Business expansion requires meticulous coordination to replicate the success of the parent company in foreign countries. As such, companies will often appoint an experienced employee to help with the expansion during overseas missions, ensuring that company values are duly upheld and passed on. However, these overseas assignments create a payroll conundrum – employees are registered on their home payroll but are also eligible as tax-paying workers in the host country.
This is where shadow payroll steps in.
Without shadow payroll, businesses could face heavy fines from the countries they are expanding to and could potentially run the risk of being blacklisted, ruining their hopes for expansion.
Shadow payroll is a payroll strategy used mainly when employees are sent on overseas assignments, which is why it is also known as “expat payroll”. Through expat payroll, employers can report information about foreign-sourced compensation. For instance, if your company is based in the USA and you have an employee in South Africa, setting up a shadow payroll there will ensure that you are in compliance with the local income tax laws. This means that you can complete your tax and social obligations in South Africa while paying the employee through the USA-based payroll.
Besides, overseas missions never quite meet the set deadline. With either complications arising or with the business taking on more quickly than intended, a three-month-long deployment can easily turn into an assignment spanning the whole year. This type of situation makes an even stronger case for workers’ income being taxable.
But the main reasons why shadow payroll is needed are:
Employees deployed abroad might need to use shadow payroll to report their wages in both, their home and host countries. While managing a shadow payroll, the following issues arise most frequently:
Employees on assignments abroad, frequently worry that their earnings will be subject to double taxation since they believe they will be taxed in both their home country and the country they are working in. It must be noted that some countries have double taxation treaties in place. These agreements ensure that any money earned is taxed fairly and that double taxation is prevented.
Taking up an overseas assignment is not always easy to do, especially when employees need to leave their families for extended periods of time. To incentivize them to take up these assignments, companies ensure that workers on overseas assignments do not pay more taxes than they otherwise would have in their home country. This is known as “Tax equalization”. Employers use this provision to balance out any tax differences. As a result, employees pay this hypothetical tax as if they were still in their home country.
Of course, this is quite a complex operation, requiring knowledge of international tax law as well as timely calculation and remittance of the relevant taxes, for safeguarding against the risk of non-compliance.
Make no mistake, shadow payroll is a convoluted process that requires not only knowledge of the law and potential relief strategies but also timely and accurate action. Furthermore, shadow payroll includes taking into account particularities like holiday pay, bonuses, and the 13th and 14th month’s salary and employee classification, among others.
Even the slightest mistake can bring about heavy sanctions that you will have to bear, sometimes even at the cost of proper expansion in the country of your choice.
Double taxation treaties are among the relief strategies available to employers when expanding overseas in Africa, for instance. Through shadow payroll and double taxation treaties, employers can make their expansion more cost-efficient.
Expat payroll is efficient in certain situations, however, it is not always applicable, even when an expatriate worker is involved. These situations do not require the use of expat payroll:
When a business partners with an EOR (Employer of Record), they automatically hand over all payroll responsibility to the EOR. Since the EOR has a legal local entity, there is no need for parallel payrolls.
When a company has its own in-country entity, shadow payroll is not needed. The company will simply need to arrange for the expatriate worker’s visa and work permit.
Although rare, it may be that some countries have no employment or payroll tax withholdings. In these cases, shadow payroll is not necessary.
In some countries around the world, remote workers and expatriates enjoy a non-taxable status, in which case shadow payroll is redundant.
Managing shadow payroll by yourself will very likely prove not to be worth the considerable effort of learning the tax and labour laws of your home country and the host country. It will also require you to act in a timely manner while making no mistakes. With the stakes being this high – there are risks of fines, being blacklisted, and potentially ruining your expansion efforts – it is best to turn to an expert to ensure that this crucial aspect of business expansion is properly taken care of.
With decades of experience helping businesses manage their payroll needs, Africa HR Solutions is fully qualified to assist you during your business expansion across the African continent. Get in touch with one of our experts now to find out how we can best meet your payroll needs.
Kevina Takoordyal has a BA Hons Business Management from the University of Glamorgan, UK, with MBA in leadership and Innovation, MBA General, PMP Certified, and Agile Scrum Master. She currently works as the Head of Operations at Africa HR Solutions Ltd with more than 20 years of proven leadership capabilities in Operations, Business Development, People Management, Process Optimization, and Project Management in the Financial Services, BPO, Banking Industry, and Heath Care Industry. In Senior leadership roles with an international footprint across Europe working and extensive Pan- African experience from a compliance, finance, and operations angle, Kevina comes across with a panoply of cross-functional skills. Kevina also serves on a few Boards, Non-Independent Executive at MioD and for NGOs on a voluntary basis, a coach and mentor to aspiring female leaders across Africa and Mauritius.
Kevina is a firm believer in Servant Leadership with a strong focus and commitment to uplifting others, with the ability to deliver through a highly engaged – diverse team, and works towards consistently synergistic value creation. While being a focused and adaptive thinker and Kevina is actively participating in panel discussions on Innovation, CX, Digital transformation.
Kevina serves as Project Assessor for the National Youth upskilling program. She has been recognized as Global Talent in a few companies, Ceridian, and International SOS Ltd whereby she has been awarded a few scholarships and had the opportunity to be mentored by Senior Vice President in the US. Award Winner in various fields and at a national level and recognized including Super Achiever Leader Award in Africa in 2016, Awarded Africa Women Leader 2018.
A qualified lawyer who joined Africa HR Solutions in July 2020, Mark Du Preez has experience working in private practice for a reputable law firm in South Africa. He also played commercially focused roles at a leading private bank, wealth management company, and outsourcing firm in South Africa and Mauritius.
Mark has played a pivotal role in Africa HR Solution’s risk mitigation strategy, which positively impacted P&L performance over the years.
He currently leads the Partnerships function of the company including relationships and oversight with in-country partners (ICPs) across Africa.
Alex has more than 15 years of experience in the global, strategic development of both enterprise and consumer brands in categories including technology, transport, enterprise software, entertainment, and travel.
With experience in roles on both agency and corporate side, he has worked across international brands and has led the development and execution of multi-discipline campaigns across EMEA, NORAM and Asia Pacific.
His focus is on driving meaningful business impact through brand differentiation and building high-functioning, digitally oriented, and analytically driven capabilities. He is motivated by working with, and developing dynamic people, teams, and organizations.
He leads, manages, develops and mentors the Key Account Management department, including line management responsibility for the team of Key Account Managers and Key Account Administrator who represent the Company as the primary communication link between all relevant stakeholders, including clients, third party in-country partners and internal functions.
Originally from Mauritius, he holds bachelor’s degrees in International Business, Finance and Management from the University of Nevada, Reno.