advanced payroll technology, data security technology, legal professionals and other robust initiatives to thrive seamlessly in global marketplace. Companies need to ensure that the intricacies of global payroll are dealt by experts to run the business operations smoothly and many multinational companies are relying on outsourcing the payroll responsibilities to third party service providers to ensure zero loose ends in their payroll compliance.
