Uncovering hidden risks and ensuring compliance with employment tax laws

Up-to-date local knowledge is essential as APAC regulators increase emphasis on cross-border employment and accurate reporting

Vialto Partners’ Mobility Revolution Survey produced some revealing insights on how mobility teams around the world are adapting to an ever-changing global landscape. One of the most interesting findings was in the field of compliance, where 39 percent of businesses cited managing compliance as a top priority.

Businesses are generally less confident when it comes to pinpointing the type of risks that pose the greatest compliance challenges within their organization. This is partly because the focus transcends departments, covering employment taxes, HR, finance, tax, and payroll. However, there are many other factors, including unfamiliarity with external risks, and risks which are hidden.

Defining external risks

External risks usually originate outside the organization and are often beyond their direct control. Audits, for example, may be conducted periodically across different areas; it could be a benefit audit in one country and a payroll audit in another.

With more countries adopting real-time reporting, authorities now have vast amounts of data to analyze, and advancements in technology have accelerated their ability to detect anomalies. This data is often cross-shared with immigration and labour authorities, further tightening employer scrutiny.

For example, Singapore’s Ministry of Manpower recently questioned a Vialto Partners client about the non-cancellation of an employment pass, even though the tax clearance return had been filed a year earlier. This suggests some level of data sharing between the revenue authority and the Ministry of Manpower, for the purpose of detecting non-compliance.

Identifying hidden risks

Hidden risks in employment tax are less obvious and may not be immediately apparent during regular business operations. They frequently arise from factors easily overlooked until they manifest as a compliance issue.

Internal process risks often arise from inefficiencies in processes, insufficient internal controls, or human errors in managing and executing various tax-related tasks. A common scenario occurs when a policy accurately defines a tax position, but due to the absence of cross-verification or a thorough ”Four-Eye” review, the payroll team reports discrepancies in the tax returns. Additional instances include inadequate measures for ensuring tax compliance and audit preparedness, along with a lack of comprehensive training for HR and payroll personnel regarding tax regulations.

Although some of these may seem obvious, others could be far less visible. For example, some businesses have begun to recognise the importance of offering new-age benefits such as fertility assistance, transgender health care, mental health support, and at-work perks to motivate a multi-generation workforce. Organizations may also be reviewing non-traditional benefits to ensure they meet the diverse needs of all employees. Employment tax risks can arise due to the unique tax treatment these benefits may require. The reality is that the tax versus the social security treatment for the same situation are not always aligned. Differences in tax treatment across countries may also result in either double taxation or a missed tax obligation.

Compliance is becoming a top priority

Effective compliance management is essential for maintaining smooth business operations and protecting an organization’s reputation. Failures not only risk tarnishing a business’s image; they can also result in costly penalties through unpaid taxes, interest, and potential legal action.

Employment tax is increasingly regarded as a critical piece of corporate governance. In the past, it may have only been examined when a compliance issue arose. However, that behaviour appears to be slowly changing as more organizations are starting to include employment tax and other stakeholder issues early in the planning and discussion stages.

Compliance is also crucial when it comes to maintaining employee trust. Employees are becoming more mindful in general of their tax responsibilities, especially in countries where personal tax filing is required. They may even seek assurance that critical matters like work permits and cross-border assignments are managed accurately and timely.

Businesses are expected to provide accurate, timely tax reporting and offer assistance with tax compliance, particularly for mobile employees who have more complicated tax obligations. Vialto has seen a growing number of employee queries that challenge certain tax positions taken by their employers, underscoring the need for transparent and well-managed employment tax practices.

Complexity increasing across APAC

The growing complexity of APAC tax rules—ranging from stricter fringe benefit compliance in New Zealand to heightened scrutiny of individual taxation in Hong Kong—highlights the need for robust internal processes and up-to-date knowledge of local regulations.

The challenge of keeping abreast of changing local regulations is intensified by varying update cycles across different jurisdictions. While some disclose legislative changes in their annual budgets, others do so far more frequently. For example, in 2024 Australia (24%), Hong Kong (15%), and Japan (10%) accounted for nearly half of all updates in the APAC region according to Vialto Partners’ internal global Employment Tax updates tracker¹. Businesses need to actively monitor such developments and promptly adjust their processes, payroll, and tax filings to maintain compliance.

Source: Vialto Partners’ Global Employment Tax Legislative Updates & Newsletter Tracker

Last year Singapore introduced a process change to the Voluntary Disclosure Programme, placing an additional administrative burden on businesses. It remains to be seen whether this will discourage businesses from voluntarily disclosing income under the scheme.

In Malaysia, the implementation of e-invoicing on 1 August 2024² is expected to have numerous indirect impacts on employment tax. For example, the e-invoicing mandate will likely increase the visibility of the business transaction, which might make it easier for authorities to identify discrepancies and non-compliance. This could also lead to a greater scrutiny of employment tax filing, especially if businesses are found to under-report or misclassify employee-related expenses.

As e-invoicing becomes mandatory, businesses may also need to integrate their invoicing and payroll systems to ensure consistent and accurate reporting of taxable benefit allowances and reimbursement. This, again, may require changes to how payroll data is captured and reported for employment tax purposes.

Changes to Indonesia’s tax treatment on all benefits-in-kind came into effect on 1 July 2023. Under new rules introduced in 2023 as part of Ministry of Finance Regulation 66 (MOF 66/2023)¹, most benefits-in-kind are now deductible for employers and taxable for employees. However, several key exemptions have been introduced. For example, meals provided at the workplace, security, health-related benefits, as well as some housing and transportation facilities in designated areas continue to be exempt from tax. There are also specific limits on other benefits like vehicle use, communal living, and sports facilities. Employers can also provide non-taxable equipment essential for work, such as laptops and internet services. Additionally, when it comes to reporting these benefits, both employees and employers must follow updated guidelines.

Stemming from multiple overlapping laws, including the 2021 Income Tax Law (known as the HPP law), as well as Indonesian Government Regulation No. 55³, the layered legal framework can certainly confuse businesses transitioning to the new system. It is however crucial for businesses operating in Indonesia to adjust their payroll systems and benefit structures to comply with these updated regulations.

APAC businesses must be vigilant and proactive

The employment tax shifts occurring across APAC reflect a broader trend towards enhanced compliance and transparency. Given the diversity of tax systems in the region, businesses must be vigilant in adhering to local rules, especially in areas such as expatriate taxation, fringe benefits, and statutory contributions. Stakeholders involved should ask themselves critical questions, such as:

1. Do we have a risk identification protocol and process in place to identify possible risks?
2. Is there overall oversight of the magnitude of employment task risks the organization is exposed to?
3. How often are we leveraging data?
4. How involved are we in reviewing new business overseas activities, such as expansions, setting up new entities, or disposing of existing ones?
5. How up to date are we with changing legislation?
6. Are we retaining adequate documentation in preparation for audits?

It is important that businesses adopt a proactive approach in adapting to these new requirements. Failure to comply can lead to significant penalties, so understanding the specific audit focuses on each jurisdiction is crucial for maintaining tax compliance and avoiding legal issues.

Strategies for employment tax success

To learn more, please contact:

Grace Huang
Partner, APAC Employment Tax Lead

1. Vialto Partners’ Global Employment Tax Legislative Updates & Newsletter Tracker
2. https://www.hasil.gov.my/media/fzagbaj2/irbm-e-invoice-guideline.pdf
3. https://www.legal500.com/guides/chapter/indonesia-tax/?export-pdf

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