It's time to think and act globally on employment tax risks

The business world arguably continues to get smaller and more connected — and more complex and riskier from an employment tax perspective. Does this make the case for creating a global employment tax leader within your organisation?

Responsibility for employment tax is often spread across an organisation’s tax, payroll, finance and HR functions, not to mention third parties, rendering it difficult to understand where responsibilities start and stop. Moreover, there may be varying degrees of technical knowledge in each function but little global oversight of the magnitude of employment tax risks that an enterprise may be exposed to.

Risks are increasing. Recent global trends — including the “work from anywhere” phenomenon, heightened tax authority scrutiny and increasingly inventive ways to reward employees — mean that companies that fail to act now may be exposed to new employment tax risks in the future. As we move into a period of enforcement induced by a global economic slowdown, there is only one trajectory for such risks — upward.

For these reasons and others, employment tax is no longer something to ignore or leave to chance. Businesses should consider their global strategy for oversight of employment taxes with three key objectives in mind:

• Identify and embed clear roles, responsibilities and accountabilities for the identification and assessment of key employment tax issues
• Put in place the risk identification and risk management processes and protocols that protect the enterprise from this growing area of risk
• Work toward effective employment tax compliance

Companies may benefit from more centralised, global oversight of this tax type. That doesn’t necessarily mean that everything to do with employment taxes gets pulled back into the center; rather, it means enhancing governance and oversight of these employment taxes so that the center has increased visibility of potential risks with mitigation strategies that can better protect the enterprise.

Digitalisation and data transparency

Ever-increasing amounts of data and accelerated sharing among revenue authorities are playing a significant role in the need for employers to be more consistent and joined-up around their employees.

Gone are the days when tax authorities only see or care about what happens in a single country. The transparent exchange of information between authorities — often spontaneous and automatic both within a country and across multiple jurisdictions —brings increased scrutiny on the cross-border aspects of employment tax.

Consider the home and host countries to which an expatriate may have tax obligations. A key challenge is that there could be implications for employment taxes in either or both countries and for both the individuals concerned and the corporate parent. Factor in that an “average” multinational company may operate in 20, 30, 40 or even more markets, and the complexities of managing such a matrix of obligations become clear.

Indeed, both the range of information that is available and the very efficiency with which tax (and other) authorities can handle it have greatly increased in recent years. Couple this with increasingly electronic border technologies and the use of advanced analytics by revenue authorities, and the shift brings focus on the importance of being on top of employment tax risks and compliance in each country, while also having the oversight in place that permits you to be joined up.

There is a silver lining in this new world of Digitalisation, though: supporting companies in their desire to have a more joined-up, global approach to employment tax compliance. Having the technology to connect across the globe, to support controls and processes, and to track geography and activity makes global employment tax compliance easier. The insight that this provides enables employment tax leaders to act more strategically with a view over spend, risk and compliance across the globe, permitting a level of value addition beyond simply being a compliance function.

Tax audits and criminal punishments

There can be little doubt that the form and content of tax audits are shifting. Revenue authorities are becoming more capable and empowered (in part by the access to data), and their demands within an audit context are becoming more granular, detailed and forensic. This change, efficiency improvements and the availability of more data have changed the focus to a “show, not tell” approach to their auditing. It is no longer sufficient to claim that a robust compliance approach is being taken; instead, it must be actively demonstrated.

As more tax authorities move to this approach, controls, processes and documentation must be far more robust than in the past, underpinned by a framework approach to employment tax risk that confirms that risks are identified and closed off in a proactive and timely manner.

Similarly, many countries are ramping up their penalties for non-compliance. More often, such approaches extend past statutory penalties, interest and surcharges and expand into criminal punishment. Germany, for example, has adopted far tougher new measures, including a 30-year statutory period of limitation for the prosecution of tax fraud and — for severe cases of tax fraud — imprisonment for a period of six months to 10 years.

These new measures — echoing many others around the world — now extend beyond the individual taxpayer to the corporation and its officers, including the company board. No one is suggesting that committing tax fraud is the objective of companies. But whether by error, omission or negligence, companies can cross the line between administrative penalty and the threat of criminality.

These shifts underline the need to have clear processes for how tax audits — and in this case, employment tax audits — are managed. Despite this, though, only 57% of businesses currently follow a clearly defined escalation mechanism for each newly identified audit or dispute, resulting in only 24% of businesses having visibility over all active tax audits and disputes globally, according to Ernst & Young LLP’s 2021 Tax risk and controversy survey[1]

Tax reform drives extensive new risks

It won’t have escaped the attention of those responsible for managing employment taxes that there has been significant, and indeed continuing, legislative reform in recent years. Legislation is becoming more complex and is changing faster than ever around the world.

The pace, volume and complexity of changing legislation means that having a central lead or resource who can oversee, update, and upskill local resource responsible for employment tax is becoming a critical strand of how overall tax teams should operate. This brings a benefit beyond management of single issues in single countries and allows lessons to be learned across business and geography from similar changes in other countries. Our survey also tells us that only 47% of businesses track new tax policy and legislative developments globally.

Managing the impact of legislative change should be a primary responsibility of a global head of employment tax.

Important tax governance developments

Allied to the introduction of harsher punishments for non-compliance, tax authorities are also moving quickly toward requiring increased accountability of tax leaders within businesses. This can be seen in the UK, for example, with the Senior Accounting Officer (SAO) rules, scrutiny of tax governance within the Business Risk Review+ (BRR+). Corporate Criminal Offence (CCO) and most recently, introduction of the Notification of Uncertain Tax Treatment requirements.

These types of rules — particularly SAO — place responsibility for tax compliance attestation in the hands of a single individual. This principle extends within organisations, too – Heads of Tax are answerable to the CFO and the Audit Committee for compliance and value preservation across all taxes in all jurisdictions. In the context of employment tax, the equation is often complicated by the fact that responsibility for employment tax and controls may fall between different business functions, a model that undoubtedly differs in businesses the world over.

What does all this add up to?

There now exists a strong case for the creation of an employment tax leader who carries responsibility, and many multinational companies are moving firmly in this direction. 

The scope of such a role is likely to include identifying and remedying historic employment tax risks, identifying, and assessing current risks, establishing global accountability across multiple parts of the business, and ensuring knowledge is kept up to date in light of ongoing and possible legislative changes. Importantly, such an individual will play a key role in managing the quantum of employment tax risk the business is exposed to, including managing the global audit, dispute and litigation cases in this increasingly important area of tax.

There is no panacea or unique approach to addressing this complex equation, but there are good frameworks to guide the discussion and decision-making. Without a central responsibility assigned to coordinate and manage employment tax risks, progress will be difficult, if not impossible.

[1] www.ey.com/taxrisksurvey