Digital Solutions to Help IT Business Optimize Taxes

In the EU a lion’s share of tax that companies pay is made up of direct and indirect tax: profit tax (on average about 20%), value added tax (VAT, 17% - 20%), social security tax. The latter is partially withdrawn from payroll tax and from every employee’s salary, in the form of income tax. But it is the enterprise, i.e. the legal entity, that operates as a tax agent. Meaning it is responsible for transporting fiscal payments to the government. According to the latest EuroDev data, social security tax is about 20-36% of payroll tax in a third of all EU countries today.

For instance, for an average IT company in Italy, the social tax toll includes income tax (IRPEF) of 23%, social security tax (INPS) of 9.19% - 10.49%, pension contribution of 33%. According to the consulting team of Accace. According to Accace.com, across all of Europe employers pay up to 75% in tax for every EUR 1,000 of a salary.

Doubtless, such a heavy tax load is a considerable challenge to profitability and cost-effectiveness of any commercial organization. It is further aggravated by the fact that employees may get sick, be on vacation or maternity leave, or simply indulge in sleuthing at work. Yet employers are obliged to pay salaries and taxes in full.

It may seem that relocating some of business processes to lower cost-of-living countries is an optimal way to not only optimize tax expenses, but also potentially avoid tax load. In fact, many transnational giants, such as Apple, Google, and Microsoft, employ this method to maximize revenues. Starbucks and Amazon offshored some operations to the Netherlands, and the aforementioned companies to Ireland.

In Europe, payroll costs may be optimized if companies work with contractors on a service contract instead of a regular labor contract. The former lists all working conditions, from days off to weekly working hours. If a contractor doesn’t perform well enough, their contract can be annulled.

In reality, though, the method discussed above is not as easy to implement. First, not every company has enough resources to launch branches abroad. Second, in some EU countries a service contract is still seen as a full-scale labor contract, if used regularly. It incurs the undesired tax load and leads to punishment for unfulfilled social responsibilities.

There is a fully legal way out. Companies may consider hiring their remote teams through a mediating service. It allows businesses to manage their foreign teams or individual contractors overseas through the necessary digital solutions provided by the service.

Mediating services have been around for quite some time and their solutions have developed considerably over the years. They speed up paperwork and provide payment accounts to companies worldwide. The key function of these cloud platforms is to pay freelancers globally through a bank transfer, PayPal or cryptocurrencies. The entire process of invoicing is fully automated. Basically, the service bridges the gap between the two parties: for a company it is a contractor, and for a freelance team it is a client.

If an average medium European IT-company partners up with a similar service to offshore some of its work, its payroll costs are optimized. When managing remote teams through the service, businesses technically are not the actual employers. Since tax agent status is not activated, they do not bear responsibility for taxes. Likewise, the service itself is not bearing any risks as freelancers are its contractors.

To users, the benefit is invaluable. HR operation cost is reduced. Hourly wage itself grows smaller due to cheaper locations of the workforce. Companies are able to tap into the international talent pool, so any desired professional can be hired from anywhere around the globe.

A proper illustration is required to paint the full picture of using a service complying with EU law. For example, a German company decides to hire a freelancer from Bosnia. To legally avoid tax agent status, the German team signs a B2B service contract with the platform and sends them an amount of money. The amount includes the money to be sent to freelancers and the commission of 3-8% charged by the platform. After the freelancer completes their tasks, the platform sends money to them.

The freelancer pays income tax on their own in accordance with their local laws. At the end of a transaction, the client (i.e. the German company) receives all closing documents. Thus, the team optimizes their payroll costs, and freelancers get a chance to legally declare their income.

In the EU a unified codebase has been established to manage indirect taxation. If the mediating service is registered in the region, then its digital payment solutions help its users optimize VAT as well. This indirect tax is not incurred as payment is facilitated between the EU residents.

To summarize, utilizing a mediating platform like the ones discussed has the following peculiarities:

• Freelance workers receive money online.
• Mass payment is available which is particularly relevant for larger companies with numerous remote teams.
• To start the payment process, money needs to be added to a company’s account on the platform. From there, it will be automatically distributed across teams.
• Hiring teams doesn’t require individual contracts. A single B2B contract with the platform replaces all other contracts with freelancers.
• Closing documents are generated automatically and sent to a user’s personal account for every payment.
• Additional savings on payrolls, salaries and taxes are in place, as a team of accountants is no longer needed to manage payments.
• Currency control and exchange rates do not halt payments to freelancers outside of the EU.
• The platform accepts money top ups in multiple currencies and sends money to freelancers, free of a bank commission.

Overall, the mediating service streamlines payment processes. Remote teams receive money in full on time. This reinforces trust between the management and teams. In turn, accounting and management routines, now delegated to a service, do not distract founders from working towards their strategic business goals.

We’re EasyStaff, a global freelance management platform. Our core features are task management for remote teams, tax invoicing and cross-border payments. If you want to grow your business internationally, stay compliant and save on tax, join EasyStaff now and book your free demo today.

https://medium.com/@easystaff/digital-solutions-to-help-it-business-optimize-taxes-93da95d2f0e0