Risk Management - February 2017
Welcome to 2017!
Last year was a year of disruptive changes… from Brexit to the US elections to the rise of Uber... and so on. All these will have profound effects on the environment in AsiaPacific.
The area of risk management is a recurring theme with many clients and recruiters I meet. As uncertainty rises, governments adjust their risk thresholds, affecting the business environment. Areas like immigration and tax are often targeted as protectionist tendencies rise.
Hence, we thought it appropriate to update and reissue and earlier article on risk management as well as extend it subsequently to touch on the all important tool of insurance.
Hope this is timely and useful.
Harry… on behalf of The Innovare Team
Risk Management – the Contracting Environment
Asia Centric Model
Those familiar with the “limited company” type model we see in Europe might find it quite a lot more complicated in Asia Pacific.
Here, we dwell on the more common form of contracting in Asia Pacific sometimes referred to as the Employee of Record (EOR) model. Some of the characteristics are elaborated below:
Immigration laws in most countries in Asia Pacific often hold a local entity responsible for the entry, wellbeing, good behaviour and eventual exit of the individual. This also ensures that local immigration and employment laws are adhered to. This host company will be the technical employer of the individual.
The starting point is usually a host company or sponsor. At the most basic form, the sponsor has to be a registered company in the country where the services are rendered. In reality, it’s not as simple. Some frequently encountered hindrances are:
A. General Protectionist trend.
In a slowing global economy, it becomes more and more common for governments to give job priorities to locals, where relevant skills exist. This manifests itself in the form of local to foreign quota (eg Indonesia and Thailand), more stringent qualifications for expatriates (eg Singapore), compulsory local training budgets (Australia) and use of local compulsory jobsites (eg. Singapore), amongst others. Companies bringing in expatriates are required to meet one or more of these criteria, some of which, are not necessarily officially expressed but rather, enforced in practice.
It is one thing to know the rules and adhere to them, which is the most basic requirement. Often, it takes experience and frequent interactions with the authorities to understand the internal criteria, as this will affect the outcome of applications.
B. Track record of the sponsor plays a part in the ease of a work pass approval.
In Singapore, we sometimes find new companies having difficulty justifying the sponsorship even for a highly paid expatriate. Immigration tend to trust a sponsor who has a good track record of approvals and the absence of labour issues. In addition, the Ministry of Manpower wishes to see companies favoring the local workforce. However, this definition is left vague and some clients have received warning letters for not adhering to the latter.
C. Licencing is sometimes required for effective outsourcing.
For example, companies in Japan wishing to hire and outsource individuals to end clients need to have the Haken (“dispatch”) licence. Licence holders are subject to regular audits to ensure that the outsourcing terms are fair to the dispatched workers. Unfortunately, such licences are getting harder to obtain and maintain.
Payroll & Tax Administration
The employer is then expected to administer the payroll of the individual and in some jurisdictions, deduct the tax and social security, where applicable.
Salary and tax accountability are required annually or upon completion of the term whichever is sooner. In some jurisdictions like Japan, Indonesia and Australia, a monthly tax deduction is required. This is similar to the practices in the UK. Others will do the final tax settlement annually (eg Singapore, Hong Kong). The challenge for the contracting industry for the latter model is how to ensure the sponsor holds enough taxes at the end of the tax year to settle with Inland Revenue. By then, the contractor has demobilized and left for a different project, leaving the sponsor holding the baby if there is a shortfall in tax retained.
Immigration and Taxes
In more advanced countries eg Singapore, the Immigration and Inland Revenue departments are well linked so that applications made for entry purposes need to tie in with the contracts and the amounts eventually paid as taxes.
This sometimes poses a challenge for contractors as they are typically time based and pay-outs vary from month to month. This goes against the grain of a fixed pay understanding which is more familiar to immigration officers. Hence, contracts need to be properly drafted for consistency as well as to meet prerequisites of the immigration and tax departments.
The typical contracting model often involves an "all-in rate" where the contractor is given a total sum that encompasses all social security, taxes and benefits.
The applicability of an all-in rate becomes tricky when the law under the EOR model requires the employer to be responsible for the employer portion. It is a cost often overlooked by the contracting companies and has to be addressed in the cost structures, rates and contracts.
Benefits & Labour Law
In the same way, the all-in rate approach makes the handling of benefits a thin line to tread. It is often overlooked that the provision of benefits is required by law in some jurisdictions and agencies/clients are often caught by surprise when there is a claim. It is thus essential to be aware of these potential costs as well as to address then in formulating the transaction.
The so-called “arm’s length” relationship assumed in most Western based model cease to provide adequate protection for the sponsor. Most of the jurisdictions will favour the contractor when it comes to the labour tribunal. This is in spite of the all-encompassing pay rate paid to the contractor as common law seems to triumph. Hence, there has to be mechanisms in place to protect the sponsors.
Certain jurisdictions like Singapore tend to lean towards the contract and might uphold the "all-inclusive rate" relationship if properly stipulated in the contract. The emphasis here is that it needs to be properly stipulated... hence, a balance of clarity and the absence of contradictions within the contract need to exist. It takes time and practice to familiarise with these unique features in Asia Pacific. Nevertheless, once the “tuition fees” are paid, the benefits to be reaped are plentiful. Definitely worth a look for the enterprising!
Should you need assistance in Asia Pacific, we would be pleased to hear from you.
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