Salary Management Guide for Multinational Enterprises: Compliance Process and Practical Points for Wage to Foreign Employees

Salary Management Guide for Multinational Enterprises: Compliance Process and Practical Operation Points for Paying Foreign Employees

As globalization accelerates, hiring foreign employees has become the norm. However, cross-border salary payment involves multiple compliance requirements such as taxation, foreign exchange, and labor law. A little carelessness may cause legal risks or financial losses. This article will systematically sort out the core steps and key considerations of paying foreign employees from account opening, tax processing, payment methods to compliance management, and help enterprises build a safe and efficient transnational salary system.

Pre -1. preparation: defining the employment relationship and compliance framework

Before paying wages, enterprises need to complete two basic tasks: identify employment patterns and understand labor regulations in the target country.

1. Employment mode selection
The employment mode of foreign employees directly affects the salary payment method and tax liability. Common modes include:

• localized employment : foreign employees sign local labor contracts with enterprises, their salaries are paid in local currency, and enterprises are required to bear social security, personal income tax and other obligations. For example, if a German enterprise employs American engineers in a Chinese branch, it is required to pay five insurances and one fund for them according to the Chinese labor law.
• Cross-border dispatch : Foreign employees sign a contract with their parent company and are dispatched to work in a subsidiary company. The salary may be paid by the parent company or the subsidiary company, and the tax withholding party shall be specified. For example, when the Japanese headquarters sends employees to the Singapore branch, it is necessary to agree who will pay the salary and how to declare the personal income tax.
• independent contractor : foreign employees provide services as freelancers, and enterprises pay according to the project and do not need to bear social security and other benefits. However, it should be noted that some countries have strict definitions of "independent contractor" and "employee", and misclassification may lead to fines. For example, the United States IRS through the "20 test standards" to judge the employment relationship, enterprises need to carefully evaluate.

2. Investigation of labor regulations in target countries
Different countries have special regulations on the salary of foreign employees, and enterprises need to investigate in advance:

• minimum wage standard : if Australia stipulates that the salary of foreign skilled workers shall not be lower than the local market level, otherwise they cannot obtain a work visa;
• salary payment cycle : France requires monthly salary to be paid at least once a month, while Germany allows monthly or bi-weekly payment;
• overtime and benefits : Canada stipulates that the overtime pay of foreign employees is the same as that of local employees, and Brazil requires enterprises to purchase supplementary medical insurance for foreign employees.

Risk Point : Failure to pay salaries in accordance with local regulations (e. g. below minimum wage, failure to pay overtime) may result in labor arbitration, fines or even revocation of work permit. It is recommended that companies entrust local lawyers or consulting agencies to complete the compliance review.

2. account opening and payment tool selection: pay equal attention to safety and efficiency

Two major issues need to be addressed in the payment of salaries for foreign employees: how to receive wages (account type) and how to transfer money (payment instrument).

1. Account type selection

• local bank account : applicable to foreign employees working in the local area for a long time, passport, work permit, proof of residence and other materials are required to open an account. For example, Chinese foreign employees need to open an account with a work-related residence permit and a tax registration certificate.
• Cross-border multi-currency account : It is suitable for foreign employees (such as senior executives of multinational enterprises) who frequently receive and pay across borders. They can choose international banks (such as HSBC and Citibank) or digital banks (such as Wise and Revolut) to open multi-currency accounts, support direct conversion of US dollars, euros, RMB, etc. to reduce exchange rate losses;
• third-party payment platform account : applicable to short-term project foreign employees (such as consultants), can receive wages through PayPal, Payoneer and other platforms, but pay attention to handling fees and withdrawal restrictions. For example, PayPal's withdrawal to a Bank of China account requires a 1.2 per cent fee.

2. Comparison of payment tools

• bank wire transfer : High security, but high handling fee (usually 15-50 USD/pen), it takes a long time to receive the account (3-5 working days) and is suitable for large-sum or regular payment.
• digital bank transfer : the handling fee is low (some platforms are free) and the account is received quickly (in real time or within 1 working day), but both parties need to open corresponding accounts. For example, Wise supports 29 currency transfers with transparent rates.
• third-party payment platform : it is convenient to operate, but there is risk of exchange rate fluctuation (for example, PayPal is settled at real-time exchange rate, which may be higher than the bank quotation), and some countries restrict its use (for example, India prohibits PayPal from being used for salary payment).

Risk point : Using informal channels to pay wages (such as personal account transfers) may be considered "tax evasion" or "money laundering", and enterprises need to ensure that the payment path is compliant. It is recommended to give priority to banks or licensed third-party payment institutions.

3. tax treatment: withholding and reporting obligations

The tax treatment of foreign employees' salaries is the core of compliance, it involves three major areas: personal income tax, social security and double taxation agreements (DTA).

1. Withholding and payment of personal income tax

• determination of tax liability : Most countries use "residence" or "source of income" as the principle to determine tax liability. For example, foreign individuals who have no residence in China but have lived for 183 days are subject to tax on their global income. For those who have lived for less than 183 days, only domestic income will be taxed.
• Tax rates and deductions : Foreign employees may enjoy tax benefits (such as housing subsidies and tax exemption for language training fees), but they must comply with local regulations. For example, Singapore provides tax relief for eligible foreign talents for 5 years, with a tax rate ceiling of 15%.
• declaration and payment : enterprises are required to withhold and pay personal income tax according to local tax laws and declare it regularly. For example, U.S. employers are required to withhold federal income taxes every month and submit W-2 forms to employees and the IRS by January 31 of the following year.

2. Social Security and Provident Fund Contributions

• Mandatory Contributions : some countries require enterprises to pay social security (such as pension, medical and unemployment insurance) for foreign employees, and some countries allow voluntary participation. For example, China requires enterprises to pay five insurances and one fund for foreign employees, but Germany allows foreign employees to choose whether to participate in statutory old-age insurance.
• supplementary benefits : enterprises can provide supplementary commercial insurance (such as high-end medical insurance and accident insurance) for foreign employees, but it is necessary to specify whether it is included in taxable income. For example, the United States treats group health insurance premiums paid by businesses as tax-free benefits, but the portion above a certain limit is taxable.

3. Use of double taxation agreements
If foreign employees are at risk of double taxation between their home and working countries, companies can assist them in applying for DTA concessions. For example, the Sino-British DTA stipulates that if a British resident has worked in China for 183 days, China has the right to tax its domestic income, but can avoid double taxation through tax credits. Enterprises need to guide foreign employees to prepare residence certificates, tax resident identity certificates and other materials, and apply to the tax authorities for relief.

Risk Point : Failure to withhold and pay personal income tax or social security may result in the enterprise being subject to tax recovery and late payment fees, and foreign employees may also face fines or affect future visa applications. It is recommended that enterprises establish a tax compliance ledger to record the amount withheld, declaration time and voucher retention.

4. compliance management: process standardization and dynamic monitoring

It is necessary to establish a long-term management mechanism to ensure transparent process and traceable records.

1. Standardize payroll process

• Make payroll policy : clarify the salary structure (basic salary, bonus, welfare ratio), payment cycle, salary adjustment mechanism, etc., and write it into the labor contract;
• multi-level approval system : salary calculation needs to be reviewed by HR, finance and department heads to avoid calculation errors or illegal payment. For example, an enterprise paid an extra 3 months of overtime pay for failing to review the attendance records of foreign employees.
• employee confirmation and feedback : before distribution, employees will be provided with pay slips (Pay Slip), various income and deduction items will be clarified, and feedback channels (such as HR email) will be set up to answer questions.

2. Dynamic compliance monitoring

• regulatory update tracking : the labor and tax laws of the target country may be subject to frequent adjustments (e. g., tax rate adjustments, changes in the social security base), and companies need to designate a person to follow policy developments. For example, Japan will raise the minimum hourly wage for foreign skilled interns to 1000 yen in 2023, and enterprises need to adjust their salaries in a timely manner.
• audit and self-examination : regularly entrust a third-party organization to conduct salary compliance audit, focusing on checking tax withholding, social security payment, salary calculation accuracy, etc. After being punished by the tax authorities for not including the bonus of foreign employees in the personal tax base, an enterprise found and rectified similar problems through annual audit.
• employee training : popularize local tax and social security policies to foreign employees to avoid compliance risks caused by information asymmetry. For example, an enterprise held a "special training on China's individual tax declaration" for foreign employees to help them understand the special additional deduction policy.

Conclusion