Global payroll audit activity and notices have returned to pre-pandemic levels, with some notable new focus areas. Employees located in foreign jurisdictions have different compliance needs than those common in the United States, and how to handle these inquiries, notices, and audits can be complex, especially if you are doing so from a different continent.
Remote workers, hybrid work relationships, and changes to leave programs have all added complexity to international compliance. Many countries have come out of the pandemic auditing for these issues and issuing guidance to companies to ensure compliance with their complex taxation rules.
Australia
Australia audit activity has commenced at pre-pandemic levels. Superannuation guarantee (SG) obligations are a big focus area in Australia, with the penalty regime for underpaying super, or paying it late, being notoriously unforgiving. On 1 July 2024, the SG increased from 11% to 11.5% and will increase to 12% by 2025. Currently, audits are focusing on the historical underpayment of SG.
Long service leave (LSL) legislation, which varies in the Australian states, is notoriously difficult to comply with. The risk is compounded when compliance with LSL obligations cannot generally be configured to calculate automatically within the payroll system. As a result, this is an area of audit that continues to be fruitful for the states in Australia. Historical underpayments of LSL for terminated employees and under-accruals of LSL for current employees are an area of focus for auditors.
State-based payroll tax is an employer tax charged in reference to most types of employee remuneration. It is typically charged at a rate of 5%-6% (depending on the state) and Australian employers are currently seeing unprecedented levels of audit activity from each of the states and territories.
Australia also has a similar worker classification push as the United States to reclassify workers from independent contractors to employees. Some recent cases have changed the landscape such that employers are encouraged to revisit their existing positions and contracting arrangements.
When obligations have not been met, and errors are not voluntarily disclosed, interactions between taxing authorities and taxpayers can be tougher and less collaborative. When a taxpayer comes forward and voluntarily discloses any historical errors, interest and penalties can often be reduced or even waived in full. Such outcomes tend not to be possible if issues and errors are discovered by a taxing authority instead.
State-based reviews of payroll tax obligations should be expected frequently. Federal review activity by the Australian Taxation Office (ATO) and Fairwork Ombudsman have historically been less common. However, in recent years, this has changed with both authorities being more active in the audit space. Within the last year, the ATO has introduced the Random Enquiry Program (REP), which is an employment taxes-specific intensive audit program.
Canada
Canada’s payroll tax audits have seen an increase over the past several years. Their focus is now on business travelers and nonresident companies sending employees into Canada to work on a contract they may have with a Canadian company. Additionally, audits in Canada are now covering a five-to-seven-year period with corresponding interest assessments with very high rates.
New Zealand
In New Zealand, holiday pay is a hot topic. The auditing agency has found that there is significant noncompliance with the Holidays Act, which was enacted 17 December 2003.
In addition, Inland Revenue currently sends annual questionnaires to employers in the country. These questionnaires have been updated since the pandemic and now include queries regarding whether the entity has cross-border employees. Before the pandemic, payroll audits by Inland Revenue were fairly infrequent. However, in the past two years, audit activity has increased.
United Kingdom
The Employer Compliance Review (ECR) is a routine audit conducted by His Majesty's Revenue and Customs (HMRC) to check whether an employer has correctly operated the Pay As You Earn (PAYE) system, which is the main method of collecting income tax and National Insurance (NI) contributions from employees. An ECR can cover various aspects of payroll, such as tax codes, deductions, benefits, expenses, and reporting. The following include some payroll-specific ECRs:
- Employment Status Review (ESR): A focused audit conducted by HMRC to check whether an employer has correctly classified its workers as employees or self-employed contractors. An ESR can have significant implications for the tax and social security liabilities of both the employer and the workers, as well as their rights and obligations under employment law.
- Payroll Assurance Scheme (PAS): This is a voluntary scheme that allows an employer to appoint an independent auditor to review its payroll processes and systems, and to provide a report that confirms whether the employer is compliant with the PAYE regulations. A PAS can help an employer to demonstrate its commitment to good practices and to reduce the risk of errors and penalties.
These audits have occurred prior to the pandemic and have also been reinstated in the past several years, as there has been an uptick of audit activity.
Mexico
Payroll tax audits in Mexico are conducted by the Servicio de Administración Tributaria (SAT) to ensure that employers are correctly calculating and remitting payroll taxes, including income tax (ISR), social security contributions (IMSS), and other related obligations. SAT may initiate audits based on risk assessments, discrepancies in reported data, or random selection. Audits can be comprehensive or be focused on specific areas such as employee benefits or withholding taxes. Audits have increased in recent years as employment tax activity has grown.
Common issues identified during audits include misclassification of employees, underreporting of wages and benefits, and errors in tax withholding calculations.
Summary
Each of the jurisdictions appears to be back in business with audits with the extra-added twist of attempting to ensure compliance with remote or hybrid workers. Here in the United States, we are struggling with state-to-state transfers or hybrid relationships. This issue is even larger on the global stage when you can have an employee traveling to various countries during the workweek. Staying on top of legislative updates, country-specific guidance, and any notices received is integral to remain in compliance with a global workforce. Partnering with your third-party providers and in-country experts is also paramount to remain abreast of changes and be ready for the potential of an audit.