acing the prospect of an audit of your end-to-end payroll, benefits, or expense processes in any given jurisdiction can be a daunting prospect. An audit of any or all of these processes globally may give payroll, HR, and finance stakeholders across the organization sleepless nights—but there are steps that you can take to ease your mind. As international business continues to grow, employee mobilizations to previously “unreachable” corners of the globe have become more commonplace. Reviewing and documenting your payroll, benefits, and expense processes in anticipation of an internal or external audit can be one of the most important decisions an organization makes. Domestic income and social tax legislation can be complex without contemplating the challenges that “internationalization” brings in relation to earnings, benefits, and expense reporting and recording. However, some simple and fundamental tips and practical advice will go a long way to reducing those sleepless nights.
One of the biggest challenges an organization faces when preparing for a global payroll, benefits, or expense audit is a lack of clear and comprehensive documented processes. A lack of documented processes and procedures almost always gives rise to gaps in that end-to-end process, which in turn can lead to items of compensation either not being reported correctly (or at all) to the statutory authorities or worse, not being subject to the correct income and/or social tax withholding. Designing and developing an end-to-end process flowchart, diagram, calendar, manual, checklist, or some other tangible document that details all of the following constituent parts of the process will alleviate, minimize, or ideally negate any possibility of compensation being incorrectly reported, failing to be reported at all, or not having the appropriate withholding applied. Be sure to at least include the following in your checklist:
Target dates for each action within the process
Responsible stakeholders (internal and external) for each action
Rules, routines, and specifics in relation to any individual task
Contact information for all key stakeholders (internal and external) within the documented process
A comprehensive, task-driven, documented process is invaluable during an audit—particularly if the audit is external—as statutory authorities look much more favourably on an organization when a process is documented. This is true even if the documented process requires updating, amending, or refreshing, versus not having any documented processes at all. Consider reviewing and updating the documented processes in one location and then replicating these processes globally or regionally whilst, of course, tailoring the specifics of the process to the relevant jurisdiction. Adopting a consistent and harmonised methodology across the globe provides administrative and strategic efficiencies and promotes universal knowledge transfer.
Record Keeping and Data Sharing
As obvious as this sounds, many organizations simply don’t understand what records should be kept—and for how long—to satisfy regulatory or statutory requirements in a particular jurisdiction. What is clear, of course, is that all record keeping must adhere to data protection regulations. To maintain compliance, ensure that you fully understand the regulatory and statutory requirements in relation to data protection and data retention in each jurisdiction. The retention and sharing of records, data, or other relevant information can be a challenge for global organizations with an internationally mobile employee population. One of the most common errors or failings in relation to global payroll is the sharing of data between jurisdictions. Here is a summary of a real-life example of a common failure to share data between jurisdictions:
Client A operates internationally and has offices, and therefore employees, in many different countries, including the United States and the United Kingdom.
The U.S. entity arranges to mobilise one of its U.S.-based employees to the U.K. for a period of two years. During this mobilisation, the employee continues to be paid from the U.S. payroll.
The compensation package offered to the employee mobilising to the U.K. includes company-provided accommodation, a company car in the U.K., and membership in a sports club in the U.K.
None of these items of compensation are in cash form (all are non-cash benefits), and therefore no payroll-related action is required in the U.S. payroll from pay period to pay period.
A U.K. income tax liability exists for this employee as a result of the employee performing the duties of his employment in the U.K., and therefore the cash compensation paid to the employee through the U.S. payroll needs to be shared with the U.K. entity on a monthly basis to ensure that the U.K. entity, as the “host” employer of the employee, correctly calculates, reports, and remits the appropriate U.K. income tax to the U.K. authorities in accordance with Real Time Information (RTI) regulations.
Similarly, as the employee in question is a U.S. citizen and therefore continues to be liable for U.S. income tax on his worldwide income, including the non-cash benefits provided to him whilst he is working in the U.K., the value of these non-cash benefits must be shared with the U.S. entity to ensure these values are captured in the employee’s U.S. year-end reporting Form W-2.
As can be seen from the example above, if either the U.K. or the U.S. entity (or both) does not share compensation data regarding this employee with each other, a risk of exposure to the company will exist in relation to the failure to calculate, report, and remit income and/or social tax to both the U.K. and U.S. authorities accurately or timely. The importance of retaining and sharing data among jurisdictions, entities, and stakeholders cannot be understated, particularly in relation to internationally mobile employees to ensure global employment tax and payroll-related compliance.
Again, this may seem beyond obvious. However, proper preparation for an international audit will pay dividends during—and most likely after—the audit. If the audit is at the request of an external body such as a statutory authority, it is important to establish which, if any, specific jurisdiction(s) the authority wishes to focus on or what, if any, specific function or aspect of the organization the authority wishes to review. If you are provided with enough detail as to the specifics of the intended audit, you can devote your time and energy to ensuring that all key stakeholders are briefed, all records are available and ready for review, and your processes and policies in relation to the identified aspects are fit for purpose. A less specific external audit request can be more difficult to prepare for. However, following the same protocols as above will ensure the statutory authority receives the impression of a well-organised, well-documented, and process-driven organization. Internal audits (in other words those undertaken at the request of the organization, usually by an external professional services firm) are less feared but can require more preparation. Many organizations commit to undertaking an internal audit immediately after receiving notification that an external audit is scheduled to take place. These “pre-audit” audits can be priceless in terms of understanding and identifying any areas of risk or exposure for the organization globally prior to any such areas potentially being identified by the statutory authority undertaking the external audit. For an internal or pre-audit audit to be successful, the organization should lay bare all processes, policies, methodologies, records, and data (or the lack of) to the internal auditor or external professional services firm. In reality, the main purpose of a pre-audit audit is to try to find any areas or aspects of non-compliance so that these can be rectified prior to the visit from a statutory authority. From experience, this can be a somewhat chastising experience for the organization. However, without any doubt the pain of realising that areas of non-compliance exist is much less when delivered during an audit engaged by the organization than an audit by a statutory authority.
An international audit can, in many ways, be a refreshing and positive experience. Engaging the services of a professional services firm or some other external body to undertake the audit is more often than not money well spent, particularly if areas of concern or non-compliance are identified and can therefore be rectified before a statutory authority brings these to your attention. Not all organizations require external assistance. If the necessary expertise is not available internally, though, engaging the services of a firm specialising in reviewing processes, documentation, and record keeping can be a financially sound move in the long run. In summary, any kind of payroll, benefits, or expense audit can be a daunting experience irrespective of whether the audit is for self-governing purposes or at the request of a statutory authority. However, by following these tips and recommendations an organisation can ensure it is adequately and suitably prepared for any audit, which will deliver the best possible outcome and greatly enhance the probability of employment tax compliance globally.