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Global payrollRegulatory compliance vs. cost efficiencies
27–30 October 2013
Page 2 Global payroll: regulatory compliance vs. cost efficiencies
Disclaimer
► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young LLP is a client-serving member of Ernst & Young Global Limited in the US.
► This presentation is © 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.
► The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP or its professionals.
Page 3 Global payroll: regulatory compliance vs. cost efficiencies
► Speaker introductions ► Journey to a globally compliant payroll► Evaluating payroll priorities► Selecting a payroll operating model► Achieving regulatory compliance and cost
efficiencies
Agenda
Page 4 Global payroll: regulatory compliance vs. cost efficiencies
Speaker introductions
Daniel Hayot – Head of Global Mobility Systems – Novartis► Daniel leads the Novartis global mobility team, which is responsible for delivering
compensation, tax, social security and equity in over 80 countries ► Daniel has been at Novartis for three years and is responsible for driving global systems
strategy and development.
Philip Thomas – Director of Employment Taxation, American Express► Philip has over 15 years of experience in tax, global equity and international mobility, and
works closely with HR, global payroll, General Counsel’s Office and external service providers to address tax compliance obligations for the company’s employees.
► Philip is responsible for Global Equity Plan tax compliance and has been working on the transformation of the employment tax function.
Mike Hibberd – Partner, Global Compensation Services – EY► Mike leads EY’s Global Compensation Services for EMEIA. ► Mike has over 25 years of experience in global mobility, specifically supporting global
organizations to achieve compliance and manage program costs.
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Page 5 Global payroll: regulatory compliance vs. cost efficiencies
Journey to a globally compliant payroll
Page 6 Global payroll: regulatory compliance vs. cost efficiencies
About Novartis
Novartis was founded in 1996 and is the leading multinational pharmaceutical company.► The company had over $57 billion in net sales 2012. ► Novartis operates in 140 countries, with global HQ in
Basel, Switzerland. ► The company has approximately 133,000 employees
worldwide, working across eight Novartis divisions.
Content courtesy of Novartis
Page 7 Global payroll: regulatory compliance vs. cost efficiencies
About Novartis
► 800 international assignees► 100 executives on assignment► Assignees in 70 countries► 1,500+ local transfers
Page 8 Global payroll: regulatory compliance vs. cost efficiencies
Novartis journey
2011:► Novartis identified a need for completeness, accuracy and control of its global
payrollAugust 2012:► EY and Novartis began implementation of Phase 1 in top five countries, going
live in January 2013
► Phase 2, a further 65 countries were implemented, going live May 2013
Challenges:► 800 assignees, across 97 payrolls
► Decentralized local payroll functions with separate reporting lines
► Concurrent roll-out of other major change programs/projects
► Dependency on roll-out of new global relocation vendor
Page 9 Global payroll: regulatory compliance vs. cost efficiencies
Novartis journey
Benefits:► Global payroll instructions
► Improved accuracy of withholding and compliance
► Monthly compilation of data
► Total cost management reporting
Page 10 Global payroll: regulatory compliance vs. cost efficiencies
About American Express
► Industry: financial services► Public company: AXP (NYSE)► Locations: 130 Countries► Headquarters: US► 2012 mobility volume: 720► Assignments: 11 countries► Relocations: 19 countries
Page 11 Global payroll: regulatory compliance vs. cost efficiencies
American Express journey
Challenge:► American Express heavily outsourced: global mobility, payroll and stock plan
administration
► Lack of end-to-end ownership for mobility-related compensation
Approach:
► 2007 Compensation Reporting Program overhaul in two phases:
► Phase 1: Eradication of errors – employee dissatisfaction, P&I costs, increased vendor costs/time delays
► Phase 2: Efficiencies in process – retain accuracy/low rework, reduce on-going costs, total cost reporting
► Move away from “expat assignments” to “permanent transfers”
Page 12 Global payroll: regulatory compliance vs. cost efficiencies
American Express journey
New model:► Between 2007 and 2012 assignee demographics have changed significantly
► 2008 – advent and roll-out of Local Plus Transfer
► 2009-2012 – success of Local Plus Transfer policy
Lessons learned:► Agreed ownership and responsibility – avoiding potential tension with payroll
responsible accountable consulted informed (RACI)
► Automate processes using a central repository
► Allocate adequate resources – ensure payrolls can manage complexity of mobility issues
► Ensure scalability of solution – if program size diminishes cost could become a significant factor
► Clarify value proposition to ensure business understands cost/risk ratio and payment is allocated effectively, where necessary, leverage compliance failings to secure funding
Page 13 Global payroll: regulatory compliance vs. cost efficiencies
Evaluating payroll priorities
Page 14 Global payroll: regulatory compliance vs. cost efficiencies
Evaluating your payroll priorities
Compliance
Cost
Greater efficiency
Full regulatory compliance at any cost
Lower compliance goal
Cost of achieving a compliant payroll must be reduced
Little consideration for cost of achieving compliance
Maximum focus
Minimum focus
Greater efficiencies must be achieved to reduce time/ resources associated with payroll activities
Limited focus on achieving operationally efficient global payroll
Assignees must receive correct compensation –assisting with satisfaction levels
Assignee satisfaction is not a priority
The business demands insightful management information
No requirement for management information
Assignee satisfaction
Management information
Page 15 Global payroll: regulatory compliance vs. cost efficiencies
How are global organizations assessing their priorities?
► EY and The Forum for Expatriate Management explored the views of 32 multinational organizations
► Resulting report (shown) provides insight into how companies with global assignment programs are increasing their focus on global payroll
Page 16 Global payroll: regulatory compliance vs. cost efficiencies
Polling questions
► How many assignees does your organization have worldwide?► Under 100► 100 to 500► 5001 to 1,000► Over 1,000
► Where is your company headquartered?► Americas► Asia-Pacific► EMEIA
Page 17 Global payroll: regulatory compliance vs. cost efficiencies
Polling question
► What are your organizations top three business challenges in managing assignee compensation? Please rank by level of importance:► Achieving compliance► Reducing cost► Establishing effective global processes and controls► Accessing total cost information► Satisfying assignees
Page 18 Global payroll: regulatory compliance vs. cost efficiencies
Business challenges driving the need for increased control
► Survey respondents were presented with five business challenges pertaining to global compensation and asked to pick the option that best identifies scenario
19%6%
28% 25% 22%
25%38%
19%13%
5%
34% 31% 16%19%
0
20
40
60
80
100
Establishing effectiveglobal processes and
controls
Ensuring compliancewith country payroll
regulations
Reducing oreliminating
unnecesary costs ofcompliance failures
Accessing totalprogram costmanagementinformation
Improving assigneesatisfaction throughaccurate and clearglobal statements
Ranked #3 Ranked #2 Ranked #1
Page 19 Global payroll: regulatory compliance vs. cost efficiencies
Challenge 1 — Establishing effective global processes and controls
► Significant manual effort required to share data globally
► High internal and external processing costs
► Duplicate effort to achieve each country’s compliance requirements independently
► Internal resource focused on year-end and corrective activities
The challenge“There are too many operational inefficiencies in our compensation process.”
Page 20 Global payroll: regulatory compliance vs. cost efficiencies
Polling questions
► Do you have controls in place to ensure items instructed to payroll are accurately processed on a timely basis?
► Do you believe your local payroll and mobility teams have sufficient knowledge of assignee payroll reporting?
Page 21 Global payroll: regulatory compliance vs. cost efficiencies
Establishing effective global processes and controls
Q. Do you have controls in place to ensure items instructed to payroll are accurately processed on a timely basis?
43.8%53.1%
3.1%
YesNoOther
Q. Do you believe your local payroll and mobility teams have sufficient knowledge of assignee payroll reporting?
31.3%
59.4%
9.3%
Yes
No
Other
Page 22 Global payroll: regulatory compliance vs. cost efficiencies
Challenge 2 — Ensuring compliance with country payroll regulations
► Global knowledge of local payroll issues is not sufficient
► Local payrolls are not set up to handle expat complexities
► Compensation details are collected from multiple data sources and are often incomplete
► Legislation changes require additional effort and experience, e.g., Real Time Information (RTI) introduction
The challenge“We need to reduce our exposure to
payroll compliance risk.”
Page 23 Global payroll: regulatory compliance vs. cost efficiencies
Polling questions
► Have you experienced any local tax authority audits and queries for which there were findings and omissions noted?
► Have you experienced any internal audits and queries where findings and omissions were noted?
Page 24 Global payroll: regulatory compliance vs. cost efficiencies
Ensuring compliance with country payroll regulations
Q. Have you experienced any local tax authority audits or queries for which there were findings and omissions noted?
59.0%
41.0% Yes
No
Q. Have you experienced any internal audits or queries where findings and omissions were noted?
69.0%
31.0%
Yes
No
Page 25 Global payroll: regulatory compliance vs. cost efficiencies
Challenge 3 — Reducing or eliminating unnecessary costs of compliance failures
These costs arise from:► Incorrect and late withholdings
► Inaccurate employer and employee statutory reporting
► Revenue authority audits (employer and employee)
► Incorrect tax return information
► Incomplete and incorrect compensation data
► Assignee over payments
► Significant internal time addressing issues
The challenge“Our costs associated with regulatory compliance are spiralling out of control.”
Page 26 Global payroll: regulatory compliance vs. cost efficiencies
Polling questions
► In general, do you experience large tax return underpayments or overpayments?
► If you have experienced internal or external audits where findings and omissions were noted, can you quantify average costs to the business over the last three years in interest, penalties and professional fees?
Page 27 Global payroll: regulatory compliance vs. cost efficiencies
Reducing or eliminating unnecessary costs of compliance failures
Q. In general, do you experience large tax return underpayments or overpayments?
43.8%
40.6%
15.6%
Yes No
Other
Q. If you have experienced internal or external audits where findings and omissions were noted, can you quantify average costs to the business over the last three years in interest, penalties and professional fees?
15.8%
10.5%
5.3%
68.4%
Less than £1m£1m to £3m£3m+Not known
Page 28 Global payroll: regulatory compliance vs. cost efficiencies
Challenge 4 — Accessing total program cost management information
Without management information (MI) it becomes very difficult for organizations to:
► Make informed decisions on the future of the global mobility program
► Internally recharge expatriate compensation costs
► Make decisions on the best approach to deal with legislative changes
The challenge
“We need access to complete data
reporting and management information.”
Page 29 Global payroll: regulatory compliance vs. cost efficiencies
Polling questions
► Can you accurately quantify the total current cost of your assignee program, including all cash and non-cash items?
► How important is it to your organization to quantify total program costs?
Page 30 Global payroll: regulatory compliance vs. cost efficiencies
Accessing total program cost management information
Q. Can you accurately quantify the total current cost of your assignee program, including all cash and non-cash items?
18.8%
40.6%
31.3%
9.3%
Yes
No
On some costs but not all
Other
66.0%
31.0%
3.0%
Very importantNice to haveNot important
Q. How important is it to your organization to quantify total program costs?
Page 31 Global payroll: regulatory compliance vs. cost efficiencies
Challenge 5 — Improving assignee satisfaction through clear global statements
► No ability to reconcile assignee home/host country payments to contractual entitlements
► No understanding of total value of reward
► Need to regularly contact HR/payroll teams to interpret remuneration
The challenge“Assignees do not understand what they have been
paid.”
Page 32 Global payroll: regulatory compliance vs. cost efficiencies
Polling questions
► What percentage of assignees raise questions on the accuracy of their delivered compensation?
► If you survey your assignee population, do you include questions associated with compensation issues?
Page 33 Global payroll: regulatory compliance vs. cost efficiencies
Improving assignee satisfaction through clear global statements
Q. What percentage of assignees raise questions on the accuracy of their delivered compensation?
65.6%
18.8%
3.1%
12.5%
Less than 5%5% to 10%11% to 20%More than 20%
Q. If you survey your assignee population, do you include questions associated with compensation issues?
25.0%
56.3%
18.7%
YesNoOther
Page 34 Global payroll: regulatory compliance vs. cost efficiencies
Selecting a payroll operating model
Page 35 Global payroll: regulatory compliance vs. cost efficiencies
Who owns the regulatory compliance for mobile employees?
Mobility Payroll Destination services
Page 36 Global payroll: regulatory compliance vs. cost efficiencies
Who owns the regulatory compliance for mobile employees?
Center of ExcellenceAll stakeholders
allocated ownership using RACI model
Page 37 Global payroll: regulatory compliance vs. cost efficiencies
Selecting the appropriate payroll operating model for international assigneesOperational payroll considerations:► Do you have a preferred payroll provider?
► Do global payroll systems exist?
► Do you have complete demographic data?
► Is your payroll function centralized or decentralized?
► Who is responsible for payroll?
► Do you have resource availability to effectively operate payroll?
► Do you have the appropriate levels of knowledge and capability?
► Can you quantify the direct and indirect costs of operating payroll?
► Can you make an informed decision to insource, outsource or partially outsource your payroll operating model?
Page 38 Global payroll: regulatory compliance vs. cost efficiencies
Payroll challenges associated with different populations
Expatriate payrollcomplexities Long-term assignee Short-term assignee*
Local-to-local (transferees)
Creation and cessation of dual payroll record
?
Maintenance of dual payroll records
?
Year-end payroll reporting complexity
?
Trailing payments ?
Payroll capability
?
Payroll instruction ?
Social security compliance
×
Accounting instruction ?
*These payroll complexities only exist with short-term assignees in certain circumstances, not in all.
Page 39 Global payroll: regulatory compliance vs. cost efficiencies
The requirements
► Demographic data► Salary and bonus and
other cash allowances► Budgeted assignment
costs► Payments via accounts
payable► Vendor payments► Expense reimbursements► Equity► Pension and other
benefits
Collection of multiple data sources in various formats
► Year-end reporting► Total cost reports► Driving program savings► Management reports► Total reward statements
Generating value and insight from global compensation data
Assignee experience► Global pay statement► Reduced pay queries► Reduced audits
Monthly centralized
global process
Apply tax and social security logic (gross,
net, pay report only)
Data validation
checks
Confirm payroll
instructionsprocessed correctly
Instructionto home/host
payroll
Tax gross-upsif required
Produce monthly
management reporting Supporting regulatory
compliance► Employer reporting► Tax return-ready data► Internal cost recharge► Supporting business
accruals► Internal controls
Page 40 Global payroll: regulatory compliance vs. cost efficiencies
Achieving regulatory compliance and cost efficiencies
Page 41 Global payroll: regulatory compliance vs. cost efficiencies
Implement global payroll management process
Global payroll operations achieve compliance and transparency
Reduced audit risk and related costs (interest, penalties, professional costs)
Complete assignment costs provides base line
Systematic cost reduction
Can all priorities be achieved?
The priorities of compliance, cost reductions and efficiencies do not have to be in conflict. They are all achievable if the right management process is established.
► Can you build a scalable model?
► Have you considered all costs – e.g., implementation, training and on-going maintenance costs
► Have you taken other factors into account – e.g., impact on assignees, global mobility reputation, time and resources required, penalties and interest
Key considerations
Page 42 Global payroll: regulatory compliance vs. cost efficiencies
Access total cost reports
► Interactive ability to drill down on high-level costs to explore key drivers of cost base
► Enables cost-saving opportunities to be extrapolated
► Provides the business with more accurate cost projections
Example output from total cost reporting, demonstrating assignment cost per country
Page 43 Global payroll: regulatory compliance vs. cost efficiencies
Global Cost Reporting: Total Cost Breakdown
Total Cost Breakdown Amount in GBP %Assignment specific expenses and allowances 114,202,867 32%
Housing 70,219,529 COLA 10,686,150 Family Fees 7,171,449 Home Leave 2,744,585 Relocation 15,509,457 Shipping 7,871,698
Stay at Home Cost 144,454,964 40%Incentive Compensation 63,804,447 Pension and related Benefit 24,109,440 Salary 56,541,078
Tax and SS costs 70,374,517 20%Hypo Social Security (3,532,412) Hypo Tax (35,913,602) Income Taxes paid by Employer 82,436,187 Penalties and Interest 2,040,519 Social Security paid by Employer 25,343,824
Vendor Fees 28,794,961 8%Vendor Management Fee 28,794,961
Grand Total 357,827,309 100%
32%
40%
20%
8%
Assignment specific expenses and allowances
Stay at Home Cost
Tax and SS costs
Vendor Fees
Drive down mobility costs
Page 44 Global payroll: regulatory compliance vs. cost efficiencies
Country-specific breakdown Service-specific breakdown
Tota
l cos
t bre
akdo
wn
Shipping Cost in USA Vendor Cost (£) Tax Cost (£) Total Cost (£)Shipping 1,029,050.00 554,103.85 1,583,153.85 Insurance Cost (1.85%) 134,429.00 72,384.85 206,813.85 Total 1,163,479.00 626,488.69 1,789,967.69
Incurred Costs
Housing Cost in China Pre-Tax Cost (£) Tax Cost (£) Total Cost (£)Rent Paid 4,572,485.12 4,572,485.12 Housing Allowance 2,909,763.26 2,380,715.39 5,290,478.65 Utilities 831,360.93 680,204.40 1,511,565.33 Total 8,313,609.31 3,060,919.79 11,374,529.09
Incurred CostsCountries Housing Cost %
GBR 14,125,804.45 20%HKG 11,696,760.07 17%CHN 8,313,609.31 12%USA 5,971,836.71 9%ARE 4,900,522.91 7%Others 25,210,995.51 36%
Grand Total 70,219,528.95 100%
Countries Shipping Cost %GBR 1,878,095.22 24%HKG 1,488,232.46 19%CHN 1,165,048.83 15%USA 1,163,478.64 15%ARE 508,675.24 6%Others 1,668,167.70 21%
Grand Total 7,871,698.08 100%
Drive down mobility costs
Page 45 Global payroll: regulatory compliance vs. cost efficiencies
Location: China inboundOverall savings potential: £2,380,715Cost reduction (%): 21%
Notes and recommendationsAccommodation:► Allowances for housing is treated as
cash in China and taxed in full► Property provided directly is tax-free
Other observations:► Policy exceptions are high in China and
benchmark data based on family size suggests 8% (£365k) further savings achievable
China savings potential on housing costs
Housing Cost in China Pre-Tax Cost (£) Tax Cost (£) Total Cost (£)Rent Paid 4,572,485.12 4,572,485.12 Housing Allowance 2,909,763.26 2,380,715.39 5,290,478.65 Utilities 831,360.93 680,204.40 1,511,565.33 Total 8,313,609.31 3,060,919.79 11,374,529.09
Housing Cost in China Pre-Tax Cost (£) Tax Cost (£) Total Cost (£)Rent Paid - -Housing Allowance - 2,380,715.39 2,380,715.39 Utilities -Total - 2,380,715.39 2,380,715.39
Incurred Costs
Tax-only Savings Potential
Drive down mobility costs: savings potential
Page 46 Global payroll: regulatory compliance vs. cost efficiencies
The cost of achieving compliance can be self-funding
Cost savingsExamples of cost reduction EY member firms have delivered to clients through implementation of a payroll management process► Tax optimization costs – global pharmaceutical company $4,200,000► Compliance savings – global pharmaceutical company $1,500,000► Total assignment cost reductions – global automotive company 411,200,000► Shipping vendor cost review – global telecoms entity 43% reduction► Social security planning review and optimization – global insurer $1,500,000
Cost savings above are only examples, savings will vary according to the specific situation
Page 47 Global payroll: regulatory compliance vs. cost efficiencies
Access accurate management information
HighlightsWorkstream Title GCS actions DeadlineGPS Phase VI – North
America and Canada
To discuss and agree GPS roll out
15/03/13
2012 year end FXAdjustments
Approval To provide sign-off
Home payroll approach for TCNs
Process To provide decision on home payroll process to use
18/03/13
Home payroll approach for TCNs
Data quality To request sample entities tochange payroll output file format
07/03/13
Variance reporting December variances
Follow up with Greece regarding December variance – no response to EY
Variance reporting MB France variances
Arrange GAM-IT training for the entity
Year end reporting GSS corrections Decide on appropriate approach to correct errors
06/03/13
Operations
OperationsPIs
deliveredDeadlines met
for GCSDeadlines met
for entity RAG
statusExpats and TCN host1 110 109 110TCN home 23 22 23
Data Collection Latest Deadline Latest ReceiptRAG
StatusComp data 05/02/13 05/02/13Non-comp data 04/02/13 04/02/13Population US APAC EMEA TotalNumber of assignees 444 600 637 1,681Number of joiners 7 18 8 33Number of leavers 5 7 4 16Comments1 TCN host data are delivered with expat pay instructions
Positive variance/on track
Anticipated delay/pending approval
Negative variance/missed deadline
RAG key:
Current month project statusProjects RAG StatusPolicy check 2.0Feasibility project2012 year end FX adjustments1
Home payroll approach for TCNsTCNs roll outMulti-currency/split pay instructions2
Global claiming sheetGPS for TCNsComments1 Awaiting GCS sign-off2 Late format of pay instructions agreed, with manual instructions to be produced January to March
Page 48 Global payroll: regulatory compliance vs. cost efficiencies
Summary
► Regulatory compliance is complex and enforcement is increasing► Most organizations are focused on addressing and mitigating the risk► Ownership will vary within organizations, but accountability is key► Consider the task as more than a payroll compliance challenge► Determine what additional outcomes are desired
Key messages
You are not alone, help is available.
Page 49 Global payroll: regulatory compliance vs. cost efficiencies
Thank you
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