A global mobility program can offer significant value to a company, not only because of the business opportunities it presents, but also because it helps to attract and retain quality talent. However, to remain in compliance with the rules and regulations of various countries, a well-run global mobility program needs accurate, timely administration and bookkeeping. Working with a global compensation services provider offers companies a cost-effective way to gain access to the expertise, manpower and resources needed to maintain centralized, organized payroll and tax reporting.
Today is the last post in our series of posts about the services offered by global compensation services providers. Keep checking back to learn more.
Global Statement of Earnings (GSOE)
The global statement of earnings (GSOE) provides a comprehensive, detailed overview of what was paid to (or on behalf of) each assignee. It is sent to the tax provider for ease of preparation of tax returns. In addition, it’s used as a data source for shadow payroll. The GSOE is reconciled to the U.S. Box 1 Form W-2 at year’s end.
The GSOE is critical to accurate reporting. It ensures that the company is in compliance both at home and in the host country, as well as that all taxes are properly recorded for reporting purposes. Furthermore, it makes sure assignees are paying taxes as needed and enables the employer to provide assignees with tax return preparation assistance, which can be an important benefit.
Shadow payroll, also referred to as “ghost payroll,” reports compensation that is paid to an assignee from another country. Running a shadow payroll concurrently in the host location simplifies income and tax reporting and facilitates compliance efforts.
Compensation reporting can be complex, because the various components of an assignee’s total compensation may originate from different locations. The base salary and any bonuses are usually paid from the assignee’s country of origin, but many assignment-related costs such as housing allowances, dependents’ allowances and taxes are paid from the host country. Keeping records in both countries ensures timely and accurate reporting. For this reason, compensation services providers send shadow payroll reports that show all payments made to the host location and/or the company’s tax provider. They also send an “add to earnings” file to the payroll department in the home country for the payments made in the host location. This ensures that there’s a full and accurate report of all costs associated with an assignment in each location.
Balance Sheet Updates
Balance sheet updates are adjustments to the initial balance sheet that was created at the beginning of the assignment and affixed to the letter of assignment. Balance sheet updates can be performed during an assignment for a number of reasons, such as a change in salary or family size. They’re also required at regular intervals to revise the cost of living adjustment (COLA) as needed. Compensation service providers work with the company’s data provider to obtain updated COLA indexes and exchange rates.
The fundamental principle of tax equalization is that the assignee will not suffer financial hardship nor experience a financial windfall as a result of the tax consequences of a global assignment. Tax equalization plays an important role in helping employees make a balanced decision about accepting an global assignment. Without it, an employee might not want to go to Sweden, where the income tax rate is currently more than 57 percent, while others could be lining up for assignments in countries with low tax rates like Saudi Arabia.
During the tax equalization process, the company’s tax provider calculates what the assignee’s tax liability would have been in his or her own country for non-assignment compensation. That means that base pay is taken into account, but things like cost of living allowance, education allowance, relocation costs and other similar costs are not included in the calculation. The resulting sum indicates whether the assignee’s compensation needs to be adjusted up or down, and the tax provider prepares a settlement accordingly. Consequently, the compensation services provider processes the payment. If the employee owes the employer money, the compensation services provider will collect it and send the company the relevant reports.
Year-end reporting involves the collection of all payroll and tax reports for all assignees, as well as the subsequent filing with all relevant national and state entities. A compensation services provider coordinates the tax eligibility list with the company and its tax provider. Throughout the year, it also provides preliminary reports to the tax provider to make sure any safe harbor (estimated tax) payments are being made. When all compensation data is collected, the GSOE is sent to the tax provider. This can be done in the currency of the home country, host country or the country where the company is headquartered.