Running payroll in a foreign country is always challenging. But as experienced payroll professionals know, some countries are more complex than others. The reason for this is that the regulations concerning payroll processing vary significantly between countries.
When deciding where to expand your business, it is also important to consider which jurisdictions have particularly complex payroll systems as setting up payroll in your new market is crucial for paying your globally distributed team. Especially when you’ve only just kicked off your global expansion journey, you will probably want to avoid the countries with the most complex payroll requirements – or at least know what you’re in for.
This is why we have compiled a list of countries which are notorious for having very challenging payroll processes. But before we dive straight into the official ranking, let’s first find out which factors influence payroll complexity.
Why do some countries have more complex payroll than others?
There are numerous factors which need to be taken into account when quantifying the complexity of payroll processing in a foreign country. These factors include:
- Tax system: Each country has different tax rates and taxation rules which define how you have to calculate tax and social security contributions for your employees, which deductions to make etc. The more rules there are, the more challenging it gets to process payroll.
- Multiple levels of taxation: Other than on the national level, taxes can be levied on state, provincial and municipal level. The more taxation levels there are, the more complex payroll becomes.
- Special requirements for certain economic sectors or businesses: If you’re unlucky, your business will be subject to additional rules and regulations.
- Labor unions: In many countries around the world, collective bargaining agreements have a direct impact on payment standards, which will thus influence payroll complexity.
- Reporting: Both the frequency and the related requirements make tax filing and reporting an important factor regarding payroll complexity. The more often you need to file reports, the more challenging the payroll process. Plus: In some countries, bureaucracy can be a real pain in the neck.
- Regulations on data security: Processing payroll means handling very large sets of employee data. It is therefore imperative to comply with each country’s data security rules. A good example of how payroll can become more complicated due to changes in data protection requirements is the introduction of the GDPR in Europe.
- Employee benefits: Each country is different with regard to employee rights and benefits administration. Just think of minimum wage requirements and overtime regulations and you know there is a lot of room for complexity. Not to forget that some countries grant employees the right to additional benefits of which some are taxable and others are not.
- Payroll frequency: While payroll is run once per month in some countries, others require a weekly payroll run. The more often payroll needs to be run, the more work you can expect.
- Worker classification: When it comes to classifying workers – i.e. whether workers are employees or contractors – each country has its own rules. Companies have to be familiar with the different categories and the respective taxation rules so they don’t risk penalties for employee misclassification.
Global Payroll Complexity Index 2021: Europe identified as most complex region worldwide for payroll processing
When talking about payroll complexity around the world, the most cited ranking of countries with complex payroll requirements is the Global Payroll Complexity Index (GPCI). This biennial benchmarking survey analyzes payroll requirements and processes based on legislative regulations concerning reporting, processes and security.
The 2021 edition of the index identified Europe as the most challenging region with regard to payroll regulations, with the top 5 most complex countries for payroll processing all being located within the borders of the European Union: France, Italy, Belgium, Germany and Spain – in order of the complexity of their payroll systems.
What impression do companies have about payroll complexity in foreign countries?
Given the number of blog posts referring to it, the GPCI can be considered an authoritative source when trying to find out which are the countries with the most complex payroll processing. However, given that the data and insights for the ranking are drawn from the consolidated operational intelligence of Alight’s own multi-country payroll processes, it seems necessary to also consider what impression of payroll complexity companies have that run payroll in foreign markets.
One of the questions to the participants of the 2021 “Getting the World Paid” survey conducted by the Global Payroll Management Institute (GPMI) was to identify countries or areas they found to be the most challenging to pay employees. Although it’s hard to come to a clear ranking – this is due to the fact that each respondent had to indicate no less than three countries or areas – the countries which were most often cited to have complex payroll regulations were Brazil, Canada, China, France, Germany, India, the United Kingdom and the US. They will therefore also be added to our list of most complex countries to run payroll.
Which countries have the most complex payroll regulations?
The 2021 Global Payroll Complexity Index (GPCI) and the 2021 “Getting the World Paid” survey have delivered the following list of countries that are known for their complex payroll regulations:
- Top 5 according to the GPCI: France, Italy, Belgium, Germany and Spain
- Additions from the GPMI survey: Brazil, Canada, China, India, the UK and the US
So, let’s look at each of these countries in detail to find out what makes processing payroll in these markets so complex.
France is leading the ranking of the most challenging countries for payroll for the third time in a row – France was also top of the list in 2017 and 2019. There are several reasons for this.
First of all, data protection is highly regulated – also due to the introduction of the GDPR. Second, labor law in France is quite complex. While the Code du Travail – which is the basic regulatory framework for employee rights and employment – is already quite detailed, the strength of national labor unions and the multitude of collective agreements which span pretty much every industry make benefits administration in France even more challenging.
What’smore, the French payroll system itself is quite difficult to navigate with various tax rates and many different social security authorities – not to forget that every document and report needs to be submitted in French. And last but least, the laws and regulations concerning payroll processing and taxation tend to change quite frequently which makes it hard for companies to keep up.
Take the multitude of labor laws and the complex taxation rules and you have everything you need for a challenging payroll process. In Italy, payroll taxes are not only levied on a national but also on a local level – resulting in different reporting deadlines throughout the year. The responsibility for correct tax withholding lies alone with the employer. Once a year, a detailed report needs to be filed to the Italian tax authority.
Similar to France, Italian unions are quite active and the number of collective bargaining agreements has a feasible impact on payroll complexity – and not in a good way. As the CBAs are renewed on a regular basis, companies with remote employees based in Italy need to keep track of all the changes concerning their industry.
One special characteristic of payroll processing in Italy is that it is compulsory for employers to set aside a certain percentage of each employee’s wages every year to be used as severance pay if needed.
Similar to France and Italy, Belgium has been among the three most difficult countries for handling payroll since the 2017 edition of the GPCI, an impression which is only confirmed by a recent study conducted by the TFM group which found Belgium to be “the world’s most complex jurisdiction for human resources and payroll”.
The Belgian tax system distinguishes between white-collar and blue-collar employees which means, for instance, that social security contributions are calculated differently for both groups. In addition, there are regional discrepancies in payroll regulations and the different language policies which apply in different parts of the country don’t make it any easier for foreign employers to manage payroll for their remote workers in Belgium.
Ask someone what Germans are famous for and they will probably tell you something along the lines of “Germans love their rules and regulations”. Well, when it comes to payroll, this is definitely true.
Income tax rates in Germany are progressive, but the exact amount of income tax that needs to be withheld for each employee depends on their individual situation. There are six different tax categories which account for the employee’s marital and family status and which determine the income tax rate levied on each worker.
Similar to other Western European countries, Germany has a complex welfare system which means that processing payroll for remote employees based in Germany involves having to calculate various different social security contributions. Additional factors to consider when processing payroll in Germany are church tax and the frequency of the reporting.
This year, Spain has joined the ranks of the world’s five most challenging countries with regard to managing payroll. One of the reasons is the number of collective bargaining agreements which heavily influence pay and employment regulations – for example, there are many collective agreements in place which make it mandatory to pay employees a 13th and even a 14th month salary.
Also, national laws on taxation and employment regulation are constantly changing. For instance, the country introduced a new set of rules back in 2019 which makes it mandatory for employers to record their employees’ daily working hours.
One of the main reasons why running payroll in Brazil is said to be difficult is the high involvement of labor unions across all industries. They are regulated by the Brazilian government and employees are required to pay union fees to them even if they are not a member – in the end, the amount needs to be transferred by the employer.
The frequent changes in the country’s labor laws and the fact that social security contributions vary depending on the calculated workplace risks and industry make payroll in Brazil even more challenging.
When calculating payroll taxes in Canada, employers have to keep in mind that taxes are levied not only on the federal but also on the provincial level. Minimum wages are also set by each province individually which complicates things for international companies with several remote employees located in different regions across Canada.
Yet another complicating factor is the frequency of payroll. Payroll can be run as often as once per week or as rarely as once per month – with additional options between them.
One of the factors that make China a really challenging country for running payroll is the fact that each Chinese province and city has its own contribution rates for social security. Another aspect to keep in mind is that the minimum wage requirements – which, by the way, also vary from province to province – are adjusted once or twice every year.
What’s more, China’s public holiday calendar contains several multi-day celebrations which has forced the government to introduce additional workdays on the weekends around these celebrations which, in the end, also affects payroll.
Running payroll in India means dealing with a lot of regional variation. While there are only three public holidays which are observed all over the country, each region observes its own additional public holidays. This means inevitably that having a remote team in India with members who are distributed over several provinces will make things difficult. The same goes for minimum wages which also vary between regions and industries.
In addition, tax filing in India involves a lot of time-consuming paperwork and you will have to set up a local bank account registered in your business’s name to be able to pay your employees, taxes and social security contributions.
10. United Kingdom
Processing payroll also involves classifying your workers in order to know which taxes to deduct from their earnings. While most countries only distinguish between employees and contractors/self-employed, the UK has introduced a third category which is the status of a “worker”. As taxation and benefits administration works differently for each category, getting it right is a challenge for foreign businesses running payroll in the UK. Also, minimum wage rates depend on the employee’s age.
Another unique aspect of payroll in the UK is the so-called Real-Time Information (RTI) system which is used to report payroll data to the authorities. As the name suggests, it is mandatory to report data on the day before or on the same day on which you issue payments to your employees. As the submitted data cannot be corrected afterwards, it’s really important to make sure all the information is correct.
11. United States
As appealing as the prospect of an “employment at will” might seem, when it comes to running payroll, the US is less of a dream destination. The tax system operates with various different rates as income tax is not only levied at federal but also at state level. Plus: Employees are divided into seven different categories for federal income tax calculation which makes it even more complicated.
While certain social security contributions such as Medicare and FUTA are the same throughout the country, the individual states have the right to levy additional unemployment taxes and other social benefits.
How to manage payroll in countries with complex payroll requirements?
After reading through our list of the most challenging countries to run payroll, you might wonder what to do if you are actually planning to expand your business in one of these countries. Especially for organizations with little to no experience with regard to setting up payroll in foreign countries, the prospect of dealing with one of the most challenging payroll systems in the world can be really discouraging. Even more so if you need to move fast and have no time to gather all the information – or find the experts – you need to run payroll for your new markets in-house.
Luckily, there are ways around this. The first one is to simply outsource payroll to an in-country partner. Having payroll run by a local expert means you don’t have to worry about compliance or deadlines for tax filing because the payroll provider will handle it for you. If you are unsure about how to select the right payroll partner for your business, you can reach out to Lano. At Lano, we work with a network of payroll providers covering over 130 countries and can put you in touch with a payroll partner that suits your business needs. What’s more, with our global payroll solution, you can integrate both your new and your existing providers with our platform and consolidate payroll data for your entire global team on one single screen.
And if you are only looking to hire a handful of remote employees in your new market and don’t want to go through the trouble of setting up local payroll, you can skip the lengthy and complex incorporation process by using Lano’s Employer of Record (EOR) solution. With our network of EOR partners, you can compliantly hire and pay full-time employees in over 150 countries around the globe without having to set up a single legal entity abroad – and, of course, without having to worry about global payroll.