There are over 200 countries and territories in the world, and each of them operates their own payroll rules and processes. But the world continues to shrink with globalisation, and the trend for regional trading blocs continues to grow.
With their primary focus being the encouragement and growth of trade, they may not at first be of obvious interest to the global payroll practitioner. But as many of the agreements involve micro-management of the “how” of trade (namely employment), their contents are often pertinent to achieving compliant payroll outcomes.
The obvious trading bloc to start with is the European Union (EU), or more accurately referred to as the European Economic Area (EEA) which includes all EU members states plus Iceland, Norway, Switzerland and Liechtenstein.
SOFT_GATE
The bloc is based on the principle of freedom of movement and action within it for four items – People, Capital, Goods and Services. EU member states agree to pool sovereignty, and therefore EU law proposed by the EU Commission and confirmed by the European Parliament sits over national law. The four additional member states of the EEA agree to implement the requirements of this law into their own domestic legislation. Payroll interest is focused on the area of freedom of movement of people.
The first area of interest is the issue of who can work where in the EEA. The freedom of movement rules ensure that any EEA citizen (or their spouse) can:
So moving a Greek employee from an office in Athens to work in an office in France is in theory seamless. One impediment might be the recognition of professional qualifications – lawyers for example tend to be qualified to practice in only one territory. But no immigration or work permit limitations prevent them from moving to another EEA country. As such, one set of “right to work” checks need only be applied across the bloc.
One primary area of payroll attention is personal taxation. There are no EU-wide rules that say how EU nationals who live, work or spend time outside their home countries are to be taxed on their income. The position will usually be determined by the relevant Double Taxation Agreement. But Under EU rules, no matter in which EU country a person is considered a tax-resident, they should be taxed in the same way as nationals of that country under the same conditions. For example, in the country where they are tax-resident or where they earn all or most of their income, they should be entitled to:Let’s look at what this means in common circumstances:
Marie Clare is employed by a Dutch company and works from home in France. She rarely visits the company premises in Amsterdam. Both her and the company must pay French contributions
Agnieszka is sent on a 15 month assignment to Budapest from Warsaw. She and the company will pay Polish ZUS contributions, as Agnieszka is not replacing anyone else.
Christian works as the Sales Director for a large German engineering company. He has responsibility for the German speaking market and routinely works in Germany, Switzerland and Austria. Christian lives in Austria and always works every Monday and Tuesday from home there. Christian is a multi-state worker and he and his employer must pay Austrian contributions, as he passes the minimum 25% test in his country of residence.
All of these requirements are enforceable cross border. In the case of Marie Clare referred to above, failure of her employer to operate a French payroll to report her salary and calculate French contributions, will allow the French authorities to ask the Dutch authorities to take action in the country of residence of the company and compel the operation of French rules from the Netherlands.
One little known feature of EEA law is that this might not be the only option for a company in terms of obligations. EEA law allows, most importantly with the agreement of the employee, for the employee to take on the burden of administration and reporting provided that the employer put the employee in a position to meet the full obligation.
This in effect means that the employer pays the value of any employer contribution to the employee for them to pass this on to the relevant authority. This is extremely useful in circumstances where an employer has a payroll obligation in an EEA country where it does not currently operate business premises or have a payroll operating.
Example: Marie Clare is asked by her employer to take on the administration of social insurance reporting and payment of contributions on their behalf. Both parties sign a legal declaration to this effect and log it with the French authorities. The company pay Marie Clare the value of the employer contributions due. Marie Clare passes the full sum of employee and employer contributions to the authorities in France and reports details of her salary using a free internet tool provided by the French URSSAF.
The EEA is not the only trading bloc to operate such arrangements. Moving to the sun-soaked Caribbean, we find CARICOM (the Caribbean Community) and the Caribbean Single Market and Economy (CSME). The 20 member and associate states covering 16 million people have pledged that the right to freedom of movement of skills and labour within the bloc is an essential part of the development of the union. CARICOM nationals have the right to enter and work in another member state for up to six months without requiring a work permit. Furthermore, the skills and labour requirements allow certain employees to freely work in another member state without time limit once they have obtained a skills certificate from their home country immigration authority. The list of approved skills includes university graduates, artistes and musicians, sports people and media workers. Not all member states participate in these arrangements, exceptions being The Bahamas, Haiti and Suriname.
Significant cooperation is also undertaken concerning social security coordination. The CARICOM Agreement on social security is intended to protect CARICOM Nationals’ entitlement to benefits and provide equality of treatment when moving from one country to another. The Agreement is seen as key in facilitating the free movement of labour within the CARIOM Single Market, but it applies to all persons who are moving to work or have worked in two or more countries that have implemented the Agreement.
If an individual is insured and employed in one CARICOM Member State, for example, Barbados, and their employer sends them to work in another CARICOM Member State, for example, Saint Lucia for a period not exceeding twenty-four months, they will remain insured under the law and regulations of Barbados whilst are working in Saint Lucia. If, due to unforeseen circumstances, the assignment exceeds this time, the laws and regulations of Barbados remain applicable until the work is completed, subject to the approval of the Saint Lucia Social Security Organisation.
Workers involved in international transportation covering either passenger or freight traffic are subject to social insurance contributions primarily in the country where the employer has their principal place of business, or if the worker is resident for social security purposes in another country to where the employer has their principal place of business, then the employer will be required to pay contributions in the residency country. This creates an obligation for cross border payroll arrangements if the employee is based in a different country to the employer. Mariners pay social insurance primarily by reference to the flag under which the vessel they sail on is registered under. The exception to this rule is where the mariner is paid by an organisation whose principal place of business is in a different member state to the flag of the vessel, then contributions are due under the scheme for te country where the paying business is based.
The Social Security Agreement sits as a standard arrangement that all member states (with the exception of Haiti and Suriname) agree to apply. This avoids the necessity for individual country agreements between each of the member states and makes movement between member states easier. Any disputes as to how the Agreement is to work in practice are ultimately referred to the Caribbean Court of Justice, which acts as the final arbiter on all matters concerning CARICOM.
The East African Community (EAC) operates similar arrangements under the Bloc’s Common Market Protocol. Covering Kenya, Uganda, Burundi, Rwanda, South Sudan and Tanzania, the protocol allows workers in one member state to accept employment in another member state.
This is contingent on the worker applying for a work permit, but these are not necessary for periods of work of up to 90 days. There is no coordination agreement covering social security rights and obligations, but under the wider treaty member states commit to non-discrimination. This means that should an employee move from one member state to another and obtain employment under the Common Market Protocol, then they must be allowed to enrol in the local scheme to the same level of coverage as a citizen of the country they have moved to.
The Economic Community of West African States (ECOWAS) provides for a singe trading bloc of 15 West African countries, including Nigeria, Sierra Leone and Senegal. The bloc has a piecemeal approach to applying the right to work without a work permit, but has focused instead on the position of those who do obtain permission to work in a different member state with regard to access to social security. The position is enshrined in the ECOWAS General Convention on Social Security which is applicable across the bloc. With funding and other assistance provided by the European Union, the rules would be familiar to an employer operating in the EEA.
The default position is that an employee should pay the contributions of the country in which they work. Secondees sent from one member state to another for a period of up to six months must remain insured in their home country, but should a project be incomplete at the six month point, home country insurance will continue until the work is completed. International transport workers pay the contributions of the country where the employer has their HQ. The convention also caters for the concept of a multi-state worker, setting the country of residence of the employee as the one where contributions are due.
The Cooperation Council for the Arab States of the Gulf, colloquially known as the Gulf Cooperation Council (GCC) goes one stage further in its involvement with payroll processing. The Wages Protection System is now mandated across the bloc. It requires private sector employers to report details of the payment of wages via the bank used to pay salaries. The point of the legislation is to address the non or late payment of wages to the largely migrant workforces in each territory. A full list of employees and amounts paid are passed from the paying bank to the central bank and on from there to the local labour ministry to assist monitoring adherence to labour law.
The GCC has also standardised the position regarding social insurance contributions via the Unified Law of Insurance Protection extension for the Gulf Cooperation Council State Citizens working outside their Countries in any of the council State Members. Each country’s social insurance system is required to accept GCC nationals as members of their scheme when the individual is working in any GCC member state.
The South American trading bloc MERCOSUR also operates a multi-lateral agreement covering social security. Again, contributions may only be charged by one member state on an employee, and these ordinarily are the state where the work is physically performed. Those on a temporary assignment of up to 12 months remain insured in the home country.
The position is unambiguous. Companies must investigate cross bloc payroll obligations which will supersede national legislation. Whilst there is a common pattern around the globe, the specific requirements of each bloc will need to be understood in order to process a compliant payroll should the company operate in more than one territory in the relevant bloc.
To ensure that your organization is compliant, and is ready for auditing and all the other challenges of the Global economy, the experience and expertise of a global payroll partner can make a huge difference.