ey human capital conference 2012: the global employment tax landscape

2012 Human Capital Conference23–26 October

The global employment taxes l d i th hiddlandscape in the hidden gems

Circular 230 disclaimer

► Any US tax advice contained herein was not intended or ywritten to be used, and cannot 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 global employment taxes landscape in the hidden gemsPage 2

Disclaimer

► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US.

► This presentation is ©2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical,distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP Any reproduction transmission orpermission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or itsdisclaims any liability in connection with use of this presentation or its contents by any third party.

► The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP

those of Ernst & Young LLP.

Presenters

► Graham Farquhar ► Delphine Swiercq► Ernst & Young LLP (UK)► gfarquhar1@uk.ey.com

p► General Electric Company► delphineswierc@ge.com

► Greg Carver► Ernst & Young LLP► gregory.carver@ey.com

Agenda

► Global employment tax trends► Global employment tax risk► Country perspectives► US issues

Theme/key points

► There is an increasing trend of managing employment d ll t ( EMEIA A i P )and payroll taxes on an area (e.g., EMEIA or Asia-Pac)

basis or even globally. ► Finance transformations are often driving this change► Finance transformations are often driving this change.► Greater government focus on compliance and information

sharing are focusing businesses on a broader approach tosharing are focusing businesses on a broader approach to employment tax risk management.

► Change brings benefits but also challenges for the► Change brings benefits but also challenges for the business and the person responsible.

Global employment tax trends

Change drivers

► Finance transformations are centralizing records and greporting processes.

► Tax is often not consulted in the process, so corporate p pand indirect tax reporting processes can become cumbersome.

► Employment and payroll taxes commonly remain an afterthought.B i d t ti di t i k► Business and government perspectives regarding tax risk and compliance are changing.

Change drivers

► Revenue authorities are engaging into more tax audits.g g g► We are starting to see use of tax information exchange

agreements.g► Tax compliance and scrutiny is increasingly front-page

news around the world. ► Evidence shows that corporate tax audits move into

employment tax audits and vice versa.

What we are seeing in the market

► The combination of new business operating models, transformed finance functions and an increasingly complex

l t l d h b ht l b l t li d

Almost 80% of companies have recently completed or will soon complete a finance transformation.regulatory landscape has brought global tax compliance and

reporting (GCR) to a tipping point.► Tax functions in general have not adapted to changing

requirements.

complete a finance transformation.

► 17% of surveyed Fortune Global 500 companies experienced tax-related business disruptions.

► 64% of companies experienced unplanned tax audits, 45% experienced unexpected tax assessments, and 42%experienced unexpected tax assessments, and 42% experienced penalties.

► The majority of companies excluded some or all of their tax function, including employment taxes from finance transformationtransformation.

► The majority of companies reported a lack of standardization leading to inefficient processes and a focus on compliance rather than business support. “Compliance may be a routine function — if done

right, it can add tremendous value, and if done

Companies’ status with regard to finance transformation

► Leading companies are transforming their tax function to address these changing requirements across all taxes.

right, it can add tremendous value, and if done wrong, it can destroy a company. But not many have reached the stage of optimal global compliance efficiency — they are still maturing.”

Fortune Global 500 — conglomerate

How companies are respondingTrends in employment and payroll tax compliance

1► Limited or no global and/or regional

Models/characteristics

p y p y p

lSimplification,

standardization and cost reduction

Control, access and visibility over

local process

visibility ► Limited or no standardization in data

collection ► Variety of service providers

globally/regionally

Governance and management

2 2► Global and/or regional governance► Visibility and control over work flow and

processes► Single or few service providers

► Some standardization of data formats and processes

► Alignment with finance shared service centers and centers of excellence

Local Regional/global

countryapproach

1 ► Integrated approach to the record-to-report process

► Leveraging technology and systems investment

► Clear global Key Performance Indicators

Standardizedprocesses and execution

(KPIs) and Service Level Agreements (SLAs) with primary service provider

Employment taxes and payroll may not move at the same rate along the curve.

A personal angle

► What is the business case for creating a wider remit?► How is success defined?► Has the business considered the impact on the individual of a wider

remit?remit?► Skill-set match — what is needed to deliver on the vision?► Time lag between appointment and efficiency — transition planning?► e ag bet ee appo t e t a d e c e cy t a s t o p a g► What is the benefit of a wider mandate for risk management? ► What support is needed or desired? ► How is the transition to a new role or an extension of the existing

remitted? ► What is the local input?► What is the local input?

Questions for the person with area responsibility for employment taxesresponsibility for employment taxes

What does compliance look How often should we getWhat does compliance look like where we operate?

How often should we get audited?

Where do we start in a newArea employment tax Can we act quickly in all Where do we start in a new country?

ea e p oy e t taresponsibility

Can we act quickly in all countries?

What’s the impact if we get How do I keep up to date? p gsomething wrong?How do I keep up to date?

Local deep experience is essential to support the area structuresupport the area structure

More than 60% of respondents indicated local resources are important to processes.The trend in finance has been to reduce or redeploy in-

country finance and tax resources to global or regionalcountry finance and tax resources to global or regional centers.► Survey indicates that almost 80% of the companies have recently

completed or will soon complete a finance transformation.► Companies recognize that it may not be efficient to build full p g y

employment tax capabilities in every country.► Many organizations are supporting rapid business expansion into new

and emerging markets through regional support rather than building local employment tax functions in each country.

More than 60% of respondents indicated local resources are important to processes.► Employment and payroll tax processes result in inherently local in-

t fili d b i icountry filings and submissions.► Changing regulations and more aggressive and informed tax

enforcement heighten the need for sustainable access to local expertise.

► 82% of respondents indicated that the lack of skilled resources limits

Companies that consider local in-country resources to be important

“There’s no supervision beyond the country in question — that would be too costly, as it’s usually a small operation. So if they’re doing it wrong, we have no idea [until it’s too late].” Forbes Global 2000 — technology hardware and

► 82% of respondents indicated that the lack of skilled resources limits their ability to adopt a more regional or global model.

Leading companies are transforming their function to address these changing requirements.

equipment company

Optimizing outside providers

More than 80% of respondents that use outside providers consider it an effective means of accessing local expertise

Many companies have outsourced one of more of their employment tax and payroll processes or intend to do so in the means of accessing local expertise.employment tax and payroll processes or intend to do so in the next two years.

Companies report that benefits of using outside providers include cost-effective and flexible access to specialist skills, broader access to leading practices, greater scalability and heightened focus on value.

Many companies have multiple service providers resulting in non standardized processes and a high cost of managingnon-standardized processes and a high cost of managing these service providers, e.g., various payroll providers.

Leading companies find that the best sourcing solution to meet employment tax and payroll needs is a mix of local, regional p y p y , gand global resources, both internal and external.

Leading companies are increasingly procuring some or all of their employment and payroll tax services on a regional or Companies assessing outsourcing as an global basis. effective means of achieving business

benefits

Achieving accountability and governance

The management of today’s tax processes is often more a product of piecemeal evolution than of

Geographic responsibility for various processes is widely distributed.

more a product of piecemeal evolution than of conscious design.► Fewer than 44% of surveyed companies have established

discrete or otherwise dedicated GCR responsibilities.► Typically, responsibility is divided between finance, tax and yp y, p y ,

business operating units. For employment taxes, this is wider including HR, procurement and company secretarial.

► Responsibility often varies significantly across geographies, with inconsistencies at local, regional and global levels.

With distributed accountability and governance, controls are often hampered and improvement opportunities are difficult to realize.

“Because [our processes] are too decentralized there is

Strong governance is essential, with clear accountability and control being prerequisites for an effective model.

L di i id tif d t

Geographic responsibility for ensuring that compliance and reporting deadlines are met

“Because [our processes] are too decentralized, there is an overlap of competencies falling under the responsibility of too many different departments. Sometimes it’s under operational staff, sometimes its legal, sometimes tax and even sometimes the local finance controller.”

Leading companies identify and use process owners to align governance and operation of processes.

Forbes Global 2000 — diversified financial company

Global employment tax risk

More than 50% of businesses think that lack of resource and communication increases tax riskresource and communication increases tax riskPlease indicate to what extent you agree that each of the following factors may contribute to increased tax and tax controversy risk in your company.

80%US <$3b segment: 68%All tax directors: 58%

CFOs: 43%

57% 58

53%54% 58

56% 60

55%50%

60%US <$3bsegment: 58%

CFOs: 43%

41% 45

38% 42

Insufficient resources to cover tax function activities

Insufficient internal communication

Changes within business operations or strategy that

are inconsistent with implemented tax planning

A lack of processes or technology

Failures in the implementation of tax

planning and other structures

All % strongly agree and agree $3b+ Americas BRIC EMEIA Asia Private Public

Only approximately 50% of employers can track compensation and work activities for their globally mobile staff

In terms of your globally mobile employees, do you have processes in place to manage the following issues?

5 33 34 34 4

0%To ensure compensation and benefits paid to them in their home

country are declared to tax authorities in the foreign country where they are located

To track the work-related activities of employees who travel abroad for business outside of formal international assignment programs

All % Yes $3b+ Americas BRIC EMEIA Asia Private Public

Approximately 25% of employers do not have a strong process to manage PE or immigration risksg p g g

Are you confident that the processes you have in place to track business travelers provides you with a high level of risk protection against issues such as permanent establish risk or immigration risk?

21% 23

4% 0%65%

31% 4%

0%3% 0%79%

0% 0%4% 0%76%

3% 0%4% 0%68%

Yes No Don't know Refused

All $3b+ Americas BRIC EMEIA Asia Private Public

Tax information exchange agreements

What employers should do now

► Undertaking global reviews of high-risk areasg g g► More compliance necessary in relation to mobile

workforce► Greater drive for compliance ► No surprises p► Better financial reporting and budgeting ► Need to be seen in the public as being compliant p g p

Some generic problems

► Benefits in-kind being accurately reported g y p► Shadow payrolls ► Compliance with equity withholding and reporting► Compliance with equity withholding and reporting► Home and host pensions► Deferred compensation► Deferred compensation► Travel by employees ► Poor execution tax planning► Poor execution tax planning

Country perspectives

Expanding your business: early hurdles

Austria GreeceSocial security registration not in place

when trading meant employee was refused

GreeceRegistration requirements based on the profession

of the worker not the trade employee was refused treatment for child of the employer

SwitzerlandRegistration required for social security on compensation and

UAENo tax withholding but security on compensation and

accident and pensions insurance via an insurance company;

cantonal registration based on

social security applies if the worker is a UAE or

Gulf Cooperation national

where employee lives

Many countries require corporate tax registration to occur prior to registering the payroll etc rather than following submission of the accounts

payroll etc., rather than following submission of the accounts.

South Africa

► There is increased revenue activity. y► Tax audits normally recover up to five tax years. ► There is an increase to a maximum of 10 years where► There is an increase to a maximum of 10 years where

there was intention.► Stock Appreciation Rights (SARS) uses a risk assessment pp g ( )

of the reconciliation of payroll costs. ► Penalties are approximately 10%, but interest is 8.5%.► Voluntary disclosure substantially reduces penalties.

► Statutory limitation of five to seven years dependant on y y psize

► Proposed increase of 7 to 17 years for income related to p yassets held outside of India

► India increasingly using Tax Information Exchange Agreement (TIEA)

► Audits undertaken randomly or where scrutiny t h b d t kassessments have been undertaken

► Interaction with immigration services ► Waiver or lesser penalties for voluntary disclosure► Penalties up to 300% plus interest

► China Tax Bureau (CTB): normally recovers last three years but no limit for tax evasion

► CTB tax audits can include: ► Site/office visits► Site/office visits► Search of bank account details

► Audits may occur either through: ► Audit plan► Special projects► Statistical analysis► Statistical analysis► Transfers by other departments ► Informants

► Penalties:► Late payment surcharge 0.05% per day of overdue tax► Penalties of 50% to 500% of tax underwithheld

► Penalties of 50% to 500% of tax underwithheld

► Recovery normally by Her Majesty's Revenue & Customs (HMRC) ► Four tax years for errors► Six tax years for carelessness► 20 tax years for fraud► 20 tax years for fraud► National Insurance limited to six tax years► Penalties► New in-year penalties ► Penalties up to 100% of tax and National Insurance Contributions (NIC)

underpaidunderpaid► Audits ► Increasing in nature► Many employers not received an audit in more than six years► HMRC currently training new auditors

Key issues

3. Business travelersChinaIndiaUK

2. Compensation Germany

South AfricaChina

1. Equity South Africa

ChinaUK

IndiaUK

IndiaGermany

4. Benefits in-kindIndia

5. StatusSouth Africa

6. Social securityIndia

UKGermany

US issues

The US state and local landscape for short-term business travelersterm business travelers► Proposed federal legislation (H.R. 1864)► States actively seeking to generate revenue► Aggressive electronic state audits ► States changing deferred compensation taxation ► States’ consideration of wages/salary and equity

compensation► Local tax jurisdictions also now auditing nonresident

kfworkforceIssues companies currently face:► Income tax not withheld in nonresident work state for short-term business traveling

workforce► Statute of limitations (employer or employee)► Limited system capabilities to track and calculate short-term business travelers► Complicated withholding tax calculation for deferred and equity-based compensation

► Complicated withholding tax calculation for deferred and equity based compensation

Tax treaty exemption

► Applicable tax treaty may exempt compensation of pp y y p ptemporary workers from US federal income tax, including mandatory federal income tax withholding (FITW) under Internal Revenue Code (IRC) Section 1441, under certain circumstances:► NonResident Alien (NRA) generally must be resident of country► NonResident Alien (NRA) generally must be resident of country

with tax treaty containing applicable exemption:► US tax exemption may be subject to significant limitations, including

dollar limits:► Exemption is up to threshold dollar limitation.► “Cliff” exemption is only for payments not exceeding dollar limitation.► Dollar limits may use gross receipts (i.e., including reimbursed expenses).

► To claim treaty exemption from withholding, NRA is y p g,required to submit IRS Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, to employer:► Employer is required to submit Form 8233 to IRS for approval► Employer is required to submit Form 8233 to IRS for approval.► Form 8233 must be obtained annually.

► Without Form 8233 wages are generally subject to 30%► Without Form 8233, wages are generally subject to 30% FITW on US-source payments.

► Requirements to apply for IRS Form 8233:q pp y► NRA needs to show they have applied for ITIN with the IRS.► To apply for an ITIN, NRA must provide letter from Social Security

Administration (SSA) stating they are ineligible for a Social Security number (SSN):► The SSN application process described above is not streamlined to pp p

provide “denial letter.”► NRA/employer may already know NRA is not eligible for SSN.

US outbound expats and wage reporting

► US citizens: Form 673 annuallyy► US citizens: documentation of mandatory foreign

withholding to exempt wages from US withholdingg p g g► US resident aliens: not eligible for

IRC Sec. 3401(a)(8)(A)(i) or (ii):► Form W-4 allowances in anticipation of Foreign Tax Credit (FTC)

or claiming IRC Sec. 911 exclusion► Supplemental wages greater than $1 000 000 subject to► Supplemental wages greater than $1,000,000 subject to

mandatory 35% withholding even if wages also subject to mandatory foreign withholding

US inbound and wage reporting

► Compliance difficult if NRA not eligible for US SSN► Wage reporting required even if foreign national not eligible for an SSN

if no ITIN/Form 8233 or foreign national from a non-treaty country► Federal Insurance Contributions Act (FICA) required unless foreign► Federal Insurance Contributions Act (FICA) required unless foreign

national from country with Social Security Totalization Agreements:► No de minimis threshold — US services on day one triggers reporting

( )► Federal Unemployment Tax Act (FUTA), state unemployment tax and state income tax withholding often required even if federal income tax treaty applies

► NRAs required to file 1040NR if compensation income equal to or exceeding one personal exemption and/or to claim treaty exemption ($3 800 in 2012)($3,800 in 2012)

US merger and acquisition considerations

► Employment tax compliance: ► Generally as a result of any reorganization, the IRS and states require various

registration forms and other notifications. ► Many of these forms must be filed within 30 to 90 days of the reorganization to

“ ” f l i f h l dd d ll d i d f d“protect” future claims for the value-added payroll cost reductions and refunds. ► W-2 reporting options are under predecessor/successor provisions.

► Value-added payroll cost reductions:► Step 1: Successor provision qualification — There are various federal and state

rules relating to successor status associated with mergers/acquisitions. Companies should review the applicable provisions to assess whether duplicate payroll costs (state unemployment insurance (SUI) FUTA and FICA) are entitled to be refunded(state unemployment insurance (SUI), FUTA and FICA) are entitled to be refunded or abated.

► Step 2: SUI cost reductions — Based on each states’ unemployment insurance laws, companies should perform a comprehensive analysis of the alternative a s, co pa es s ou d pe o a co p e e s e a a ys s o t e a te at epayroll reporting options pursuant to the reorganization.

Conclusion

► Employment tax is becoming increasingly global.p y g g y g► Major employers are changing to reflect this.► Local expertise should always be considered. p y► Issues in one country can often be seen in others.

Questions

ey human capital conference 2012: the global employment tax landscape

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intoemployment tax audits

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