Globalization of Employee Workforce: The Impact on Employee Plans ASPPA Annual Conference Heather B. Abrigo, Esq. Drinker Biddle & Reath LLP

Transcription

1 Globalization of Employee Workforce: The Impact on Employee Plans 2016 ASPPA Annual Conference Heather B. Abrigo, Esq. Drinker Biddle & Reath LLP 1

2 Why do we care? Introduction Globalization has grown and is clearly growing It is now digital Cross-border data flows have grown by a factor of 45 over the past decade, and they re projected to post another ninefold increase by 2020» 2016, Lund, Manyika, Bughin, Globalization is Becoming More about Data and Less About Stuff Harvard Business Review Statistics: McKinsey Global Institute» Over the last decade, global flows of goods, services, finance, people, and data have contributed at least 10% of world GDP, adding $7.8 trillion in 2014 alone» Data flows already accounted for $2.8 trillion of this value Introduction Why do we care, cont.? Statistics, cont.» Already 12% of the global goods trade is cross-border e- commerce, and half of the world s traded services are delivered digitally.» Foreign profits of U.S. corporations increased by approximately 235% ($89 to $298 billion from 1994 to 2004)

3 Introduction Why do we care, cont.? The biggest reason: Retirement Plan implications Plan document issues with respect to US and non-us employees (e.g., proper eligibility, compensation definition) Tax implications (e.g., Limitations on contributions and benefits under IRC section 415; Employer deductions for contributions to a plan; and U.S. taxability of distributions); and Effect of tax treaties between the US and other countries when designing retirement plans for such non-us employees Introduction Why does the IRS Care? IRS has identified the following issues with respect to multinational employers: Special coverage rules for nonresident aliens and treatment of employees in U. S. territories with respect to testing of U.S. plans; Determination of limits for participants with foreign source income; The impact of sourcing rules on withholding taxes; The foreign tax credit limitation; Section 199 Domestic Production deduction; U.S. trust requirement for qualified plans; transfers between foreign and U.S. trusts and potential valuation issue; Withholding on distributions; Comparability of plans; Outsourcing; Taxation of contributions; earnings, distributions; and rollovers; Potential International Financial Reporting Standards (IFRS) issues; and Tax shelter/promoter/abusive transactions and civil and/or criminal fraud

4 Example Plan Sponsor is U.S. Corporation Member of a controlled group Includes numerous U.S. Operating Entities Including Puerto Rico Also includes other non U.S. Operating Entities France and China Plan Sponsor is a Multinational Employer Multinational Employer Does the plan have assets in foreign jurisdictions? Has the plan transferred assets to a foreign jurisdiction? Does the plan sponsor have related entities in foreign jurisdictions? If the answers are yes, the term multinational applies

5 Question #1 Are we dealing with a domestic trust? Two tests: the U.S. Court test and the control test. A trust must pass both tests to be treated as a Domestic Trust U. S. Court Test. A court within the U. S. must be able to exercise primary supervision over the administration of the trust. A court is defined as and considered a U. S. court only if it is a court within the geographical U. S. A court situated in a Territory of the U.S., or in a foreign country, does not qualify Two tests, Cont.: Question #1, cont. Control Test. One or more U.S. persons must have the authority to control all substantial decisions of the trust

6 Who is eligible? Question #2 Employers: Under Internal Revenue Code section 414, foreign entities may be members of a U. S. controlled group. This means employees of a foreign member of a U.S. controlled group must be taken into account in applying the qualification requirements of code section 401(a) Question #2, cont. Foreign Employees Several categories are typically used: (1) Non-U.S. Person; (2) Nonresident Alien; (3) Third Country Nationals; and (4) US Expats Non-U.S. Persons: Nonresident alien individuals; foreign corporations and partnerships and foreign trusts and estates Nonresident Alien: A nonresident alien is generally an individual who is not a resident alien such as a Green Card holder or someone who otherwise satisfies the substantial presence test

7 Question #2, cont. Foreign Employees Several categories, Cont.: Third Country Nationals (TCN): An employee who is not a citizen of the home or host countries. For example, a French National working in the Chile subsidiary of a US company would be considered a TCN employee. Various laws and treaties govern which country's labor laws and taxation apply to third country nationals. US Expats: Identified as domestic employees of a multinational company or its subsidiary with a foreign assignment, whereas third country nationals or TCNs are employees of a multinational company that work in a foreign country and do not have the citizenship of the parent company's home country or the country of employment. Question #2, cont. Foreign Employees Impacts Minimum coverage testing Nonresident aliens: No U.S. source earned income = not taken into account for ratio percentage test or average benefits test

8 Question #2, cont. Impacts Plan eligibility Nonresident aliens: With U.S. Source Income:» May be treated as excludable IF all of the employee s U.S. Source income from the employer is exempt from tax under a tax treaty Nonresident aliens: Without U.S. Source Income If employee NOT excluded:» must be treated as a non-excludable employee for coverage testing purposes, regardless of whether he has waived participation in the plan and even if that waiver is irrevocable. Question #2, cont. Impacts Plan Participation Treatment of Foreign Source Income» Can you allow an employee who is a nonresident alien with no U. S. source income to participate in a qualified plan sponsored by the employee's employer, even though the 415 compensation limitations are generally determined based on compensation that is included in gross income? Depends!» Section 1.415(c)-2(g)(5) of the Treasury Regulations: amounts paid to an individual as compensation are treated as compensation under section 415 even if those amounts are not includible in the individual's gross income on account of where the services were performed

9 Question #2, cont. Impacts Plan Participation Section 1.415(c)-2(g)(5) preamble:» Preamble to the regulations: Foreign compensation clarification means nonresident aliens working outside of the US are not prevented from participating in a US qualified plan on account of the Code section 415 compensation rules Important to Note: Code section 415 regulations accommodate 415 regulations but do not authorize salary reduction contributions by the foreign employer.» 401(k)» 403(b): includible compensation issues Question #3 What is this U.S. source income: Let s start with what is NOT Internal Revenue Code section 861(a)(3): The nonresident alien is temporarily present in the U. S. for a period not exceeding a total of 90 days during the taxable year; Such compensation does not exceed an aggregate of $3,000, and The compensation is for labor or services performed as an employee of, or under a contract with, another nonresident alien, a foreign partnership, or a foreign corporation, not engaged in trade or business within the U. S., or an individual who is a citizen or resident of the U.S., a domestic partnership; or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of U.S. by such individual, partnership, or corporation

10 Question #3. cont. What is NOT U.S. Source Income: If an employee is otherwise a nonresident alien and receives income for services performed in one of the U.S. territories, that alone would not cause the nonresident alien employee to have U. S. source income. For further information see IRS Publication No. 519, U.S. Tax Guide for Aliens and IRS Publication 570, and the Tax Guide for Individuals with Income from U. S. Territories. Question #4 How are distributions taxed if received by a nonresident alien? General Rule: Mandatory 30% withholding The 30% must be withheld unless the withholding agent (i.e., the retirement plan) can reliably document that the payment was made to a U.S. person, or a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. (See, Code 1441) Withholding requirement will apply absent qualification for the graduated withholding rates, or a tax treaty exemption. Note: The nonresident alien must provide appropriate documentation to the retirement plan in order to claim either graduated withholding or a tax treaty exemption

11 Question #4 How are distributions taxed if received by a nonresident alien? General Rule: Mandatory 30% withholding Need to break out source of distribution: Distribution attributable to employer contributions with respect to services rendered is treated as U.S. source income if the services are rendered within the U.S. The portion of sources rendered outside the U.S. is treated as foreign source income. The portion of any qualified plan distribution attributable to earnings is always treated as U. S. source income. Question #4, cont. How are distributions taxed if received by a nonresident alien? Exceptions? Yes Certain tax treaties provide that private pensions and annuities are exempt from tax. Example: Chilean employee participates in 401(a) Plan» All services rendered outside of US = income from foreign sources» Not subject to withholding» Lump Sum Distribution: Not subject to the withholding to the extent the distributions do not exceed the Employer s contributions since they are foreign source income [Rev. Ruling ]» Annuities may be exempt under 871(f)

12 Question #5 Are employer deductions always deductible? Foreign Trust: Look to Code section 404: A U.S. employer may make deductible contributions to a foreign stock bonus, pension or profit sharing trust if the foreign trust satisfies all of the tax-qualification requirements applicable to such plans under Internal Revenue Codes section 401(a), other than the mandate that the trust be a domestic trust; Exception: Look to whether a deduction for contributions to a foreign deferred compensation plan may be allowed under code section 404A Question #5 Requirements of Code section 404A: The plan must be a written plan maintained by the employer that provides for the deferred compensation; The plan must be maintained for the exclusive benefit of the employer s employees or their beneficiaries; 90% or more of the amounts taken into account under the plan have to be attributable to services performed by nonresident aliens; and The compensation for which services are performed is not subject to U.S. federal income tax. IMPORTANT TO NOTE: An election under Treasury Regulation section 1.404A-6 or 1.404A-7 must be made to treat the plan as either a qualified funded plan, or a qualified reserve plan and to select a plan year

13 Question #6 Why do Tax Treaties matter? The United States has income tax treaties with a number of foreign countries under which residents (sometimes limited to citizens) of those countries are taxed at a reduced rate or are exempt from U.S. income taxes on certain income received from within the United States. If an individual is a nonresident alien from a country with which the U.S. has an income tax treaty, the individual may qualify for tax relief from the 30% withholding. Nonresident aliens must provide a properly completed Form W-8BEN to the withholding agent to claim treaty benefits. If the withholding agent knows, or has reason to know, that a nonresident alien is not entitled to claim treaty benefits, the treaty rate may not be used. Question #6. cont. The U.S. has tax treaties with more than 50 countries. Tax treaties have the same effect as legislation and so a provision in a tax treaty can have the same effect as a statutory provision. Tax treaty can change the result of the transaction. See, aty_table_3.pdf for list of tax treaties

14 Some additional issues to consider Rights of Multiple Spouses What law controls the definition of marriage and legal spouse? How many QJSA waivers are needed? Foreign currency exchanges 415 regulations do not address currency conversion Questions? Heather B. Abrigo Drinker Biddle & Reath, LLP (310)