- Julie Cincotti, Director of Human Resources, ByAllAccounts
- Joseph Falcao, CFO, McCue Corporation
- Tammi Pirri, Vice President, Human Resources, Black Duck Software
What Did We Learn?
Short Cuts Can Prove To Be Costly
While there are certainly benefits to making extended use of business travelers as an alternative to either a traditional expat assignment, or hiring local employees, this can in fact be a high-risk strategy with costly consequences. Few companies consider the tax risks that can be created by a sustained presence – both the corporate tax liabilities that can stem from a local PE assessment, and also the personal tax liabilities that attach to the employee.
When it comes to a personal tax residence, experts suggest the ‘183 days’ rule as a hard and fast test, meaning that so long as the employee stays for less than 183 days, no local taxes ensure. However, this is a bit of a simplistic view, since the 183 day rule is generally a product of tax treaties. If there is no tax treaty between the destination country and the home country, then in many cases the threshold drops to 30 days.
Another favored shortcut for international entities is the use of contractors, negating the need for payroll, social security, and the local infrastructure necessary to support international employees. And while contractor arrangements are a reasonable short term fix, there is a growing trend for local country regulators to add another layer of local administration, aimed squarely at uncovering more detail on the overseas contracting party (i.e. you!).
Mandatory Employer Costs Aren’t Just Social Security
When budgeting to enter a new country, you may want to consider diving deeper than the usual salary costs (base pay, social security, etc.), and investigate whether your new country has other unique, mandatory costs that may take a bite out of your operating costs.
For example, in the case of employer liability for workplace death or injury, some countries will require you to take out a separate life insurance policy from a local carrier, rather than just rely on the general social security contributions. In other cases, countries will also require you to take out separate policies for each State in which you have employees operating. And finally, there are cases such as those in Italy, where the social security cost can accrue simply as an accounting entry rather than actual contributions by the employee. Upon termination, you are required to payout the balance of the funds (referred to as the TFR funds).
However, the biggest source of hidden mandatory costs is collective agreements. In many Southern European countries (ie Spain, Italy, etc.) collective agreements are directly enforceable to all employers operating in certain industry sectors, regardless of whether or not the employer has expressly signed up for them or is even aware of them. Matters can get even more complicated, such as in Australia, where the modern awards system of collective agreements is developed along vocational lines, meaning that you can have a workforce in one place working under multiple agreements.
Watch Out For Those Leave and Termination Costs
All countries have different rules on annual leave, sick pay and terminations, which can be costly if not paid attention to closely.
Take sick leave, for example – in some countries, it’s not basic salary, but rather, a vacation bonus of 0.8 of a month’s salary per leave year, in addition to the base salary they receive when taking the day off. Other countries will average out the employee’s earnings rate over six weeks to determine their pay.
Vacation allowances are also a moving target. In many countries, the statutory minimum entitlement will increase with service, and in others, it will depend on the employees age, and even in some rare instances, how many children they have.
Finally, be aware of your termination costs, as they’re not just limited to the notice period stated in the contract of employment. Since many countries recognize the right not to be unfairly dismissed, a negotiated settlement is usually a necessary part of the termination process. (And while you might be tempted to justify the termination as ‘fair,’ the evidential bar has been set exceedingly high.)
Beware of Small Headcounts with Employee Benefits
The cost of benefits per head can be greatly influenced by two factors, including the size of your headcount and the length of history in the country, both of which can be in short supply when venturing into new territories.
For example, a local of local trading history, or even a bank account, can be a bar to getting vehicle leases and insurance policies. In turn, as one of the more common and costly mistakes in international employment agreements is to contractually commit to providing a company car, you’ll either have to purchase the car outright for the employee or be in breach of contract.
However taking care not to make a contractual commitment is not enough in some cases. For example, France requires that employees are provided with life and disability coverage (referred to locally as ‘prevoyance,’); yet over the past 18 months, it’s become increasingly difficult to secure coverage when you’re trading with just a representative office. This leaves you with two options – either upgrade to a taxable entity, or self-insure, each of which comes with its own set of risks.
Further, smaller headcounts also create more problems with local insurance policies. When local headcounts are under a certain threshold (usually 10-20 employees), coverage is provided on an individual rather than a group basis, which often requires medical questionnaires and underwriting. If pre-existing conditions exist, coverage will either be declined, or provided on a moratorium basis with a prohibitively expensive annual premium. No matter the cost, you as the employer are contractually bound, in most countries, to ensure that your employees receive full coverage as required by country, state and local law.
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