The Taxation journey can be very much like Dorothy venturing into OZ if you think of business as the hot air balloon and the hurricane as compliance and tax regulation. It can be a very confusing journey at first, and your wicked witch of the west – we can all figure out who this is – is constantly being right behind you, waiting for you to make a mistake. Just like Dorothy’s journey, tax can be, for a lack of a better phrase, complicated in its complexities.
These complexities can also be seen in the payroll tax practices of the US and the Middle East alike. Whilst they have different procedures and rules, each of these have their own specific set of regulations which one needs to comply with every time.
Payroll in the USA
The aspect of US payroll that causes the most problems is taxation. The USA has two main branches of taxes within their system; Income tax and Social security tax – this includes Medicare taxes. The employer is allowed to retain income taxes at the rates of about 10%-37% depending on the earning of the employee and these taxes rates are set by each individual state, additionally, the wages that are subject to income tax include holiday allowances, salaries, commissions, bonuses, and fringe benefits.
Similarly, the social security tax is contributed by both the employee and employer but the tax is still withheld from the employees wages. Their tax regulatory, the Federal Income Contributions Act [FICA], states that taxes should include Old age survivors and disability benefits, which are charged at a rate of 6.2% for the employees and employer and the Medicare is charged at 1.45% from both parties.
There is no federal standard that exists with specifies how frequently employees should be paid, but this Is left to the individual state administrations to decide. However, the payroll regulations exist on both a state and federal level and as such, business – both small and large – are required to retain income taxes and social security contributions from their employees and it is also their responsibility to calculate and report taxes to their federal tax authority [IRS].
Payroll in the Middle East
While the US has its complex taxation, the Middle East also has its complexities. For example, how in country-specific laws are interpreted, bank regulations (different disbursement and bank upload files that change, etc.), and sometimes quite complex expatriate compensation and benefits management.
In contrast to the US payroll, the UAE has a number of rules and regulations which are intensely different to that of the USA. Like the USA, where there are areas in which the state has power over their own legislation, the freezones have their own labour law and contracts which the relevant people are obligated to use.
The UAE technically does not have a minimum wage but the wages that are paid need to be enough to meet the needs of the employee, but these wages do tend to match the education of the employee themselves. With regards to the tax, the UAE regulates the business by the labour law but these business have no obligation to pay corporation taxes, but the VAT does stand at 5%. Pensions in the UAE private sector are contributed by the employer at a rate of 12.5% and topped by 2.5% by the government.
In the UAE specific, payroll calculations can be multifaceted and can get quite technical/specialized, such as different gratuity for licensing authorities and reasons for exit, linking payroll disbursement with visa requirements such as WPS reporting, payment in different currencies and exchange rates, and diverse pension calculations for GCC Nationals, DEWS, etc. to name a few. So, although payroll elements do not include direct tax calculations, it is well worth having a payroll expert on hand/onboard.
Yet, in addition to the payroll management that can be compared to other countries, OPS also provides:
- In-country advising on each client’s compliance with labour laws. This is paralegal interpretation of governmental documentation in Arabic and the analysis of the impact on each client’s scenario
- Interpretation of client’s HR regulations and policies, and advising if this is compliant with the labour law
- Configuration of the payroll system with custom/bespoke specific client setups and regulations
- Mapping the payroll process, SOP, and yearly setup of payroll calendar to accommodate Middle East public holidays, such as Eid etc.
- An assigned account manager that is responsible for each client – you will not deal with back of the house processors
- Access to the payroll system per individual user access rights for transparency and flexibility
- Management Reporting, – more than 60 reports as well as custom-made report writer function
- The ability to customize the back end of the system for each client
- Integration with other systems to ensure automation, process flow and single source of truth
- Our online solutions are hosted on Microsoft Azure servers using the latest encryption technologies with fully audited access while our robust disaster recovery, backup and business continuity plans ensure that your data is completely confidential and secure.”
If you are interested in doing business in the UAE but the unknown territory of the taxation scares you, look no further than OPS. We are the Tin Man and Lion helping you along the yellow brick road of business and success.