Top 3 Most Complex Tax Systems in the World!
Payroll is hard. Working on payroll in a country that isn’t your own is really hard. Of all the countries in the world, navigating the tax structures of France, Italy and Belgium are the most difficult. According to the Global Payroll Complexity Index, these three EU nations are considered to have the most complex payroll systems in the world.
As we discussed in our earlier blog, payroll complexity covers a number of factors. This includes population size and demographic, the number of pieces of data required to run payroll for an employee, reporting obligations and more.
But what is it about France, Belgium and Italy that make them so complicated? Let’s explore.
France
With unique social security systems in place, high corporate rates and naturally, a language barrier, France is a tricky nut to crack from a payroll perspective. France has high numbers of early retirees and expats among its population. These groups require more complex payrolls due to the extra reporting and data required.
France also has 17 different payroll parameters in order to process payroll. That means that for every employee, company payroll teams need to have 17 different pieces of information about them. The global average is only 14. This might not seem like a big increase, but when you multiply that out over the millions of employees in France, things add up fast. More data means you need more places to store it and it’s not uncommon for payroll data to be spread across several systems within a company.
These reasons, in addition to strict reporting and regional tax issues, are what makes France such a challenge to process payroll.
Payroll in France
Payslips
If you’re doing business in France, your employees are expected to have an electronic payslip even if they are paid through bank transfer.
What tax considerations are there?
France doesn’t deduct income tax on a monthly basis. Instead, it’s deducted annually. Unlike other European countries, the French social security system is funded through social security contributions. Employees and employers must contribute a specified amount to the social insurance system whilst ensuring other mandatory processes are implemented.
HR in France
In France, the regular working hours are 35 hours a week. Overtime is calculated differently dependent on the hours worked after regular working hours. There are exemptions for those in particular roles.
Like other European countries an employee cannot be terminated unless for a reason under the ‘Code Du Travail’.
Italy
Italy runs a close second to France in payroll complexity. Unlike France, whose major challenges are population and payroll parameters, Italy has other complexities. For Italy, it’s reporting, geographical issues and compliance.
The Italian payroll system is both antiquated and multi-faceted. Some regulations go back to the Second World War and new rules that handle modern requirements are simply layered on top rather than integrated. Moreover, Italy places almost all employee tax responsibilities onto the employer.
In order to even do business in Italy you need to obtain a company identification number and fiscal code. This process that can take up to 15 days and requires your business to sign documents in front of a notary public in person. This can delay payroll implementation, as companies are prohibited from starting employees until the fiscal code is obtained.
As an employer, it’s your responsibility to deduct taxes from your employees’ pay appropriately and make sure they are submitted to the proper tax authorities on a monthly basis. This is extremely complex in Italy, because tax authorities are managed at provincial, regional and city levels, rather than one central bureaucracy. There are 144 major cities in Italy and each one has unique labour and tax laws.
Italian Payroll
Payroll that’s always changing
All employee contracts are drafted in the framework of a Collective Labour Agreement. These CLAs are tied to specific sectors, but vary depending on which region you’re in. Contribution amounts, legal work hours, overtime rules and the number of pay cheques per year all vary according to CLAs. If that wasn’t complex enough, CLAs are renewed and renegotiated every 4 or 5 years. 25% of them are renewed annually. This means that payruns can potentially differ massively year after year.
Tax considerations
All taxes must be submitted by strict deadlines, and penalties are steep. There are three types of tax based on gross salary and dozens of types of tax that vary according to employee place of residence. You must also take into account tax bands, free quotas, family reductions, amounting to over 80 variations.
A unique termination feature
The Trattmento di Fine Rapporto is a kind of severance pay unique to Italy. This represents approximately 7% of employee compensation. It is calculated and set aside by the company, and then returned to the employee at termination with interest accrued. Calculated TFR requires access to employee histories and potentially represents a significant fund of cash that needs to always be available.
Italian HR
The Italian workforce is represented by various unions, worker councils and CLAs, depending on their job type. Employers hiring in Italy will have to adjust their payroll operations to account for a variety of factors. Union membership fees and differing standards regarding the number of work hours each week, minimum wage rates and time off policies are all affected by collective agreements.
Onboarding new employees will almost certainly be impacted by the influence of a union or worker council, so companies that simply issue standard contracts will find it difficult to hire in Italy.
Many CLAs provide probationary periods, ranging from 20 working days to six calendar months, during which both parties may terminate employment without notice. To successfully onboard new workers, you are required to provide the employee’s personal data to local authorities no later than their starting date.
Belgium
The first complexity when dealing with Belgian payroll is language. Belgium is made up of three regions and has three official languages: Dutch, French and German. Depending on where your company is based in Belgium will determine which language you’re working with. If you have multiple sites, you may be dealing with two or even all three languages in your payroll. Like Italy, these regional differences are part of what makes Belgium payroll so complex.
Belgium also has multiple governments, who make decisions that can affect payroll in a variety of ways. Monthly changes to legislation can impact current payruns and could even apply retrospectively, so being up to date with legislative changes is essential for Belgian payroll teams. In addition, the Belgian governments place the onus of payroll errors onto employers, so if there is a mistake, you are liable.
Belgian Payroll
Benefits in Kind (BIK)
BIK calculations are made based on the number of work days per month. This means that some calculations will change monthly, while others won’t. Some benefits are taxable, but that “tax” is divided between social security and actual taxation. This is because a separate agency handles social security, distinct from the tax authority.
Social Security
Social security deductibles change every quarter. As such, companies must pay quarterly employer contributions to the National Social Security Office in addition to quarterly employee contributions.
HR in Belgium
Hiring new staff in Belgium requires you to jump through a number of hoops. As soon as an employee is hired, you must register with the National Office of Social Security, the Ministry of Finance, the Family Allowances Fund, an insurance provider specialising in workplace accidents and an inter-company health provider.
Rules governing work hours are determined by sector, role and the type of work in question. Certain types of employees, such as managers, are subject to their own overtime rules, distinct from other employees. Interestingly, overtime is prescribed by laws that detail specific situations. Working more than your allotted hours could be considered illegal.
Getting over the language barriers is just the first hurdle when it comes to international HR and payroll. The three most complex payrolls in the world share ever-evolving legislative changes, demanding reporting obligations and multiple layers of payroll parameters. In order to successfully navigate the complex and murky waters of global payroll and HR, you need international expertise.
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