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Rules of the Game for Global Players

June 1, 1997
Related Topics: Global Business Issues, Managing International Operations, Expatriate Management, Featured Article
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When a company first starts to send employees overseas, many questions need to be answered. The following information, provided by Price Waterhouse LLP International Assignment Services Partner Marcia Marsh and Manager Rob Burke, details those questions and provides the answers to get you going.

What type of corporate structure should HR set up in the new international location?
Though this decision is traditionally thought of as a concern for the legal and tax departments, it impacts HR as well. The type of entity can place significant limitations on the activities that employees can perform. As HR frequently drives the initial start-up activities (since the need to have an employee on the ground is often an urgent matter), an HR professional should communicate extensively with tax and legal experts to lay out the types of activities employees will be required to carry out.

How long will it take to get a business registered?
Again, HR often is under a good deal of pressure to hire staff and get them on the ground. But having a registered corporate presence may be a necessity before local recruiting can take place or work permits and visas can be obtained for international transferees.

Delays in the start-up may push HR to look for pre-registration employment options including labeling workers as independent contractors in the interim. Although this may be a practical option in certain cases, an HR professional should keep in mind that most countries have regulations that define when an employment relationship exists, independent of how an employer labels a worker.

What immigration regulations must be addressed?
If HR is considering staffing an office with international transferees, global managers almost certainly will have to obtain visas and work permits for these employees, usually before they arrive in country. Failure to do so can result in significant financial and nonfinancial penalties for the company and employees (including imprisonment) in some locations. Beyond work permits and visas, HR professionals should consider other immigration restrictions. For example, some countries have established ratios for the number of local staff that must be employed for each expatriate. These regulations can clearly have significant impact on staffing decisions.

If a company employs international transferees under some type of expatriate compensation and tax-balancing program, how can HR minimize and properly budget for the associated costs?
Expatriate compensation packages can be quite costly, especially in locations where housing or other living costs are extreme. Further, income and social tax rates in many countries are quite high, and as the company funds an individual's excess tax (usually over a home-country standard), the "tax on tax" effect can drive costs up significantly. Structuring a competitive compensation policy and taking advantage of local tax-planning opportunities can generate large savings and add directly to the bottom line. At the same time, understanding the true cost of international assignments is an important piece of overall budgeting, and a lack of understanding can result in significant financial surprises.

If HR performs individual tax planning for international transferees, are there corporate tax and accounting concerns that preclude HR from pursuing such planning, or that call for some modification?
It may be the case that the savings generated by individual tax planning negate a corporate tax deduction, and the savings is thereby eliminated or reduced. Further, individual tax planning often requires specific chargeback of costs, which may conflict with tax and accounting strategies or requirements. Communication between HR, tax and accounting is important in attempting to minimize overall costs for the company.

What are the local compensation and benefits rules, and how do they impact corporate policy?
Many country governments mandate various types of compensation and/or benefits to employees. Both local nationals and expatriate staff can fall under these rules. One common mandatory payment is 13th-month salary payments, usually payable at year-end, but at times payable in installments. Another example is the fact that certain governments or national labor unions mandate salary increases for qualifying employees at various times during the year. These are clearly issues a human resources professional will want to consider when determining merit increases and paying seasonal bonuses.

Should HR establish a local payroll, and does it matter where employees are paid from?
Many companies enter markets without staff on hand to administer a local payroll. Although a company's headquarters payroll department can usually get funds to employees through international wire transfers, most countries have payroll reporting and withholding requirements that apply even to offshore payments. Finding a local vendor or an adviser who can help fulfill these requirements often is a good option. In some countries, there may be significant and legitimate tax savings opportunities for amounts paid offshore. But differentiating the legitimate opportunities from noncompliance is important, as corporate exposure from the latter is a real concern.

Workforce, June 1997, Vol. 76, No. 6, p. 78.

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