In 2021, the G20 announced a historic agreement on international tax policies: With the new deal, from 2023 there will be a 15% minimum tax rate for Multinational Enterprises (MNEs). The deal, agreed by 136 countries and jurisdictions representing more than 90% of Global GDP, is estimated to generate over $150 Billion in additional tax revenues annually. With Estonia, Ireland and Hungary having joined the agreement, it is supported by all OECD and G20 countries.
This new policy was created with the goal of standardising tax rates for corporations and addressing tax avoidance, which runs rampant in organisations all over the world. The COVID-19 pandemic shone a spotlight on how the world’s largest companies, many of them digital giants, continued to turn huge profits even as the global economy looked headed towards recession. This is, undoubtedly, aimed at Silicon Valley’s biggest names, many of which paid little, if any, tax in some countries in which they operate.
As a result, companies will have to pay local government and corporation taxes locally in all countries from which they operate and generate profits. This includes companies that simply make profit in other countries, whether they have a physical presence there or not.
Prior to the new legislation, many companies tried to avoid paying the appropriate amount of taxes by re-routing their profits through low tax jurisdictions. Although this activity can be hard to quantify and prove to a tax collection agency, organisations who now do this could face serious financial and social consequences.
Large companies, some of which will owe millions in taxes, go to great lengths to avoid paying the correct amount. It’s unclear what separate corporations actually pay in taxes, because prior to this new legislation, there has been little oversight and accountability surrounding corporate taxes. Many large corporations pay almost no income tax, with strategic accounting and financial loopholes. Even public-facing Fortune 500 companies find ways to evade taxes - and one of the main strategies is to shift profits to foreign subsidiaries.
The G20 wants to bring the rest of the world up to their 15% minimum and close the gap between countries with higher tax rates, and countries with rates so low that corporations “hide” within them. This way, no matter where the company is making profits and housing their headquarters - real or perceived - they will be paying at least 15% as a minimum tax rate across the board.
The G20 hopes this will increase honesty and transparency amongst large multinational corporations and discourage the tax status “hide and seek” that many large companies engage with each year. This is also only the start and high growth technology organisations should be mindful that, in the future, these tax changes are highly likely to be rolled out to all Multinational Enterprises rather than purely those with revenues above EUR 750 million.
This new tax legislation for the G20 reduces the need to set up and maintain ongoing management of global entities particularly in low tax jurisdictions - especially for small companies or start-ups - and as a next move, many organisations may decide to move to EoR solutions to employ staff in multiple countries, especially if they have small teams.
An EoR, or Employer of Record, is a partner that administers taxes and benefits while employees perform work at a different company. Essentially, it’s like an outsourced payroll and tax department, separate from the company as an entity - but still taking care of the needs of all employees.
EoR takes over many responsibilities that a traditional employer normally would, while still maintaining compliance with all labour laws for payroll, taxes, and more. An EoR is often viewed as an “alternative payroll solution” that handles timekeeping, payroll, compliance, benefits, taxes, and more. The EoR is actually the full-time legal employer of a new hire, so the partner entity holds all the liability and accountability for workers. This can help companies hire new employees quickly and scale rapidly - without the hassle of dealing with all the paperwork internally.
Why use an EoR?
EoR services can help businesses save time and better allocate resources in their payroll, tax, professional employment organisation (PEO), HR departments. EoR's and other third-party services can help companies deal with the challenging and complex tax and employment laws across multiple regions, along with obtaining and managing local visas and work permits.
Dealing with all of the above can be incredibly time-consuming, costly, and frustrating for businesses - and pull them away from their core value work. Hiring and onboarding employees can be incredibly time-consuming and using a third-party EoR can help companies scale much more quickly - some can onboard employees within 48-72 hours! That’s nearly one- tenth of the typical time it takes to onboard an employee.
Not employing staff directly, or setting up a third-party entity, could be a tax- and -resource saving strategy as they scale up. The more employees onboarded and the more a corporation tries to grow, the more they’ll need to pay attention to things like taxes, payroll, onboarding, and HR - but there’s a better way. EoR's provide a solution for companies who don’t have the time or resources to deal with taxes, payroll, onboarding, and benefits in-house.
Here are the top reasons that many global enterprises are opting for EoR's:
1. Saved time.
EoR's can free up valuable business time, so your employees can focus more on business operations, sales, or providing value. Dealing with taxes, onboarding, payroll, and related departments can often involve multiple roles and teams - which can all be reallocated to core business when these tasks are delegated to a third party provider. Employees benefit from this saved time, too, since they’re onboarded quickly and are able to start doing the job sooner. Since EoR's are experts in onboarding, they will ensure that employees have a good experience - which helps improve retention rates over time. Research shows that a proper onboarding experience for employees can help improve the work they do, the length of time they stay at a company, and their overall satisfaction with their jobs - so leave this part to the experts.
2. Improved compliance.
EoR's can help improve your tax compliance status and make sure you don’t face any legal troubles. Remember, since EoR's legally employ workers, the onus of compliance, accuracy, and legal accuracy is on them - which is a load off for most companies who don’t want to worry about it. EoR providers are experts in compliance and legal issues, while many new companies and start-ups aren’t equipped to take these issues on with confidence. Many companies who provide EoR's also provide payroll services, which can be helpful for ensuring you maintain complete payroll compliance.
3. Flexible services.
EoR's can manage taxes and payroll for full-time, part-time, and freelance staff, making this a versatile choice for a company with multiple types of employees to serve. EoR's can also support your company if you move regions, expand into new locations, or start doing business in a new country. Often, changes like this are very complex and expensive, and EoR providers can help companies focus on doing business instead of hassling with tax laws and compliance issues.
4. Cost savings.
More often than not, the cost of outsourcing EoR and PEOs is much lower than having a full-time dedicated staff doing the work. The same work is getting done and your compliance is improving, but you’re actually paying much less. It’s a win-win, for everyone. Staff members who were previously dealing with taxes and payroll can be reallocated to other work, or small companies can simply downsize for a significant cost savings. Cost savings can also be realised in the form of increased compliance and accurate tax filings, since companies can face massive fines and fees from tax organisations when they aren’t 100% compliant.
For companies facing international expansion, utilising an EoR can be an excellent way to navigate new waters: Setting up a legal entity in a new territory can be terribly costly and time-consuming, and since tax legislation is different in every country, this provides an additional challenge: You’ll be setting up in a country with new legislation, different cultural nuances, and local ordinances you may be completely unaware of.
Some companies try to get around this issue by hiring “pseudo-employees,” or local contractors, which can backfire in the form of social tax bills and legal risks. But they don’t want to set up a permanent entity either, which is expensive, challenging, and rigid - and it comes with long-term tax costs. Again - this is where EoR's come in. They provide a solution for companies who don’t want to put themselves at legal risk, but don’t want to take on an unnecessary tax hassle either.
EoR's can be used for shorter-term support, for companies who want to scale quickly and hire new employees in new regions, or they can be utilised for long-term partnerships.
An EoR provider that is fast, compliant, and makes your life easier.
Emerald Technology helps companies manage the challenges of international expansion with EoR's, PEOs, global workforce management, and talent acquisition services. They cover as much or as little as you need - from sourcing new talent you need to onboarding and payroll.
Emerald Technology sources, secures, onboard, and employs top-notch talent in the region of your choosing - fast. And they do it all while maintaining the strictest standards of compliance, to mitigate your risk and improve your business outcomes. New employees can be onboarded in just 24-72 hours.
If you’re worried about adhering to local tax laws, trying to scale quickly, or want to start expanding into other regions with ease, contact Emerald Technology today to learn more about their end-to-end solutions.
