As a company’s size and operations expand, so does the complexity of its payroll processes. A foreign company’s move to Asia often involves sending one or more expatriate staff to fill key roles in the new subsidiary. During this period, it is not uncommon for expats to be paid in multiple countries or currencies, such as bonus payments into a separate account in Hong Kong or social security in the expat’s home country.
These transactions complicate the individual’s tax situation, as well as payroll operations for the company. This can distract from the organization’s main purpose, especially when a company is quickly expanding its operations across different countries. For this reason, it may not be the best use of time to have the local manager personally handle payroll transactions.
Outsourcing payroll offers a solution to this problem, freeing up the valuable time of local managers. Entrusting the matter to an experienced payroll outsourcer also reduces the risk of error and noncompliance.
Changing government regulations also have increased the need for outsourcing payroll. This is especially true in a region as fast-paced and dynamic as emerging Asia, where regulations affecting payroll can change quickly. If one does not closely follow these developments, it’s easy to miss an update and suddenly fall out of compliance. A minor oversight can have major ramifications. Depending on the jurisdiction, strict fines may be imposed for incorrect or late payments of individual income tax withholdings or social security contributions.
Benefits of Payroll Outsourcing
In addition to helping the company reduce the risk of noncompliance in all of the markets in which it operates, companies that choose to outsource their payroll operations experience other benefits. When payroll is handled externally, reports can be sent directly to headquarters, ensuring confidentiality of sensitive information. Having a pan-Asian vendor can streamline this process. Instead of having separate reports from a host of different jurisdictions, these can be collated into a single report, making it easier for headquarters to stay current and informed on global payroll.
Payroll outsourcing also frees up local managers to concentrate on the needs of the growing business. By outsourcing this responsibility, companies streamline their internal HR department workflow and can concentrate resources into core HR duties such as strategy formulation, hiring employees, monitoring employee performance, and maintaining successful internal communication.
Multinational companies with operations in one or more Asian countries that choose to outsource payroll may find that this process also results in savings. The increasing virtualization of HR administration in countries like China and Vietnam has allowed work that previously entailed locally based employees working with government bureaus to be handled from an online location.
The major impetus for companies to choose an outsourced model is the ability to achieve a higher level of consistency in data management, greater transparency for management, and improved confidentiality across their Asia-based operations.
Choosing the Appropriate Model
Because companies have different needs, payroll outsourcing will look different for each company as it seeks to manage payroll across different countries. In addition to taking these needs into account, employers must weigh the advantages and disadvantages of the three most commonly utilized models.
The first model, a country-by-country approach, entails contracting vendors locally in each country. The second model, a managed approach, involves contracting an integrated service provider who then subcontracts the actual processing on a country-by-country basis. The final approach, the integrated model, involves contracting one “pan-Asian” vendor able to provide payroll services via vendor employees in each country of operation.
Each of these models offers different benefits and has some drawbacks that will need to be considered by the company:
- “One-country” vendors can often do an efficient job, but for a company that has operations across multiple markets, communicating with several such companies every month can be time-consuming for HR managers based at headquarters.
- Under the second model, “global” vendors take a more managed approach, but they may struggle to meet all of the local statutory requirements and customs in faraway markets that change rules and regulations frequently. This is especially true given that these global vendors have their own subcontractors.
- Finally, stepping in to fill this gap are the “pan-Asia” vendors, offering shared service or integrated payroll outsourcing models. Their ability to coordinate multiple payrolls across the entire region represents a significant improvement over the traditional “one-country” and “global vendor” model. Under this approach, reporting takes place through a single-point-of-contact methodology rather than subcontracting payroll duties to other firms.
- While outsourcing payroll isn’t a viable option for every company with Asian operations, it’s worth considering as your business scales up its operations and payroll increases in complexity. Different models are available depending on the needs and life cycle of your company, and the benefits gained from outsourcing can offset the expense in hiring a provider.
Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, including liaison offices in Boston and Waltham specifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, please email us at[email protected]. For further information about our firm and how we can support American investors in Asia, please visit our North American Desk.