17/10/2017. Circular 230 disclaimer. Payroll for International Assignments. Agenda. Your presenters

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1 Circular 230 disclaimer Payroll for International Assignments 17 th Annual Virginia Statewide Payroll Conference October 13, 2017 Any tax advice contained herein was not intended or written to be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. The following slides are for educational and discussion purposes only, and are not intended, and should not be relied upon, as accounting advice. Page 2 Your presenters Agenda Nathan Mathis Mobility Performance Improvement Manager McLean, Virginia Nathan.Mathis@ey.com Anika Kim Global Mobility Tax Manager McLean, Virginia Anika.Kim@ey.com Understanding different types of international assignments US taxation of outbound and inbound assignees Shadow payroll Payroll considerations for assignees Payroll risks and common issues Best practices Q&A Page 3 Page 4 1

2 Polling question Understanding different types of international assignments Do you know who all your globally mobile employees are? Page 5 Page 6 International assignment types Determining Temporary or Indefinite < 3 Months Short Term Business Trip 3 months 1 Year Short Term Assignment 1+ Years Indefinite Long Term Assignment Local Transfer If the assignment is expected to last for 1 year or less, it is temporary unless there are facts and circumstances that indicate otherwise An assignment that is initially temporary may become indefinite due to a change in circumstances A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment Page 7 Page 8 2

3 Temporary vs. Indefinite Common assignment related compensations If the assignment or job away from the employee s main place of work is temporary Certain travel, meals and lodging expenses (awayfromhome expenses) can be excludable from taxable income Relocation expenses are not exempt Employee cannot claim foreign earned income exclusion If the assignment or job is indefinite Travel, meals and lodging expenses that the employee incurs in the new tax home cannot be excludable from income Allowable relocation expenses may be exempt Employee may be eligible to claim foreign earned income exclusion Housing* Auto Allowance* Destination Services Location/Hardship Allowance Cost of Living Allowance (COLA) Per Diems Assignee* Per Diems Family Transfer Airfare Assignee* Home Leave* Relocation Reimbursements Foreign Income Tax Payments *Typically nontaxable for temporary/short term assignment Page 9 Page 10 Case study #1 Case study #2 Employee Blue works for a US employer and has received a foreign assignment. Blue will work in the UK for 8 months (1/1 8/31) then work exclusively in France for 3 weeks (9/1 9/21). On August 21, Blue finds out that she is needed in the UK office for another 4month period (9/1 1/22). Her assignment to France gets cancelled and she remains in the UK. Blue s manager comes to you (the US payroll manager) on December 16 th and asks if the reimbursements for the travel expenses, meals and housing are taxable in the US. Employee Yellow works for a US employer and has received a foreign assignment. Yellow will work in China for 8 months (1/1 8/31) and then South Korea for 3 weeks (9/1 9/21) and then return to China for 6 months (9/22 3/22). Yellow s manager comes to you (the US payroll manager) on December 16 th and asks if the reimbursements for the travel expenses, meals and housing provided are taxable in the US. Page 11 Page 12 3

4 US taxation of outbound and inbound assignees US taxation of outbound assignees U.S. citizens/residents are taxed on their worldwide income The worldwide wages paid by a US employer to US employees are generally subject to federal income tax withholding and the wages are required to be reported on W2s Includes cash compensation and benefits in kind Includes items paid/reimbursed outside the US Page 13 Page 14 US taxation of outbound assignees (cont.) US taxation of outbound assignees (cont.) An exemption from federal income tax withholding applies: If the employee completes, signs and returns Form 673 to the employer provided the employee qualifies for the IRC 911 exclusion or; If the employee is a US citizen and his wages are subject to mandatory foreign tax withholding IRC Code 3401(a)(8)(A)(ii) or; If the employee completes a W4 based on his/her anticipated foreign earned income exclusion or foreign tax credits FICA tax is due on wages of US citizens and permanent residents for services performed outside the US for an American employer or for a foreign affiliate with an IRC 3121(l) agreement in place FUTA and SUTA tax is generally due on wages of US citizens (not permanent residents) for services performed outside the US for an American employer Page 15 Page 16 4

5 US taxation of outbound assignees (cont.) Case study #3 State reporting and withholding requirements vary Domicile concept Relevant to U.S. expatriates who may return to home state after completion of assignment Each state statute must be reviewed to determine Employee residency status Income reporting requirements Withholding requirements If foreign earned income exclusion or foreign tax credit applies at the state level You have recently been hired as the US payroll manager of Other People s Money, LLP. Congratulations! On your first day, you learn that OPM is under payroll audit by the IRS for lack of withholding on their 50 expatriate employees. You have been asked to provide proof to support the fact that even though these individuals have an average W2, Box 1 of USD $700,000, you have withheld no federal income taxes on them. Your new bosses are concerned. What documentation should you provide to support the prior positions of OPM? How should you respond to the audits? Page 17 Page 18 US taxation of inbound assignees US taxation of inbound assignees (cont.) If you are an alien (not a US citizen), you are considered a nonresident alien unless you meet one of two tests: The Green Card test The Substantial Presence Test (SPT) To meet SPT, you must be physically present in the United States on at least: 31 days during the current year, and 183 days during the 3year period that includes the current year and the 2 years immediately before that, counting: If US resident: Subject to tax on worldwide income just like a US citizen File Form 1040 If US nonresident: Subject to tax on US source income only, including: Compensation attributable to US workdays Income from US investments File Form 1040NR Page 19 Page 20 5

6 US taxation of inbound assignees (cont.) US taxation of inbound assignees (cont.) Wages earned in the US by US residents should be reported on a W2 and are subject to withholding at graduated rates Wages earned in the US by nonresidents should be reported on a W2 and are subject to withholding at a flat rate of 30% Reporting and withholding requirement is based on where services are performed not where they are paid For a US nonresident, wages are generally subject to Federal and State income tax withholding unless all three conditions below are met: The employee is present in the US for a period of 90 days or less for the taxable year, and; Services are provided for a foreign employer that has no US permanent establishment, and; Compensation for these services is not more than $3,000 for the taxable year Page 21 Page 22 Example US taxation of inbound assignees (cont.) During 2016, Henry, a nonresident alien from a nontreaty country, worked for a non US employer. Henry, who uses the calendar year as his tax year, was temporarily present in the US for 60 days during 2016 performing personal services for his employer. His employer paid him a total gross salary of USD2,500 for those services. Would this income be taxable in the US? Income tax treaties may exempt income from taxation in the US In order for the nonresident employee to claim exemption from US income tax withholding under the treaty, the employee must submit the completed Form 8233 to the employer If a treaty exemption applies the employer still has a requirement to issue a 1042S to report the US source treaty exempt income Page 23 Page 24 6

7 US taxation of inbound assignees (cont.) US taxation of inbound assignees (cont.) Each state statute must be reviewed to determine: Residency status for each state Reporting and withholding requirements by state based on residency and work performed in state If any income tax treaty exemption applies at the state level FICA exclusion may apply to employees holding certain US visas such as F1, J1, M1. Q1, or Q2 FICA exclusion may also apply to individuals who pay social tax in another country where there is a totalization agreement between the US and the other country FUTA and SUTA tax is generally due on wages of nonresidents. Exclusion may apply to employees holding certain US visas such as F1, J1, M1, Q1 or Q2. Page 25 Page 26 Shadow payroll Shadow payroll Sometimes called a mirror payroll Payroll in the country where the employee is not paid used to mimic the actual payroll to allow for accurate income reporting and tax remittances Although the same compensation is reported in two locations, the compensation would not be paid twice Used to calculate US taxable compensation and remit required US tax withholdings Provides a means for compliance US residents = Worldwide income US nonresidents = U.S. source income only Page 27 Page 28 7

8 Shadow payroll (cont.) Payroll considerations for assignees There needs to be a process for obtaining compensation (cash and noncash) paid by home and host on a regular basis Timing: Technically: should run on the same schedule as actual payroll Practical: less frequent or standard with periodic reconciliations Page 29 Page 30 Payroll considerations: employer Payroll considerations: income tax treaties The primary employer is the company that has signed employment contract, determined compensation, and has the right to control/terminate employment An expatriate employee is often seconded (loaned) to another company, but remains primarily an employee of the company of his home country Dependent Personal Services Article Not exceeding 183 days in a 12month period Remuneration paid by an employer who is not a resident of that country Not borne by a permanent establishment or fixed base which the employer has in that country This 12month period may be a calendar year or a rolling 12month period Page 31 Page 32 8

9 US income tax treaty network holes Payroll considerations: Totalization Agreement Intended to eliminate dual Social Security taxation and to help fill gaps in benefit protection for workers who have divided their careers between the United States and another country Certificate of Coverage generally 2 5 years with possibility of extension Page 33 Page 34 Countries with Totalization Agreements with the US Applying Totalization Agreements or income tax treaties Australia Austria Belgium Canada Chile Czech Republic Denmark Finland France Germany Italy Japan Luxembourg Netherlands Norway Poland Portugal Slovak Republic South Korea Spain When qualifying for an income tax treaty or Totalization Agreement, it is possible that the payroll reporting and tax withholding/remittance obligation may be mitigated In many cases there is a form that will need to be filed in advance of the treaty application to substantiate the position A treaty position may be denied if the proper forms are not completed Greece Sweden Hungary Switzerland Ireland United Kingdom Page 35 Page 36 9

10 Payroll considerations: sourcing Payroll considerations: payroll delivery Sourcing determines what is taxable in the US and which country has the first right to tax the income The sourcing rules differ based on the particular type of income involved Some compensation components may have complex or extended allocations periods The sourcing period for these compensation components may extend beyond the immediate years of travel and may create residual years of tax filings Travel tracking is VERY important Move Type? Relocation Host Country Payroll Secondment Policy Type? Home Country Payroll Type 1 Type 2 Type 3 HQ or GEO Payroll Split Payroll Page 37 Page 38 Payroll considerations: multiple data sources Payroll considerations: multiple data sources Data gather Balance sheets, payroll instruction files Payroll Accounts payable Vendor payments Expense management provider Others (e.g., direct payments from incountry client) Equity Data mapping, analysis and review Compensation components Actual Difference Cash Budgeted Noncash Other Total Total Total Total Outputs Feedback into payroll Compensation data for payroll (e.g., P60, W2) Provide compensation data to tax return preparer Variance analysis Tax translation (based on country and global tax positions) Accrual management Calculate gross ups on nonpayroll items Return on investment analysis Budget to actual calculations What if scenarios Partial or full outsourcing of collection and reporting process Adjust pay delivery methods to create more efficient process Enhance timeliness of collection and reporting process Implement more stringent data analysis and variance reporting Develop global compensation collection and reporting procedure guides Create global data source dictionary and responsibility matrix Page 39 Page 40 10

11 Payroll risks and common issues Potential payroll risks Risk footprint Cost footprint Monetary penalties Criminal penalties Reputational penalties Employee dissatisfaction and loss of trust Size footprint Page 41 Page 42 Common payroll issues Common payroll issues (cont.) Employee incorrectly classified Residency status Social Security status Duration of assignment Overreporting, underreporting or a complete lack of reporting in home/host Paid or provided locally (outside payroll) Paid via accounts payable Lack of description or understanding of benefits provided Lack of resources to track and/or determine taxability Inability to implement planning Unaware of obligations Trailing payments previous assignment Payments identified late in process Early payroll cutoff dates Incorrect treatment applied Tax gross ups Incomplete documentation Withholding waivers Certificates of Coverage Accidental triggers Business travelers Unknown implications of chargebacks Page 43 Page 44 11

12 Best practices Best practices Develop an action plan Review current process Communication with stakeholders Data collection Vendors Payroll Tax preparer Document and agree assumptions Page 45 Page 46 Best practices (cont d) Best practices (cont d) Implement process and procedure guides Develop payroll guides for each location and taxability grids Implement automated taxability determination and grossup procedures Implement formal training and update procedures Internal/external oversight by incountry subject matter professional Tracking of business travelers Is there a monitoring system? Leverage current processes Sourcing and tracking of equity/bonuses Collection/maintenance of base data External solutions Page 47 Page 48 12

13 Q&A EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young LLP, All Rights Reserved. ey.com Page 49 13