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www.pwc.co.ukMaking payroll payManaging risk andcompliance in anunprecedented eraof change

Global megatrendsDemographicand socialchangeShift in globaleconomic powerRapidurbanisationClimate changeand resourcescarcityThe world is changing. Major economic, cultural, social and scientific changes arehaving a significant impact in the world. These changes are known as megatrends.PwC’s Network Leadership identified five megatrends that will impact the future ofboth PwC and its clients over the next decade and reshape the global marketplace.We believe these megatrends will impact the payroll function and process.2 Making payroll pay PwCTechnologicalbreakthroughs

ContentsOverview4Globalisation and the impact on payroll operations5Payroll technology in the digital age8Risk, regulation and compliance10Making payroll pay12Contacts13

Payroll errors cost theaverage FTSE 100 companybetween 10M and 30M perannum. Tax legislation inthe UK requires a Boardmember or Officer of thecompany to take personalresponsibility for thecompany’s tax reporting.More legislative change is onthe way, including theintroduction of individualtaxpayer accounts and themove to payroll of benefits inkind. Isn’t it time you took acloser look at your payroll?OverviewThe objective for payroll has alwaysbeen a simple one – pay your employeesaccurately and on time. Payroll hashistorically been seen as a low riskfunction, generally automated (oroutsourced) and where issues rarelytrouble the higher levels ofmanagement. To that extent youprobably haven’t given it a great deal ofmanagement time or attention. Thatneeds to change because employmenttaxes are now globally the largestsource of government income,contributing on average 38% of thetotal tax take, and its coming undergovernment and tax authority scrutinylike never before.Tax authorities increasingly see thepayroll function as their primary taxcollection agent, transferring an evergreater burden of responsibility onemployers particularly when set againstthe backdrop of continuous legislativeand regulatory changes. Globalmegatrends such as technologicalbreakthroughs, rapid urbanisation,4 Making payroll pay PwCdemographic shifts and social changesare combining to drive radical changes inthe way we live our lives. For example: How, where, when and for whomwe work. How, where and when we accessinformation. How organisations use technologyto record, analyse and report data.This means employment turnover ratesare higher than ever before as is greaterworkforce mobility and flexibility – allputting an increased strain on thetracking of accurate data for payrollreporting.Organisations need to face up to thechallenges facing payroll. The financialand reputational risks of processingpayroll late and/or incorrectly, notadhering to evolving data privacy andprotection regulations and thedisconnect between finance, HR andpayroll systems, create a countdown toa potential disaster.In this paper we look at the payrollfunction and process through anumber of lenses based upon theexternal challenges that organisationscurrently face. Globalisation and the impact onpayroll operations. Payroll technology in the DigitalAge. Risk management. Regulation and Compliance.These challenges may be replicated inmany locations so our view and how wehelp our clients is not confined to the UK.Our focus is not simply on the complianceaspects of the payroll process but makingsure that the payroll function has stronggovernance and controls, supported bythe right technology.

Globalisation and the impact onpayroll operationsAs organisations increasingly look beyond domestic boundaries, so the complexity of their payroll operations grow. In arecent PwC survey of 193 organisations, 89% expect international mobility to increase, but much of this will be throughshort term assignments and international business travellers, rather than more traditional long term assignments. Trackingindividuals to determine taxability on a country by country basis is already one of the hardest challenges that organisationsface in order to be fully compliant with tax withholding rules.Global mobility adds complexity to the payroll processAssignments, secondments, dual contracts,split payroll, business travellersCurrency translation/split paymentsLate reported payments, corrections andtrailing incomeWithholding, reporting and depositrequirements and exceptionsCompensation, capture/collectionComplex computations including gross upsPwC Making payroll pay 5

As emerging market economies evolve,so does the level of payroll taxsophistication. This is evidenced by thegrowth in social security systems andemergence of Provident Funds incountries such as Brazil, China andIndia. At the same time, organisationsare increasingly dealing with changedworkforce demographics and flexedworking arrangements. Employees onzero hours contracts, contractors,part-time and job sharing arrangementsall place additional burden on the payrollfunction. Who they are responsible forpayment to, how much should be paidand for which period of time? This ismade more complex when these workpatterns extend across geographicboundaries.The movement to Real TimeInformation (RTI) reporting in the UK,requires employers to gather details offoreign paid compensation as it isdelivered in the home locationoverseas. While the UK HMRC providesa relaxation to the RTI system in the UKwhere the employer registers aModified PAYE arrangement, this typeof more ‘relaxed’ PAYE system has notbeen replicated by other countries.Therefore, the pressure remains togather data in real time for processingacross multiple jurisdictions. In Africa,payroll is the source of tax filing data inmany countries – i.e. individuals do notfile tax returns, so if the payroll isn’tright, it’s the employer who will beaudited by the tax authority.Global payroll challengesIncreased level of tax audits and notices(both corporate and individual)More evidence oflinks formingbetween tax andimmigrationauthoritiesExchange ofinformationagreements intax treaties beingused forindividual taxcomplianceEmerging markets –assessments and audits basedupon recharged values – not onactual costs1Move to usingemployer datadirectly topre-populateemployee taxreturnsTax transparencycreates visibilityon any failure tocorrect tax andsocial securityNon-recoverable overpaymentsto tax authorities – ensure youget the sums right!Moving People with Purpose – Modern Mobility Survey, PwC, October 20146 Making payroll pay PwCTargeted audits(e.g. frequentbusinesstravellers)UK Real time PAYEreporting andenhanced penaltyregime createsSAO andgovernance issues

Questions to ask How do you currently identify andtrack internationally mobileemployees? How do you know when frequentbusiness travelers have triggeredwithholding tax thresholds? As your international operationshave grown have you developed amulti territory payroll strategy(e.g. retained a single globalprovider, or are you managing anetwork of local providers)? How do you deal with multicurrency arrangements? How do you deal with ModifiedPAYE arrangements in the UK andshadow payroll arrangementsoutside the UK – and where youbear the tax on behalf of youremployees, is the tax and socialsecurity contribution beingengrossed correctly?Our viewOrganisations are struggling with the increasing complexity and globalnature of payroll. Compliance is a key driver, particularly for clients wherethey have small employee populations outside their key establishedlocations. Managing payroll for mobile employees and dealing with crossborder issues needs payrolls to be managed in a coordinated way, such thathome and host country issues can be addressed simultaneously.PwC Making payroll pay 7

Payroll technology in the digital ageRapidly advancing technology in the Digital Age means organisations are increasingly moving theirtechnology away from ERP based systems to cloud based solutions.In the past, digital meant ecommerce.But the landscape has changed; therapid rise of social media, smartdevices, big data and cloud computinghas opened up avenues forimprovement. At the same time,employees are changing throughdemographic change, increasedexpectations and empowerment.Technology and social media aremaking employees better informed,more connected and more vocal – gettheir payroll wrong and with the powerof social media you and the wider worldwill very quickly get to know about it!For many organisations the payrollsystem (or interface with an outsourceproviders system) remains separatefrom the HR and finance systems whichdrive payroll inputs and manage theoutputs. Very few organisations areoperating cloud based payroll systems,interlinked with their other cloudplatforms. Confidential data may bepassed via email or other non-securedata exchanges.With an increasing number of payrollsystems available, organisations arefaced with difficult decisions inselecting the right fit for the business.Making the right decision based on theorganisation’s risk appetite,understanding of the broader IT andbusiness strategy is vitally importantfor payroll systems.Having good data is increasinglyimportant to ensure good governanceand control over systems and processes.At the same time, your employeesexpect you to act responsibly with theirpersonal information and to respecttheir right to privacy. UK DataProtection Act and forthcomingEuropean Data Regulation lawdemands this too. Failure to complywith the law can lead to serious legaland financial consequences andsignificant operational challenges, suchas business disruption, financial lossand damage to brand and reputation.Managing your cost base – traditionallypayroll systems have been managedthrough the in-house IT teams. Withincreasing dependencies onoutsourcing and use of emergingtechnologies such as Cloud,organisations are moving from a Capexto Opex model where billing isperformed by the provider. This placesan increased reliance on the provider toensure billings are performedaccurately.Digital technology trendsSocialMobileAnalyticsCloud In emerging markets itis much more commonfor employees toopenly share details oftheir compensation Payslips sent to mobiledevices Ability to producemeaningful informationfrom significantvolumes of data Data privacy issues –who can access compdata and from where?8 Making payroll pay PwC Real time compreporting – see it as ithappens How does payrollcommunicate withother systems

Questions to ask Does your current payroll systemfit into your overall technologystrategy? Have you analysed the cost ofrunning your global payrollsystems and number of vendors? If your HR system is cloud based– what interface do you have toyour payroll system and how dothe outputs link to your financesystem? Do you have confidence that youroutsource provider can deliver anend to end payroll solution? Is your payroll data secure andhave you performed penetrationtesting or tested ISO compliancewith ISO 27001 (whether youoperate the payroll internally orvia an outsource provider)? How can you take advantage ofcloud technology to enable a moreresilient and efficient payrollenvironment?Our viewHaving a coherent technology strategy is critical to deal with the increasedcomplexity of payroll operations and the increased compliance and regulatoryenvironment. The top three criteria for selecting a global payroll vendor arecost, geographic/global capability and technology platform. Often the decisionto implement a system is made based upon cost alone, without thought to howthe technology will fit with broader technology strategy.PwC Making payroll pay 9