Differences between BPO Services in the US and Germany

As a typical US BPO client, XYZ is a US entity that was formed recently, and has a German Parent company, XYZ GmbH. The legal setup of XYZ was handled by an attorney outside of Rödl & Partner USA, since US public accounting firms are prohibited from providing legal services to their clients. XYZ is planning to start with one to three US based employees, of which none will be an accountant. Their job is to build XYZ’s business in the US. BPO’s job is to be XYZ’s back-office. XYZ’s books will be kept in QuickBooks, a widely used accounting software for small to medium-sized businesses in the US. Access to the software can be set up for both the Company and BPO, but initially BPO staff will set up the client’s data file and record in it independently. BPO staff can use QuickBooks’ default chart of accounts, customizing it as needed to fit XYZ’s business and the transactions it has with its foreign related parties. In the case of XYZ, the chart of accounts will be set up to mirror the Parent company’s chart of accounts to facilitate consolidation. 

 

Payroll will be an important topic for XYZ when it looks to hire its first employees in the US or retain the talent it already has. In the US, solutions for important benefits like health insurance and retirement plans are dominated by the private sector, which can be a source of confusion for Mittelstand companies new to the US market. US BPO staff do not prepare payroll internally. Instead, they act as liaison between the client and 3rd party payroll providers like ADP, Paychex, professional employer organizations (PEOs) and employers of record. The payroll company takes care of paying XYZ’s employees and filing its payroll-related federal and state wage reports. The payroll company may also be instrumental in the setup of XYZ’s benefits package. The payroll company will enter its own agreement with XYZ and bill for its services separately. BPO staff can ensure that XYZ’s employees are properly set up in the payroll provider’s system, code compensation components appropriately and process the payroll according to the frequency selected by the client and in keeping with state requirements, e.g., biweekly, semi-monthly, or monthly. Clients like XYZ tend to have frequent changes to their payroll (e.g., new hires with off-cycle start dates or bonuses and commission payments,), so it is rare that BPO can set up a client’s payroll on autopay. 

 

State sales and use tax is another area where XYZ, as a new entrant to the US market, will rely on the expertise of BPO staff. Since the Company will be selling tangible products, including sales to end-users, BPO staff will initially register the Company for sales and use tax filing in the state where the Company is located. In most states, this will require a monthly filing and payment of sales and use tax. XYZ is advised to request sales tax exemption certificates from all customers, and is required to include sales tax on invoices to customers who are not tax exempt in the state(s) where the Company is registered. In addition to sales tax, the Company is required to report and pay use tax on purchases of items without sales tax. 

 

that are not exempt from tax in the state where the item is being used. Generally, these would be business personal property not re-sold to customers or considered an integral part of the manufacturing process. BPO can calculate sales and use tax due, prepare the monthly sales and use tax return(s) for the Company, and file and pay online on behalf of the client, with the client’s approval. 

  

Every state has somewhat different rules around sales and use tax, and tax rates can vary significantly among states, districts, counties, and cities. As the Company grows and has sales or employees in other states, BPO can assist XYZ to determine whether the Company needs to register and file for sales and use tax in a particular state. There are certain criteria, including thresholds for sales amount and volume of transactions that are taken into consideration, and BPO will frequently consult with a tax specialist to evaluate whether the Company needs to register and file sales and use tax returns in a particular state. 

 

BPO records all of the financial transactions and prepares monthly financial statements for XYZ, as well as additional reporting required by the German Parent. Other clients may only need quarterly, semi-annual, or annual financial statements. 

 

At the end of the fiscal year, BPO prepares the year-end financial statements for XYZ and gathers other information needed for the annual federal and state income tax return(s). The financial statements are the basis for the preparation of the income tax returns. BPO staff do not prepare income tax returns, however they work closely with the Rödl & Partner tax preparers to answer any questions that arise during the completion of the tax returns. 

 

BPO work is flexible and as XYZ progresses, the Company may decide to move some of the accounting functions in house, at which point BPO will provide training and hand-off as needed and continues to be the main point of contact for the client. 

 

In contrast, BPO services for the Parent Company in Germany might differ from XYZ described above in the following ways. The Parent company of XYZ, XYZ GmbH, is a mid-sized company headquartered in Germany. In Germany, payroll is prepared and paid once a month and the company is required to submit payroll data to the health insurance companies and the German tax office on a monthly basis. While larger companies often have their own employees for payroll and bookkeeping services, it is quite common that these tasks are outsourced to tax accounting firms (Steuerberater) in Germany. The tax accountant prepares the monthly payroll and transmits the data electronically to the health insurance companies and the tax office. XYZ GmbH receives the pay slips and pays salaries and wages to the employees. In most cases, payments to the tax office and health insurance companies are collected by the agencies via direct debit. In comparison to the USA, German health insurance benefits are highly regulated and statutory for employees, except for those above a certain income level, such as executives. 

 

In addition to payroll processing, the XYZ GmbH is required to complete the monthly financial statements and the monthly advance VAT (Value-added tax) filing to the tax office, which are due on the 10th day of the month following each month end. The tax accountant prepares the monthly financial statements and submits the advance VAT filing electronically. In most cases, VAT is collected via direct debit from (or refunded to) XYZ GmbH’s bank account. In contrast to US sales and use taxes, VAT is filed on a federal level, and rates are standard throughout Germany. After year-end, the tax accountant prepares the annual VAT return, and any adjustments will be paid or refunded at that point. 

 

Most tax accounting firms in Germany use Datev software solutions, which combines payroll, financial and tax accounting in one program so that the data is integrated, eliminating manual entry of payroll journal entries, and relevant data can be submitted electronically to the tax office and the health insurance companies easily.