TAX CONSIDERATIONS, PLANNING OPPORTUNITIES & TRAPS WITH GLOBAL EMPLOYEES

Transcription

1 TAX CONSIDERATIONS, PLANNING OPPORTUNITIES & TRAPS WITH Wednesday, March 9, 2016 Nicole Simonian Alan I. Appel Philip Wright Asia Coordinator - Partner Senior Tax Consultant, Partner, Tax Advice & Controversy Asia Employment Coordinator Professor & International Bryan Cave LLP Bryan Cave LLP Tax Program Director, New York Law School

2 2 TAX ISSUES ASSOCIATED WITH Overview General Considerations Employer-Principal / Employee-Agent Arrangement Tax Considerations Entity Taxation Employee/Agent Taxation Illustrations/Examples Illustrative Treaty Provisions

3 3 TAX ISSUES ASSOCIATED WITH Overview General Considerations Interdisciplinary Issues cross a number of lines within an organization including HR, legal, benefits and finance/tax Legal/Finance Implications Local Labor and Employment Laws Foreign Corrupt Practices Act (FCPA) Import / Export Controls Immigration Finance/Currency Controls/Payment Banking Taxation Custom Approach No one size fits all approach must be tailored for both organization and be assignment specific

4 4 TAX ISSUES ASSOCIATED WITH Employer-Principal / Employee-Agent Arrangement Employment Relationship Employer Legal versus Substance Deduction / Cost Reimbursement Intercompany Services Agreement Beneficiary of Services On whose behalf are the services performed Transfer Pricing Considerations Withholding Considerations Employee (Dependent Agent) Independent Contractor (Independent Agent) (Third Party or Related Party) Methods of Assignment General Considerations Nature and Beneficiary of Services Rendered Application of US (Home Country) and Foreign (Source Country) Law Legal Documentation Taxation Corporate Individual

5 5 TAX ISSUES ASSOCIATED WITH Employer-Principal / Employee-Agent Arrangement (Continued) Methods of Assignment Home Country Employee Employee of Home Country Direction and Control by Home Country Source Country Employee Direct Hire Local Law Requirements Primary / US Secondary Secondment Individual becomes subject to direction and control of source Country with cost reimbursement to Home Country Proper Documentation and Execution Withholding Tax Consequences on Reimbursement to Home Country Mitigates Permanent Establishment (PE) Risk Split-Payroll (Dual Employee) Employee is a dual employee of Home Country and Source Country Transfer Pricing Issues Legal Uncertainty and Complexity Global Employment Company

6 6 TAX ISSUES ASSOCIATED WITH Tax Considerations (Entity) Source Country Taxation General Do the activities of the agent create the risk of taxation to the principal in the country in which the activities occur? Local Country Taxation Engaged in a Trade or Business Permanent Establishment Applicable Treaty Who is the Employer / Principal Legal / Substance Disregarded Entities and Fiscally Transparent Entities Type and Documentation of Assignment Arrangement (See Above) Status of Employee / Agent Employee (Dependent Agent) Independent Agent (Related Entity or Third Party) Activities Duration of Assignment Duties of Agent/Employee Oversight and Direction Conclude Contracts Auxiliary and Preparatory

7 7 TAX ISSUES ASSOCIATED WITH Tax Considerations (Entity) Tax Consequences / Permanent Establishment Engaged in Trade or Business US Parent - Foreign Country Permanent Establishment Local Country Tax Reporting by US Parent Local Country Employee Tax Reporting Foreign Entity US Permanent Establishment Filing of US and State Income Tax Returns and Payment of Taxes on Allocable Income Possible Loss of Deductions if more than 18 months after due Date Possible Application of Branch Profits Tax US Employment Withholding Tax and Related Information Reporting Compliance Issues Reporting and Payment of Tax Employment Taxes Documentation Applicable withholding Regime (Payments to or by the Principal)

8 8 TAX ISSUES ASSOCIATED WITH Tax Considerations - Individual Source country Taxation General Do the activities of the agent subject the agent to taxation in the country in which the activities are performed Local Country / Foreign Country Employer Federal Income Taxation / Social Benefit Taxation / State-Cantonal Taxation Duration Nature of Assignment Local Country Taxation / Applicable Income Tax Treaty Compliance Issues Principal ( Employer ) withholding and recording keeping Issues Employee Return Filing and Other Tax Reporting Obligations Miscellaneous Compensation Package Fringe Benefit and Pension consideration Tax Equalization Agreement Totalization Agreement

9 TAX ISSUES ASSOCIATED WITH FACTS Corporation X is a US MNE with subsidiaries located throughout the world engaged in the manufacture and distribution of products sold throughout customers worldwide (Product). Corporation X owns 100% of FC-1, a Singapore entity, that serves as the HQ company responsible for its Asia Pacific Sales and distribution. FC-1 is the legal owner of non US IP. Sales of Product are made through FC-2, a Hong Kong entity wholly owned by FC-1. FC-2 has distribution centers located in various jurisdictions thought out Asia Pacific (branches and separate entities). FC-3, a PRC entity, manufactures Product on behalf of FC-1 (Contract Manufacturer). Corporation X owns 100% of Y, a US entity that will provide Sub-Contracting services to affiliated entities. Y Sub-Contractor X FC-1 (SG) FC-2 (HK) Distribution Centers FC-3 (PRC) 9 Manufacturing Non US Trademarks and Tradenames

10 TAX ISSUES ASSOCIATED WITH Example 1 Activities of Employee A Local Country Taxation A is a Senior Executive Employee of X with responsibilities that include oversight of Asian Sales, Marketing and Manufacturing. A travels to Asia Pacific once a quarter as part of his general duties and attends meetings at company locations in Singapore and Hong Kong. The duration of the travels are generally 7 to 10 days. A also meets with certain key customers at their locations though out Asia Pacific. A also attends an annual leadership program with various Asia Pacific executives in Hong Kong for one weeks. A is a Board Member of FC-3 and attends quarterly board meetings held in various locations in the PRC. The Board Meetings are scheduled to coincide with A s quarterly travels to Asia Pacific. Y Sub-Contractor X FC-1 (SG) FC-2 (HK) Distribution Centers FC-3 (PRC) 10 Manufacturing Non US Trademarks and Tradenames

11 TAX ISSUES ASSOCIATED WITH Example 2 Activities of Employee B Temporary Assignment Local Taxation (SG/PRC) FC-3 is undergoing a significant upgrade to its manufacturing facility to increase the production of Product and to comply with certain recently enacted regulatory rules. The upgrade is expected to span a period of months. B is an Employee of X that will be assigned to FC-1 to provide technical oversight of the upgrade of the FC-3 plant. B and his family will reside in Singapore. B will have an office at the SG headquarters but will spend a significant portion of his time overseeing the project at the plant in the PRC. B will travel and meet with various subcontractors located within the PRC and other jurisdictions throughout Asia Pacific. B will return periodically to the US to provide briefings with respect to the project. B expects to return to the U.S. when the upgrade is complete. Y Sub-Contractor X FC-1 (SG) FC-2 (HK) Distribution Centers FC-3 (PRC) 11 Manufacturing Non US Trademarks and Tradenames

12 TAX ISSUES ASSOCIATED WITH Example 3 Local Permanent Hire - Employee C US/PRC Entity Taxation / Individual Taxation Employee C is the senior in country executive of FC-1 responsible for Asia Pacific operations. Employee C travels extensively throughout Asia Pacific including trips to the PRC manufacturing facility and the various sales and distribution facilities throughout Asia Pacific. Employee C is a neither a U.S. citizen nor U.S. resident. Employee C is a member of the FC-3 board and attends its quarterly board meetings in the PRC. Employee C travels to the U.S. for quarterly operations reports that are conducted at X s US HQ. Y Sub-Contractor X FC-1 (SG) FC-2 (HK) FC-3 (PRC) 12 Manufacturing Non US Trademarks and Tradenames Distribution Centers

13 TAX ISSUES ASSOCIATED WITH Example 4 Temporary Travel to US and SG - US/SG Entity Taxation / Individual Taxation (US/SG) Employee D is the Plant Manager of the PRC Manufacturing Facility resident in the PRC. In connection with the upgrade of the manufacturing plan Employee D will travel to the US for training that is expected to last approximately 6 weeks. Employee D also travels to SG and various other jurisdictions throughout Asia Pacific to meet with Employee B and various subcontractors and suppliers regarding the plant upgrade. Y Sub-Contractor X FC-1 (SG) FC-2 (HK) FC-3 (PRC) 13 Manufacturing Non US Trademarks and Tradenames Distribution Centers

14 TAX ISSUES ASSOCIATED WITH 14 Example 5 Service Company - US/SG Entity Taxation / Individual Taxation (US/SG) - Employee E Y corporation is a wholly owned U.S. subsidiary of X established solely to provide certain subcontracting services with respect to the upgrade of the FC-3 manufacturing facility. Employee E is an employee of Y corporation and is responsible for overseeing the activities conducted in PRC related to the subcontract. Employee E has been loaned to SG. Employee E expects to conduct its subcontracting oversight on the ground in PRC with travels between the US and PRC. Employee E will meet on occasion in SG to discuss the status of the upgrade. Y Sub-Contractor X FC-1 (SG) FC-2 (HK) FC-3 (PRC) Manufacturing Non US Trademarks and Tradenames Distribution Centers

15 23 TAX ISSUES ASSOCIATED WITH Appendix IRS Training Material Illustrative Treaty Provisions

16 TAX ISSUES ASSOCIATED WITH IRS LB&I Training Materials (9/03/2014) Creation of a PE through the activities of Seconded Employees in the US Facts: FP is a UK resident company that runs an international hotel business through both owned and franchised hotels. FP acquires S a US corporation that owns and operates U.S. hotels. S is FP s U.S. headquarters and its base for running its business in the U.S. FP seconds employees to S to train S employees and Franchise owners. Issues: Do the seconded employees carry on the business as employees of FP or S Is there a place of business in the US through which the FP employees operate Is the U.S. place of business fixed The critical element in determining whether FP carries on the business is identifying whether the FP employees remain FP employees or whether, under a secondment arrangement, they become the employees of S. Relationship of employer and employee exists when the person for who services are performed has the right to control and direct the individual who performs the services not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished Secondment FP (UK) S 16