Nuances of local payroll

In one recent example, TMF Group was helping a multinational corporation to set up in Italy. As far as the company was concerned, it had dotted every ‘i’ and crossed every ‘t’. However, we encountered a problem early on: Italy only allows legislated third-party payments from a specified list of local Italian banks. The client’s bank – the one they had patiently and steadfastly negotiated a global relationship with for local accounting and payroll – was not on that list.

Our in-country experts’ knowledge of Italian rules and regulations really helped the client navigate this delicate situation, and were able to negotiate a solution involving payment coming through a trust account we set up. 

This is not an uncommon scenario, nor is it the only money-related issue that international companies can face when placing staff in a new country. When paying salaries to staff overseas, it’s prudent to monitor several issues, including:

• reliability of money transfer
• exposure to currency risk for both the company and employee
• country-specific legal, banking and compliance issues
• consolidation and cost of accounts and reporting.

Paying from a foreign account exposes payroll operations to risk; foreign exchange is not an immovable object, and it can be tricky to consolidate, forecast and execute payroll when dealing in foreign currencies. It’s rarely realistic to price this risk into local personnel’s salary packages. Most companies prefer to pay locally, be invoiced in the local currency, and deal with local payroll as part of a global provider relationship, in order to bring more certainty when dealing with sometimes volatile currency exchange markets.

International bank transfers bring their own risks too. Companies transferring money from an overseas account into a local office account need to factor in speed of payment as well as foreign exchange concerns. Many banks have reciprocal relationships to help smooth the transfers for this purpose (known as bank-to-bank partnership agreements). Alternatively, companies can make payments via a globally accepted standard platform, such as SWIFT or Bacs. But wire services – while fulfilling an essential need – can be expensive and lengthy. Payments can take a number of days because they are often batched together, risking late salary payment.

Many countries require taxes and even salaries to be paid from a local country account. In Greece, for example, employees need to bank at the same institution as their employer. Sometimes global banks that claim to be able to process payments everywhere often mean they do this using their own specific file format, and this may not match the local files that payroll systems produce. In addition, some countries have controls on the amount of money transferred into the country in a single transaction, because of money laundering concerns, which could cause issues in a global payroll operation.

Ideally, companies receiving income in a local currency should pay local salaries from this income first. But that’s not always possible – and it pays to have a backup plan. An integrated international payroll operation can help companies better respond to currency fluctuations and employee needs through better analysis and forecasting, and therefore to market volatility.

In addition to local banking and accounting regulations, there are myriad local compliance factors to consider. For example, a company running its global payroll operation from Geneva needs to ensure its handful of employees in Venezuela physically sign their pay checks as required by local law. And there are many other such examples when dealing with a multi-country payroll operation.

One way to manage this complexity is by working with a payroll partner with experts who are fluent in both English and the local language and able to manage your local payroll and compliance – globally.