3 Reasons to Consider Shadow Payroll for your Expatriates
Are you planning to send an employee to a foreign country for a reasonably long project or length of time? If yes, then besides arranging visa and managing the required documentation, you also need to take care of some the complex areas like shadow payroll.
Shadow payroll is a concept where employees, working in a foreign country get paid by their home or host country. However, either way the employer is responsible for the payroll tax compliance in the host country.
How Shadow Payroll Works
Through shadow payroll an employer reports data related to compensation that is paid from another country. For example, if you have an employee in the UK, setting up a shadow payroll in that country will keep you compliant with the host country’s income tax obligations. At the same time paying the employee via the home country payroll, you can fulfill your tax and social obligations.
Here are the three major reasons why managing shadow payroll is essential.
- Reporting Payments & Benefits
For employees on assignment in a foreign country, their salaries/wages may need to be reported in both the home and host countries via shadow payroll. The biggest challenges that arise from administering a shadow payroll are:
- Figuring out what should be calculated, reported, and remitted;
- How such calculations are to be done; and
- When to carry out such calculations, reports, and remittances.
During an international assignment or project, an employee typically gets paid his/her base salary from the home country, even though the costs may eventually be charged back to the host country. Other assignment-related allowances such as taxes, housing, and education costs for dependents are often paid from the host entity.
- Implementing Tax Equalization and Hypothetical Tax (“Hypo”)
The purpose of tax equalization or tax protection is to encourage expatriates to take up overseas assignments without having to worry about tax-related matters. The employer takes care of those matters.
Simply put, tax equalization makes sure that employees on international projects or assignments do not pay more taxes than they would have paid in their home country. Through this method, any difference in taxes is offset, and employees pay the hypothetical tax or “hypo” as if they are still residents of their home country.
- Addressing the Issue of Double Taxation
While on overseas assignments, employees are often concerned that they may be double taxed on their salaries, fearing they are taxable in both the home and host countries. It is worth mentioning that certain countries provide foreign tax credits through tax treaties between the two countries. Such treaties make sure that earnings are taxed appropriately and double-taxation is avoided.
The Way Forward
Despite being a complex and detailed process, if done correctly, shadow payroll can reduce your administrative workload as well as the risk of non-compliance globally. If you want to learn more about what shadow payroll is, the tax implications, and how to set it up internationally, take a look at this white paper on shadow payroll.
Have questions? Connect with us at firstname.lastname@example.org or +1-408-913-9130 for more info.