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Emerging Trends

Emerging Trends for MSMEs in Emerging Asia

By Frank J. Mendelson and Adam Livermore

1499850704_fhh7tv68e2Editor’s Note: Dezan Shira & Associates employs specialists within specific regions. This information is based upon its experience in emerging Asia. It is not a global provider.

1. What are some of the trends you see in global payroll today?

One fast-growing trend we are seeing is the emergence of multinational micro, small, and medium-sized enterprises (MSMEs). These organizations are really starting to invest in far-flung foreign countries as the legal and practical barriers become lower.

Increasingly, smaller companies are finding it realistic to move to places like China or India. They do so for a number of reasons, but when they do, they obviously need help to get their employees paid and to stay in compliance with local rules and regulations.

2. What are the benefits to an MSME developing a team of employees in Asia?

The trend is toward finding labor in markets that have the right skill sets at an affordable price.

A company might set up IT operations with a team of 50 to 150 employees in a place like Gurgaon, India, as an alternative to basing its IT in a far more expensive location where its headquarters may be located, such as San Francisco. For these organizations, at some point their headcount in Asia might exceed their headcount in the United States. Or, if successful, they will scale up faster in Asia than they will in the United States.

For MSMEs, their employees in Asia tend to be highly critical to the success or failure of the entire company, to a larger extent than would normally be the case for a larger company. Therefore, payroll needs to be serviced effectively and accurately, and this can provide a major boost to the company at a critical stage of its development.

Payroll is only one component within the HR administrative function. It is key to ensure matters such as social insurance management, recruitment, and visa applications for foreign workers are handled professionally.

3. What are the global payroll challenges for MSMEs?

MSMEs might have anywhere from 100 to 500 employees overseas, and these employees might be located across three to five different countries, which can complicate the payroll process as tax calculations and social insurance contributions will inevitably vary widely from country to country. Because the headcount in each country is relatively low, it is unrealistic for these companies to hire a high-level HR manager in each, especially at the initial stages of their development. There is a real challenge for the HR manager at headquarters to effectively manage payroll and wider HR matters.

A simple example of a company that required assistance is one that wished to set up an office in Noida, a suburb of Delhi. It was building an online platform as the core of its business model and needed coders, testers, developers, etc., to grow it. It was not realistic to hire people with these qualifications in the United States because it could not afford the cost.

When the company came to India, it had little knowledge of the country and needed to start from the bottom up. It received help hiring an appropriate General Manager and finding a location for its office.

It outsourced recruitment work with us to find more than 50 programmers to build its platform. Once they were onboarded, we managed its HR administration and took over payroll processes on a monthly business. Now that its platform is up and running, the company plans to expand to 200 people within the next year and a half. The assistance it received allowed it to ramp up to its current level in four months.

This is an example of a project for an MSME that would have been impractical 10-15 years ago because investing in India was difficult and internet technology was nascent. Formerly, it had been the domain of large companies, but now, a small and nimble company backed by private equity can do it, too.

4. How have global payroll regulations within emerging Asian markets changed?

In general, national governments are getting better at collecting tax. This means that they are gathering and taking a more thorough look at the data companies must provide on their employees as part of the payroll process.

By definition, because they are emerging countries, the ability to effectively manage and regulate tax collection has, until only recently, been a major challenge. Many companies found ways to artificially reduce the tax and/or social insurance their employees pay. In particular, domestic firms have tended to avoid paying the full tax amount for their employees. In these countries, the employer is typically responsible for deducting tax, rather than the employee paying it.

However, within the past few years, technology has allowed governments to gather and analyze information more efficiently and bring about a more level playing field for the foreign entrants whilst effectively widening the "tax net."

In China, for example, individual income tax filings are completed online on a monthly basis, and social insurance data can be automatically cross-referenced with tax filings. In addition, employees earning over RMB 120,000 annually are forced to make online declarations verifying the amount of tax that they have paid on income received, and it’s becoming increasingly simple for the government to identify exceptional situations. This contrasts with the situation in previous years where declarations and filings were done on paper and sat in folders within government offices with little prospect of a tax officer being able to find evidence of tax avoidance.

There is a similar trend visible in India and Vietnam; however, they’re still relatively unsophisticated compared to Mainland China, which is, in itself, less sophisticated compared to Singapore and Hong Kong. However, Singapore and Hong Kong are developed economies with small populations, and are therefore naturally better able to manage complex tax collection processes.

5. Is it becoming costlier to employ a workforce as emerging markets develop?

Yes, but in different ways, and there are certain hidden costs that companies must consider.

China is quickly becoming more and more expensive, both for blue and white collar workers. There remains a shortage of talented executives able to work in English at MNCs, meaning that salaries are high for genuinely good hires.

In China, expectations are growing, the economy is more consumer-driven, and the middle class is growing. Annual salary increases are a constant battle for foreign organizations looking to manufacture and export. Not only are there base salary increases, but social insurance costs rise annually as they are based on average salaries within cities. Finally, because of the strictness of the Chinese labor contract law, terminating employees can be costly. Employers need to factor that into the cost of employment.

In contrast, India has a different situation where executive-level managers receive globally competitive salaries. However, there is a large discrepancy between executive-level and operational-level staff because there is a surplus of operational-level employees across a wide range of skillsets.

Additionally, in India, the staff expect generous salary increases because inflation is high. As a result, companies tend to have relatively high turnover, as many find it more efficient to onboard new staff at lower salaries rather than retain existing staff who expect high increases but perform relatively straightforward jobs.

Moreover, compared with China, terminating white collar employees is simpler. Because their version of the labor contract law only covers blue-collar workers earning up to a certain monthly amount, white collar workers don’t enjoy as much legal protection. Thus, employers are relatively free to terminate them, contributing to higher white collar turnover.

The situation in Vietnam is similar to China, in that there is a lack of high-level English-speaking executives. At the lower level, there is a surplus pool of employees who can work relatively cheaply. However, the breadth of that pool in terms of the kind of work that they can do is not as broad as India because of the size of the pool and the English skills needed.

Read an article on the importance of HR audits to foreign companies in Asia in this issue, also by Dezan Shira & Associates expert Adam Livermore.