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Emerging Trends

Emerging Trends in Global Payroll Regulation

By Frank J. Mendelson and Scott Lewin

ScottLewin_1493739163_ff7fudswcw1. What are the emerging trends or issues that have your attention in global payroll?
The regulatory environment affecting payroll is changing rapidly. The Latin American region, in particular, is leading the way in increasing government visibility into corporate transactions as governments look to reduce fraud and better audit, track, and trace tax liabilities in real time. It started in the form of mandated electronic invoicing, but now these governments are increasingly targeting payroll and human resources (HR) functions as well. And it’s working. Governments are increasing tax revenues and cutting down on fraud. As such, it’s only a matter of time before other countries around the globe start to follow this trend. Brazil and Mexico were among the first to establish e-invoicing requirements, which now the United States, and many European countries are beginning to roll out. We’re likely to see the same trend with mandated payroll reporting.
Payroll professionals especially should be paying attention to what’s happening in Brazil and Mexico. “eSocial” is a comprehensive new initiative in Brazil affecting payroll and HR, requiring employers to submit all labor, social security, tax, and fiscal information related to hiring and employment practices. This includes everything from wages and contract details to warnings, suspensions, and even medical leave. This new mandate requires immense changes in the way companies document and process payroll and information on their labor force. It also is evidence of an emerging trend of governments’ intent and ability to monitor business activities down to individual paychecks. Mexico already has implemented Nomina Electronica, the requirement for all paychecks to be electronically registered with the government prior to payment to the employee.
2. How would you advise someone whose company is just beginning to expand to a global payroll with regard to risk management and compliance?
In terms of risk management and compliance, the move to global payroll is smart as it helps to ensure corporate visibility and streamlines processes, which reduces error risk. But with so many local compliance laws, and more emerging, some companies may be tempted to house the most complex local processes outside of their centralized solution. With payroll managed in disparate solutions, companies leave much more room for error, and therefore penalties, making it critical that they approach payroll compliance through a single, centralized process that prevents losing corporate oversight. Plus, as regulation changes occur frequently, the risk for noncompliance becomes greater by having to keep track of updates among various segments as opposed to a single source.
3. How can a global payroll department integrate on a strategic level with corporate finance, HR, and other departments to provide a competitive advantage?
Government mandates are actually necessitating such integration. IT departments have a direct impact on payroll; payroll has a direct impact on the tax department, etc. Using government-mandated standardization, companies are automating payroll and tax reporting in their centralized enterprise resource planning (ERP) systems, reducing error risk and freeing up payroll staff to focus on exceptions and innovations instead of data entry. Ultimately integrating and automating payroll, accounts payable, accounts receivable, accounting, IT, etc., results in streamlined processes, cost savings, and competitive advantages.
4. What countries are the most complex for global payroll, and how do you prepare for them?
With the wave of changes and expansions taking place this year within Mexico and Brazil’s already complex regulatory environments, companies are in for a turbulent ride, risking significant fines, penalties, and business disruptions with any error. The tax authorities in these two countries are expanding focus from business-to-business transactions to reducing fraud in payroll and individual tax filings as well. Cash payments and contract labor are common in Latin America, and the majority of the population is unbanked, so governments are turning to payroll and HR regulations to combat tax avoidance. In Mexico, all paychecks must be registered with the government, and payroll deductions must be validated through journal entries in accounting reports. This gives the tax authority the ability to track fraud at both the corporate and employee levels because it has a registration of all payments.
Brazil is taking fraud detection to the next level, looking at not just payroll events, but labor events as well. Under eSocial, companies will be required to report labor, social security, tax, and fiscal information related to their hiring and employment practices. Payroll and social security contributions will be reported electronically on a monthly basis to the government, and must match reported labor events such as hiring, suspensions, and contract details. This visibility will help Brazil crack down on social services fraud in addition to payroll tax errors, triggering alerts when individuals are collecting both a paycheck and unemployment insurance or disability.
5. What global process server model do you use in global payroll, and why does this work best for you? Centralized/decentralized; regional/local?
Our clients are largely moving toward centralized solutions with regional customizations within the global template. This model has proven to best fit payroll and other financial processes for companies with a large global presence. Because each country has its own requirements that will continue expanding and changing over time, a global centralized system will be key for companies that want to ensure efficiency while maintaining corporate oversight. This also makes it easier for internal teams—no matter where they are located—to adopt to processes such as automation that will further enhance their day-to-day productivity. A global centralized system allows for more transparency and unification rather than relying on multiple, third-party, bolt-on solutions that have a greater risk for error among other potential frustrations.
6. How is technology helping global payroll become more strategic?
For most global enterprises, we recommend taking advantage of a hybrid cloud model in order to focus on strategy and innovation instead of day-to-day maintenance. This approach eliminates the headache of setting up hardware and keeps all workflows in the cloud, making it an ideal way to address the issues associated with payroll compliance. This allows integrations and updates to take place quickly and efficiently, while also eliminating potential downtime associated with events like power outages. In turning to a global payroll strategy, a hybrid cloud approach would allow for necessary transparency, streamlined processing, and updates, saving companies both time and resources.