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Employment Tax Compliance – Complex, Costly and Challenging
As summer rolls around the corner, hay fever sufferers are feeling the irritating effects of the increasing pollen count just as tax directors are experiencing the galling impact of rising income tax and social security charges, the irksome increase in payroll compliance requirements and the annoying growth of employment tax costs within their budgets. Whilst it is not possible to cure this affliction there are prophylactic steps which can be taken to lessen the pain. Taxand UK discusses why now more than ever tax directors need to take the lead to face the increasingly complex, costly and challenging employment tax compliance environment.
The UK is leading the way with income tax (new top rate of 50%) and social security (increase by 1% from 6 April 2011) rate raises but the size of some country's national debts means that other governments will need to follow suit shortly. As well as rates going up there are payment thresholds alterations, decreases in annual allowances and tax calculation methodology changes. Whilst politically driven it is the employer who has to accommodate the changes both in their payroll systems and to decreasing take-home pay.
The organisational pressure from highly paid employees to put tax saving ideas in place is mounting. When deciding whether to adopt a particular solution the tax director needs to consider:
- policy setting and precedence creation - what happens when rates decrease, is it justifiable to respond with tax saving structures only for the country where the board reside
- the risk of the saving mechanism "closing" through legislative or interpretation change
- the business case - do the savings to both company and employee sufficiently outweigh the costs of implementation and operation - pension salary foregoing plans are a good example of tax saving ideas which usually do
- the media and political optics of these arrangements particularly within the financial services sector.
Multinationals therefore need to determine their global strategy on responding to tax rate changes. As a minimum the tax director needs to consider what, if anything, they need to communicate to employees. There is an increasing prevalence for financial education within the best employers and tax is one of the most popular and appreciated topics. Secondly, payroll tax rule changes should be independently verified after implementation to resolve any inaccuracies quickly.
Governments need to optimise the tax revenue and what better area on which to focus their efforts than payroll taxes. The levels of employment tax compliance are historically poor not least in respect of termination and parachute payments, expense policy operation, international assignees, commuters and benefits in kind. Ensuring policy compliance on the ground is the principal challenge. The cost of non-compliance is rising so preventative steps are required.
Local country payroll health checks on a global basis must be undertaken on a bi-annual basis. The best value from such health checks comes through independence, technical analysis combined with operational review and experience of where problems typically arise. The review needs to cover:
- payment and statutory filing timeliness
- tax amount accuracy ie have all the benefits been correctly taxed; are tax rulings in place, current and being complied with; are withholding taxes on the stock plans correct; are taxes being paid in all the right countries
- filing requirement completeness or are some statutory obligations not being fulfilled
- process efficiency.
As well as the increasing employer social security burden there is the escalating administration expense. The opportunity to implement tax saving ideas is reducing as "loopholes" close and tax breaks are removed. The increase in filing requirements and information sharing across international borders expands the error catchment area and the likelihood of exposure.
However, there are tax efficient reward plans which can be put in place without risk. There must be a responsibility on tax directors to re-examine tax planning opportunities previously rejected for lack of business case and to instigate a major locations tax saving ideas study for example, new tax incentives for "green initiatives". Additionally, the link to other taxes cannot be ignored. The potential for VAT on benefits in kind (Astra Zeneca and X Holding BV/Oracle Nederland BV cases) needs to be kept under review. In our experience corporate tax deductibility of remuneration, especially in respect of equity plans is inadequately operated leaving tax savings unused.
Employment taxes have historically been shared by HR, payroll, finance and the tax department but the increasing liabilities, complexity and quantum of income tax and social security, in our view, means that tax directors need to now clearly take the lead. It is a risky strategy for the global tax director to devolve responsibility, without appropriate checks and balances, to local countries or to other departments. At the end of the day these are taxes and so even if the liability is paid for by the employee, the employer is accountable for collecting those payments as well as paying its own increasing social security liabilities.
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