30 January 2013: Legal Entity – An Employment Killer

A problem in developing countries –

Compandben plans to take action around the world –

We get many queries from potential clients wanting a routine payroll administration service for an employee they wish to hire or indeed have already employed.

In most countries in Europe, in Australia,  Canada, Israel, Kenya, Malaysia, New Zealand, Zimbabwe and one or two others this poses no problem. The “Head Office” or one of the other branches of the company is registered with the social security and for employee tax withholding. The client is deemed to have effectively set up a Representative Office.

There are some restrictions on what can be done – for instance the employee cannot have any executive authority to conclude deals, contracts, prices and credit terms.

But in most countries in Africa, Asia, and South America – as well as a couple of countries in Europe, you will be advised that in order to employ staff a full legal taxable entity is required – for example  a branch, or subsidiary.

In countries where this is the case our local Partners can usually offer an “Employment Services” solution where they would actually employ the employee on behalf of the client. But this is expensive: as well as a fee for the employment service, there will probably be VAT to pay on the whole cost -salary +employer social charges + fee.

It is a nuisance and a major employment killer.

Typically…

• A sales manager finds an employee to do prospecting for new clients in …say…Argentina – we had a recent case there:
• He tells the Finance/Legal team that in order to employ this person directly the firm has to start a taxable legal entity there – a branch perhaps.
• The Finance manager doesn’t want to do this unless there is real business there.
• So he asks if there can be an “employment services” solution.
• No problem but the cost then adds  +15% employment fees AND  (in Argentina) +21% VAT

The client has reasonably enough said “no thanks “!

Every day thousands of potential employers are putting off employing staff – mainly in developing countries because of this restriction.

• Some will of course bite the bullet and set up branch structures:
• Some will employ the employees as “independent contractors”:  but that solution brings its own problems: if the employee doesn’t pay his taxes etc the local tax authority may well deem that the “contractor” is really an employee and demand payment from the “employer”.
• Some will use their distributors- but that poses problems of “divided loyalty”
• And some will have their employees employed though third parties -which can be costly.

But most just shelve the project and the much needed employment in the developing country never happens.

Compandben is planning to take this up with Embassies and Chambers of Commerce around the world. 

John Tinsley

Oh STOP PRESS
I have just been advised that in MALI a legal entity isn’t required. Nice to see something going right for that country!

And here is an ACTUAL EXAMPLE of what I am talking about. (It is in French and concerns TOGO.)

QUESTION (e-mail – John Tinsley (Compandben) to ‘ABOTSI’ – 18 January 2013)

Subject:  Plafond des charges sociales patronales

“En Europe – inclus la France c’est possible pour une societe etrangère etre inscrite avec le secu et pour paiement des impots pour les employés sans une entite legale. Ci joint meme une formulaire que le Secu en France a crée pour cet enregistrement – en Anglais…

De meme en presque tous les pays d’Europe, USA, Canada, Australie, …et Zimbabwe, et Kenya et meme Mali.

Mais ailleurs il faudra que la societe etrangère établisse une entité legale (une branche ou equivalent) afin d’ etre permis employer des employés. Qu’est ce que la situation au Togo?”

REPLY

“Bonsoir. Au Togo, il faut une branche avant d’employer les employés car la sécurité sociale exige l’identité de l’employeur.”