The link between payroll and accounting when expanding overseas The link between payroll and accounting when expanding overseas

The link between payroll and accounting when expanding overseas
31 Oct 2015

John Galvin explains the links between payroll and accounting when a company expands into a new country and hires an employee there for the first time. For payroll, this means that a new country payroll needs to be established. For finance, this has a number of varied implications both in tax and accounting.

Is this still true if we are relocating an existing employee into a new country? The same finance rules broadly apply whether the company is hiring a new employee or relocating an existing employee there.

Registering a new payroll overseas

When you create a new payroll overseas, you will need to register your company as an employer in that country. This is required so that your company can file and pay employer taxes, withholding taxes and social security contributions.

Why does a payroll registration affect finance?

A payroll registration overseas has important consequences for your finance team. How you choose to register your company has a major impact on the tasks and procedures that finance has to undertake in that country. It can even impact on how much tax your company pays overseas.

When a company creates a payroll registration overseas, it needs to decide which legal entity will formally make the registration. This is because the payroll registration must be made by the same entity that will legally represent the company in that country.

What types of legal entity can be created?

There are many different types of legal entities, which you can choose from in each country. The most common types are:

• Limited liability company, such as a GmbH in Germany
• Branch of the head office legal entity, or other overseas company within the corporate group
• Representative office.

Each of these types of entity has different accounting and tax rules. Every country has its own regulations but in my experience the following generalisations can be made:

Limited liability companies have to file annual statutory accounts, prepared in line with the local accounting standards required in each country. They need to file corporate tax returns and pay corporate taxes based on their profits generated in the country. They also have to file sales tax returns such as VAT if they are to meet the requirements for sales tax registration.

Branches are legally part of another entity such as an HQ company, so there is less setup work involved. They have less onerous requirements for filing accounts, but they may have to file group accounts instead. They have very similar requirements for paying corporate and sales taxes.

Representative offices are the least onerous type of entity, but tax authorities only allow them in very restricted circumstances. They can be registered under an HQ company overseas and they generally do not have to file statutory accounts or tax returns.

What does this mean for payroll?

My golden rule is that payroll should always consult finance before setting up a new payroll registration overseas. This will enable finance to choose the most tax-efficient type of legal entity. It will also prepare finance to setup the statutory accounts filing and tax return procedures needed.

As well as finance, payroll should also make sure the legal department is involved in the choice of legal entity overseas. The legal team will need to make sure that the entity is properly incorporated and registered.

First payroll linkages between payroll and accounting

Once you are ready to implement your first payroll, then payroll and finance need to work together to make sure everything goes right first time. Here are some of the common pitfalls to watch out for.

International payments

The world of overseas payments can be highly confusing and bureaucratic, both for payroll and finance. Your first payroll is not complete until all the following payments are made:

• One-off taxes or fees for the payroll registration
• Salary payment to the employee
• Social security payments to local bodies
• Withholding any employer taxes to the relevant tax authorities
• Benefit payments to government or private institutions.

International accounting

When a new country payroll is set up, there are a number of risks for finance:

• A new legal entity and cost centre may be required in the accounting system and new codes need to be applied to the payroll
• The reporting from the new supplier may not contain all the information which finance needs for coding, or finance may not understand all the data in the new reports
• There may be new types of benefits and taxes which finance does not know how to code.

What do finance need to do?

• Finance should test that each new international payment is set up correctly. For example, a penny test for the new employee is a really good idea.
• International payments take longer than domestic. Finance should give payroll a clear idea of the lead times needed in order to ensure that payments arrive on time.
• In certain countries, employer payments need to be made from a local bank account. If this is the case, finance need to ensure that the bank account is created well in advance as this can take months.
• Finance should test the new payroll reports in advance to ensure they contain all the information needed for month end.

How can payroll help finance?


• Payroll can ensure that all information needed for new country payments is provided to finance in good time
• If payroll are responsible for coding the new country salary and tax entries, they can doublecheck with finance that the account codes are set up correctly
• Payroll can work with the payroll supplier to ensure that the new reporting gives finance all the data they need

Year-end implications for accounting:

At the end of each year, finance will have some new tasks to deal with which could require support from payroll:

• New statutory accounts may be required. These can require specific data from payroll, particularly if the accounts need to be audited.
• Annual corporate tax returns need to be completed. These may also require new information from payroll.
• Finance may need to find a new accounting and tax supplier, if your payroll provider does not include this service.

By John Galvin

John Galvin, CEO of Galvin International, provides expert, independent advice for clients setting up global payroll. He also finds clients excellent international payroll, accounting and tax partners worldwide. John heads a team of global finance experts and a worldwide network of independent payroll, accounting and tax suppliers. He has 20 year’s CFO-level experience with multinational blue chips and SMEs and has successfully implemented global payroll, accounting and tax in over 40 countries. If you have any queries about the information in this article, or would like to know more, please contact John at john.galvin@galvininternational.com.

John Galvin explains the links between payroll and accounting when a company expands into a new country and hires an employee there for the first time. For payroll, this means that a new country payroll needs to be established. For finance, this has a number of varied implications both in tax and accounting.

Is this still true if we are relocating an existing employee into a new country? The same finance rules broadly apply whether the company is hiring a new employee or relocating an existing employee there.

Registering a new payroll overseas

When you create a new payroll overseas, you will need to register your company as an employer in that country. This is required so that your company can file and pay employer taxes, withholding taxes and social security contributions.

Why does a payroll registration affect finance?

A payroll registration overseas has important consequences for your finance team. How you choose to register your company has a major impact on the tasks and procedures that finance has to undertake in that country. It can even impact on how much tax your company pays overseas.

When a company creates a payroll registration overseas, it needs to decide which legal entity will formally make the registration. This is because the payroll registration must be made by the same entity that will legally represent the company in that country.

What types of legal entity can be created?

There are many different types of legal entities, which you can choose from in each country. The most common types are:

• Limited liability company, such as a GmbH in Germany
• Branch of the head office legal entity, or other overseas company within the corporate group
• Representative office.

Each of these types of entity has different accounting and tax rules. Every country has its own regulations but in my experience the following generalisations can be made:

Limited liability companies have to file annual statutory accounts, prepared in line with the local accounting standards required in each country. They need to file corporate tax returns and pay corporate taxes based on their profits generated in the country. They also have to file sales tax returns such as VAT if they are to meet the requirements for sales tax registration.

Branches are legally part of another entity such as an HQ company, so there is less setup work involved. They have less onerous requirements for filing accounts, but they may have to file group accounts instead. They have very similar requirements for paying corporate and sales taxes.

Representative offices are the least onerous type of entity, but tax authorities only allow them in very restricted circumstances. They can be registered under an HQ company overseas and they generally do not have to file statutory accounts or tax returns.

What does this mean for payroll?

My golden rule is that payroll should always consult finance before setting up a new payroll registration overseas. This will enable finance to choose the most tax-efficient type of legal entity. It will also prepare finance to setup the statutory accounts filing and tax return procedures needed.

As well as finance, payroll should also make sure the legal department is involved in the choice of legal entity overseas. The legal team will need to make sure that the entity is properly incorporated and registered.

First payroll linkages between payroll and accounting

Once you are ready to implement your first payroll, then payroll and finance need to work together to make sure everything goes right first time. Here are some of the common pitfalls to watch out for.

International payments

The world of overseas payments can be highly confusing and bureaucratic, both for payroll and finance. Your first payroll is not complete until all the following payments are made:

• One-off taxes or fees for the payroll registration
• Salary payment to the employee
• Social security payments to local bodies
• Withholding any employer taxes to the relevant tax authorities
• Benefit payments to government or private institutions.

International accounting

When a new country payroll is set up, there are a number of risks for finance:

• A new legal entity and cost centre may be required in the accounting system and new codes need to be applied to the payroll
• The reporting from the new supplier may not contain all the information which finance needs for coding, or finance may not understand all the data in the new reports
• There may be new types of benefits and taxes which finance does not know how to code.

What do finance need to do?

• Finance should test that each new international payment is set up correctly. For example, a penny test for the new employee is a really good idea.
• International payments take longer than domestic. Finance should give payroll a clear idea of the lead times needed in order to ensure that payments arrive on time.
• In certain countries, employer payments need to be made from a local bank account. If this is the case, finance need to ensure that the bank account is created well in advance as this can take months.
• Finance should test the new payroll reports in advance to ensure they contain all the information needed for month end.

How can payroll help finance?


• Payroll can ensure that all information needed for new country payments is provided to finance in good time
• If payroll are responsible for coding the new country salary and tax entries, they can doublecheck with finance that the account codes are set up correctly
• Payroll can work with the payroll supplier to ensure that the new reporting gives finance all the data they need

Year-end implications for accounting:

At the end of each year, finance will have some new tasks to deal with which could require support from payroll:

• New statutory accounts may be required. These can require specific data from payroll, particularly if the accounts need to be audited.
• Annual corporate tax returns need to be completed. These may also require new information from payroll.
• Finance may need to find a new accounting and tax supplier, if your payroll provider does not include this service.

By John Galvin

John Galvin, CEO of Galvin International, provides expert, independent advice for clients setting up global payroll. He also finds clients excellent international payroll, accounting and tax partners worldwide. John heads a team of global finance experts and a worldwide network of independent payroll, accounting and tax suppliers. He has 20 year’s CFO-level experience with multinational blue chips and SMEs and has successfully implemented global payroll, accounting and tax in over 40 countries. If you have any queries about the information in this article, or would like to know more, please contact John at john.galvin@galvininternational.com.