Payroll calculation for companies operating in a global market is more than just a headache; it’s a venture filled with regulations that must be met accurately to avoid severe penalties. As a result, we covered a handful of the underlying complexities surrounding international payroll calculation in this post. We want to help you get a grasp on what you’ll need to start considering when your business expands into a new country.
Changing regulations & access to information for payroll calculation
Let’s reflect, for a moment, on the US tax code. As a business owner, you’re probably very familiar with the fact that the tax code changes all the time, probably even every day. That’s why you work with an experienced accountant to handle the requirements held by GAAP and your company’s tax accounting. Other countries do not live by the rules of GAAP, and instead, follow reporting principles established by IFRS. Tax regulations in foreign jurisdictions seem to change on a regular basis making it difficult for businesses manage.
Also, many countries outside the use tax regulations to entice more commercial activity via a tax haven, which is a country with a corporate tax below ten percent. Countries like Brazil, Ukraine, Russia, and Turkey enact onerous tax policies simply to increase the state coffers.
Global markets, like Thailand, are also less likely to provide accessible information about their new tax regulations, which is vastly different than what you’re used to in the US. This leaves room for error when businesses are managing their own payroll calculations if a tax regulation was added or amended without their knowledge. We suggest working with an international payroll provider to avoid these hiccups.
Calculating taxes on commission
Sales commission works very differently in overseas markets than it does here in the States. Depending on your country of operations, some commission is taxed at rates below an employee’s base salary. Other countries are tax commissions at rates that are higher than an employee’s base salary.
To make it even more complex, some countries, like Brazil, combine commission with an employee’s base salary. This type of classification can make the commission amounts guaranteed rather than varied. In Turkey, the income tax compounds on commission amount over the course of the year, which get expensive for employers.
Changes to Value-Added Tax (VAT) in payroll calculation
Value-Added Tax (VAT), also referred to as GST or Turnover Tax, is a consumption tax placed on a product. Value is added at the stage of production or final sale and most commonly used in the European Union (EU). The amount of VAT that the user pays is the cost of the product, minus the costs of already taxed materials used in that product. What’s important for businesses to understand is that even if a country has VAT, it’s not always applicable to transactions related to international professional services.
There are essentially two ways of breaking down the differences. First, in a country with VAT, the tax applies to invoices that “leave the country,” which means the business is invoicing international clients for services that are rendered in-country. Second, in a country with VAT and the tax is not applicable is that same invoice. Most countries fall into the latter category.
Currently, the Middle East is experiencing the largest changes regarding VAT. For many years, GCC countries including UAE, Qatar, Saudi Arabia, Kuwait, Oman, and Bahrain had very little to no tax, but with the substantial drop in oil prices, new government revenue is desperately needed. These countries are achieving cash inflows by bringing in VAT over the next few years.
Tax equalization for expats
For international businesses working expats, payroll calculation surrounding income tax is very complicated. The expat may be required to pay taxes in both their host and home countries, leaving them with a hefty financial burden.
Tax equalization occurs when a company writes its own equalization policy, with the assistance of an international accountant. This policy applies to any expats that it may send overseas. The company conducts two tax calculations every month for both the host country and the home country of the expat. On a quarterly or annual basis, the company compares the two calculations and performs a true-up.
Expats paying more income tax in the foreign jurisdiction, companies can give the expat some money to offset the difference. If the expat is paying less in taxes in the foreign jurisdiction, then the expat may owe the difference.
Figuring out international payroll calculations is complex and should be managed by an expert in international payroll. Contact us today if you want to learn more about strategy!