expatriate payroll administration presentation - 20feb2014-final-r · 2014-02-25 · international,...

International, mobility and expatriate payroll and tax compliance:“X” factors of successful expatriate payroll administration

Dave Leboff, ExpaticoreFrancoise Dinkins, Deloitte Tax LLPEnzo Borzaro, Deloitte Tax LLP

Thursday, February 20, 2014

Copyright © 2014 Deloitte Development LLC. All rights reserved.1 International, mobility and expatriate payroll and tax compliance

Scope of expatriate payroll administration 2

Challenges of expatriate payroll management 4

Basics of mobility and balance sheet approach 10

Payroll process and design 15

Expatriate earnings: Policy into payroll 22

Global employment tax: Compliance and risk 27

Tenants of tax policies 37

Wrap-up 46

Questions 51

Agenda

Scope of expatriate payroll administration


• The accurate and compliant processing of home and/or host payrolls for an organization’s population of employees who– Crossed a border to work for their employer for a period longer than a

business trip– Covered by mobility policies that need to be reflected in payroll reporting

• Inpatriates may or may not be covered by this definition

Definition of expatriate payroll administration

Slide courtesy of Expaticore

Challenges of expatriate payroll delivery


• Corporate governance– Clear accountability and division of responsibilities that address resolution of issue– Establish an adequate control structure and procedures for financial reporting

• Global compliance– Calculating and remitting Host Country Income and Social Taxes– Collection of all inputs to expatriate compensation including data from benefit providers,

relocation providers, internal accounting and human resources– Consolidation of home and host payroll data to support worldwide income tax reporting– Preparing annual wage statements and regulatory reporting, i.e., U.S. W-2, Canadian T4

• Assignee satisfaction– Understandable pay slips for expatriate employees– Timely and accurate tax return preparation

The challenges of expatriate payroll delivery


1. Manage employer risk

3 Objectives of an effective expatriate program environment

21.2%



2. Manage employer cost

3 Objectives of an effective expatriate program environment (cont.)

30.3%



3. Improve customer service (expats)

3 Objectives of an effective expatriate program environment (cont.)

32.5%



Why does this matter?

Payroll errors are a significant contributor to excess expatriate payroll program costs


Basics of mobility and balance sheet approach


• In theory, the expat deal is as follows:– U.S. payroll pays salary ($100,000) less

• Hypothetical tax• Housing offset• Goods and services offset• Assume that this results in net pay of Net Reserve ($20,000)

– Foreign payroll pays • Actual housing• Actual cost of living• This preserves “quality of life”

Balance sheet basics



Balance sheet basics

Tax$30,000

Goods andServices$35,000

Housing$15,000

Reserve$20,000

Tax$30,000

Goods andServices$35,000

Housing$15,000

Reserve$20,000

+$10,000

+$20,000

+$20,000HOMECOST

$100,000

On assignment

cost$150,000



Expat payroll model

Pay code AmountSalary Salary $100,000

Allowances

(Hypo Cost Of Living — Negative Allowance) ($ 35,000)

(Hypo Housing — Negative Allowance) ($ 15,000)

(Hypo Tax — Negative Allowance) ($ 30,000)

Actual Cost of Living Allowance $ 45,000

Actual Housing Allowance $ 35,000

Actual Tax Allowance (Gross up) $ 50,000

Total Reportable Compensation $ 150,000



• Why not just give a bag of cash?– Exchange rates– Purchasing power– Foreign tax rules– Compliance and balance of risk

• Balance sheet concept– Employee maintains some parity with home country compensation system

• Gross compensation is visible to employee• “Net Reserve” is similar to stay-at-home take home pay

– Employer provides allowances and benefits that adjustable with changes to foreign exchange and purchasing power

Alternative to balance sheet?


Payroll process and design


Program management

Standard global payroll program management model

Governance

Global program management

Local processing Local processing Local processing



Host PayrollHomePayroll

Updates to Home PayrollIterative Updates

Host Payroll 1

Host Payroll 3

Host Payroll 2

HRIS/Comp

Stock

RelocationCollation/Distribution of Joiners/Leavers/Updates

Updates Collated and Distributed to Each Local Processor According to Calendar

Payroll Data Sources

Payroll Processors Apply Rules and Run Gross-to-Net Local

Compliance

AP

Management and Accounting

Reports

Other Reports

Employee Payslips

Expat payroll processing



Group discussion — Define your objectives

Control Environment

High

In what environment does the process fit today?

In what environment should the process fit for your organization?

Environment 1 Environment 2 Environment 3 Environment 4

Service Level

Unmonitored Process in place and managed passively

Process in place and managed actively

Consistent with global best practices

Description of Service Level

• Undefined process• Non-compliant• Lack of controls• Cost exposure

• Degree of non-compliance• Lack of controls• Inconsistent/Inefficient

processes• Inaccuracies• Opportunities for cost

containment

• Processes in place• Compliant• Room for further

efficiency and consistency

• Compliant• Reflects

benchmarking trends

Low


• Understand past pitfalls

• Determine source(s) of past challenges

• Define process goals and objectives

• Understand the rules• Identify available

solutions• Test your theories

• Understand past pitfalls

• Determine source(s) of past challenges

• Define process goals and objectives

• Understand the rules• Identify available

solutions• Test your theories

• Understand impact on key stakeholders:– Mobility team– HR– Business Unit– Support functions– Assignees

– Third party vendors

• Understand it may not be a “one size fits all” approach

• Consider internal campaign to gather feedback before implementation

• Consider pilot program• Run parallel systems

as needed• Roll-out education and

training programs• Implement

performance metrics, such as:– Wage card amendments– Amended returns– Satisfaction– Key delivery dates

Transform your process

Understand Challenges and

Define Objectives

Review, Renew, Revamp

Roll-out Communication

StrategyFuture State

Implementation


Benefits of a streamlined process

Global approach Accuracy of reporting

Cost minimization Adherence to policy

• Support correct cost charging to global locations

• Single set of data can be utilized by all locations

• Eases communication between local teams and local vendors

• Standardized processes allow for a consistent support system for assignees

• Restores confidence• Reduces time spent compiling and

correcting data• Ensures company compliance with

local tax jurisdictions• Assures employee that assignment

will not negatively effect compensation level

• Internal time spent to correct compensation

• External third party vendor costs (Payroll and tax providers)

• Untimely tax filings associated with interest and penalties

• Potential fines, penalties, exposure resulting from incorrect reporting

• Allow for more accurate budgeting • Increases accountability of local

business units to ensure review prior to assignee deployment

• Identifies exceptions to policy • Creates internal equity between

assignees and assignment locations

Ope

ratio

nal e

ffici

ency

Compliance


Global employer services integrated offerings

Integration of service offerings is a differentiator. A tax service provider can draw upon their comprehensive knowledge of the client organization and blend that with a range of global abilities to deliver a solution for all global employer issues.

Cost effectiveness

Upgraded employee experience

Global compliance and controls

Talent management

Risk management

Technology enablement

IntegratedGES

Offerings

Controls and governance Compensation, benefits and rewards

Global mobility operations Global mobility strategy

• Expatriate tax compliance• Payroll/compensation compliance• Employer reporting• Global controls• Immigration/Social Security• Employment tax compliance• Reporting• Benefits regulatory

compliance

• Global compensation• Global benefits• Global equity incentives • Retirement, Health & Welfare,

Pension and Benefits • Executive compensation

redesign• Employee compensation and

benefit program design

• Outsourcing advisory• Operations and processes• Technology• Payroll and compensation

management• Administration• Measurement and analytics

• Business:HR alignment • Talent strategies• Service delivery design• Policy and process design• Global mobility

transformation• Workforce planning

Expatriate earnings:policy into payroll


Simple Non-tax related Allowances

Expatriate earnings

Allowance COMPLEXITY SOLUTIONPOSITIVE OR

NEGATIVE EARNINGS

Grossup for Federal

Income Tax

Grossup for State Income

Tax

Grossup for FICA/Medicar

e

Relocation Allowance POSITIVE X X XForeign Service Premium/Mobility Premium

POSITIVE X X X

Home Housing Offset/Norm NEGATIVE X X XGoods and Services Offset/Norm NEGATIVE X X X

SIMPLE EXPATRIATE ASSIGNMENT ALLOWANCES (NON-TAX) How to Report Expatriate Earnings

NONE NA



Complex Non-tax related Allowances

Expatriate earnings (cont.)


NEGATIVE EARNINGS

Grossup for Federal

Income Tax


Tax

Grossup for FICA/Medicar

e

Host Country Rent

USUALLY FOREIGN PAID, May Need an

update from AP, Relo copany or foreign

payroll

Apply foreign exchange rules

POSITIVE X X X

Host Country Goods and Services/ Commodities and Services/Cost of Living Allowance



payroll


POSITIVE X X X

Tuition



payroll


POSITIVE X X X

Club Dues



payroll


POSITIVE X X X

Transportation



payroll

Apply foreign exchange rules; also US imputed

income may apply

POSITIVE X X X

Home Leave - Taxable Part USD/part foreign

Apply foreign exchage rules for non-US portion of

Home leave

POSITIVE X X X

Home Leave - Non Taxable

EMPLOYEE ONLY - IF TRIP IS CONSIDERED

FOR BUSINESS PURPOSES

Do not report on US payroll

NOT APPLICABLE

COMPLEX EXPATRIATE ASSIGNMENT ALLOWANCES (NON-TAX) How to Report Expatriate Earnings



Hypothetical Tax Allowance


Best practice: Include Hypothetical FICA/Medicare in hypothetical tax calculation


NEGATIVE EARNINGS

Grossup for Federal

Income Tax


Tax

Grossup for FICA/Medicare

Hypo Federal Tax NEGATIVE X X XHypo State Tax NEGATIVE X X XHypo Social Security NEGATIVE X X XHypo Medicare NEGATIVE X X X

HYPOTHETICAL TAX - EXPATRIATE ASSIGNMENT ALLOWANCES How to Report Expatriate Earnings

NONE NA




NEGATIVE EARNINGS

Grossup for Federal Income Tax

Grossup for State Income Tax

Grossup for FICA/Medicare

US, State, Local Income Tax Payment on behalf of employee/Grossup

None (except the grossup calculation itself) NA POSITIVE X X X

Foreign Tax Withholding/Grossup paid by Employer

Foreign paidApply foreign exchange

rulesPOSITIVE

Usually do not gross up for US income tax as the

tax may be credited againt US income tax

X X

Foreign Tax Refund Received Directly by Employer, or by Employee and Repaid to Company IN YEAR OF ASSIGNMENT

Foreign paidApply foreign exchange

rulesNEGATIVE

Usually do not gross DOWN for US income

taxX X

If tax advisor provides guidance to include in W-2Apply foreign exchange

rulesNEGATIVE

Usually do not gross DOWN for US income

taxX X

If tax advisor provides guidance NOT to include in W-2 and for employee to take as "Claim of Right"

deduction on Schedule ANA NA NA NA NA

US, State or Local Tax Refund Received by Employee and Repaid to Company DURING YEAR OF ASSIGNMENT

None None NEGATIVE X X X

If tax advisor provides guidance to include in W-2 None NEGATIVE X X XIf tax advisor provides guidance NOT to include in W-2 and for employee to take as "Claim of Right"


Tax Equalization Payment Made to Employee by Employer

None None POSITIVE X X XTax Equalization Payment made by Employee to Employer during year of Assignment

If tax advisor provides guidance to include in W-2 None NEGATIVE X X X

Tax Equalization Payment made by Employee to Employer in Any Year FOLLOWING Assignment

If tax advisor provides guidance NOT to include in W-2 and for employee to take as "Claim of Right"


TAX-RELATED ASSIGNMENT ALLOWANCES How to Report Expatriate Earnings

Foreign Tax Refund Received Directly by Employer, or by Employee and Repaid to Company IN ANY YEAR FOLLOWING ASSIGNMENT

US, State or Local Tax Refund IN ANY YEAR FOLLOWING ASSIGNMENT

Tax related Allowances



Global employment taxCompliance and risk


• Wages are payment for services between an employee and employer (IRC § 3401(a))

• Wage Classifications – Regular wages– Supplemental wages (§ 31.3402(g)-(1))

• All wages generally subject to withholding– Exceptions to withholding rules

• Non-cash fringe benefits — Timing may differ• Employer owned automobile — Withholding not required but allowed• Group Term Life Insurance >$50K

Federal wages


• U.S. citizen or resident employee of foreign employer subject to Federal Income Tax (FIT) withholding on wages for services performed outside the U.S. which exceed expected §911 exclusion and not subject to foreign withholding

• Foreign employer not subject to Federal Unemployment Tax (FUTA)• State tax withholding issues• Don’t forget foreign payroll requirements• Penalties

Application of U.S. withholding rules


Revenue Ruling 92–106• Wages paid to non-resident alien for services performed within the U.S.

for either a U.S. or foreign employer subject to Federal Income Tax (FIT) and Federal Insurance Contribution Act [Social Security] (FICA)

• Employer subject to Federal Unemployment Tax (FUTA)• Exception for non-resident alien employee of foreign employer present

in U.S. for 90 days or less during taxable year and whose compensation is $3,000 or less in the aggregate

• State tax withholding issues• What about equity and other sourced income?

Application of U.S. withholding rules (cont.)


Income Subject to U.S. Social Security Tax• Generally all wages paid for services within the U.S. paid to anyone by

anyone regardless of citizenship or residence of either• Wages paid for services abroad to a U.S. citizen or resident by a U.S.

employer• Wages paid for services abroad to a U.S. citizen or resident by a foreign

employer where there is a §3121(I) agreement in effect• Wages paid for services abroad to a U.S. citizen or resident by a foreign

employer when the foreign employer is regarded as a U.S. employer under the Heart Act (effective August 1, 2008)

• Social Security planning opportunities — Totalization Agreements• Impact of tax equalization

Application of U.S. withholding rules (cont.)


• Differences depending on:– Employment relationship (secondment vs. direct hire)

• Revenue Rule 92-106– Citizenship/visa held

• PLR-135354-07 provides that the withholding exclusions under IRC 3401(a)(8)(A)(i) and (ii) only apply to U.S. citizens.– 911 exclusion– Mandatory foreign withholding

• Tax treaties and totalization

International assignee employer payroll obligations


• U.S. Payroll (May be a shadow payroll)– Subject to U.S. withholding unless 911 or mandatory foreign withholding– U.S. social tax– U.S. federal/state unemployment– U.S. pension/401(k) contributions

• Foreign Payroll– Foreign withholding, if applicable– Foreign social tax if no totalization

U.S. person seconded by U.S. company to foreign entity


• Working in the U.S.– Treated like any other U.S. employee– Subject to full U.S. employment tax

• Working in a foreign country– Subject to U.S. withholding unless 911 or mandatory foreign withholding– W-2 reporting if withholding is required– Not subject to U.S. social tax

U.S. person directly employed by foreign company


Form 673 — Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911

Form W-4 — Employee’s Withholding Allowance Certificate

Requirements for U.S. citizens

Requirements for U.S. Greencard holders

Requirements of nonresident aliens

Form 673 and Form W-4


• Tax treaties/totalization/certificates of coverage• Shadow payrolls• Multiple tax equalization policies• Tax “tagging”• Inconsistent home/host pay frequencies• Foreign statutory provisions

– e.g., 13th/14th month pay• Split pay• Multi-currency funds management• Language

Other complexities


Tenants of tax policies


• Laissez Faire– Employee is on his own

• Tax Protection– Employee pays no more than he would have at home

• Tax Equalization– Employee pays no more OR no less than he would have at home

Three expatriate tax policy types



• Without tax equalization…– Compliance risk on employee – Complex compliance in two tax jurisdictions– Mobility decisions affected by tax considerations– Motivates negotiation for personal tax planning

• With tax equalization– Transfers the complexity and risk to company– Neutralizes tax as a consideration in relation to mobility– Standardizes process– Personal benefits of negotiation eliminated

The basic case for tax equalization



• Assignee is responsible for a policy-derived amount (“theoretical tax”) approximating the employee’s stay-at-home tax liability

• This estimated obligation is retained each pay period in the form of a negative allowance called “hypothetical tax”

• Employer pays all of the expat’s actual income and social taxes• After the tax year is over and all tax-related information is known, the

theoretical tax is fine-tuned and compared to the hypothetical tax retained for a final true-up – Like actual tax compared to withholding

What is tax equalization



For example…

Employee has $20,000 hypothetical tax

retained from salary

Employer pays GBP 40,000 on behalf of

employee and USD 8,000 in the US

After year end Tax Consultant computes theoretical tax (tax that employee would have paid had they remained at home) in

the amount of $18,000

Employer reimburses hypothetical tax of $2,000

to employee



After year end — Tax equalization

THEORETICAL TAX CALCULATION (INCOME TAX,

FICA, MEDI)

Regular EarningsActual Base salary 165,000$ Actual Bonus 25,000$ Actual 401k deduction (15,000)$ Actual Flexible spending deduction (5,000)$ Actual Medical/dental deduction (2,000)$

Estimated personal income 6,000$ -$

Other US Deductions/Exemptions -$ Actual Itemized deductions/standard deduction (5,800)$ Actual Personal exemption (2,500)$

Theoretical taxable income - Exclude Assignment Related Allowance 165,700$ Theoretical Income Tax 49,710$ Theoretical FICA 8,698$ Theoretical MEDI 2,436$ TOTAL THEORETICAL TAX 60,844$ Hypothetical Tax Retained (51,312)$ Payment Due with ReturnRefund from ReturnDifference owed to Company or (Employee) 9,532$

Negative Allowance?Claim of Right?



TEQ: Balance due with return/company owes employee


FICA, MEDI)Regular Earnings

Actual Base salary 165,000$ Actual Bonus 25,000$ Actual 401k deduction (15,000)$ Actual Flexible spending deduction (5,000)$ Actual Medical/dental deduction (2,000)$



Theoretical taxable income - Exclude Assignment Related Allowance 165,700$ Theoretical Income Tax 49,710$ Theoretical FICA 8,698$ Theoretical MEDI 2,436$ TOTAL THEORETICAL TAX 60,844$ Hypothetical Tax Retained (51,312)$ Payment Due with Return (10,000)$ Refund from ReturnDifference owed to Company or (Employee) (468)$

Company Reports $468



TEQ: Refund received/employee owes company


FICA, MEDI)Regular Earnings

Actual Base salary 165,000$ Actual Bonus 25,000$ Actual 401k deduction (15,000)$ Actual Flexible spending deduction (5,000)$ Actual Medical/dental deduction (2,000)$



Theoretical taxable income - Exclude Assignment Related Allowance 165,700$ Theoretical Income Tax 49,710$ Theoretical FICA 8,698$ Theoretical MEDI 2,436$ TOTAL THEORETICAL TAX 60,844$ Hypothetical Tax Retained (51,312)$ Payment Due with ReturnRefund from Return Owed to Company 10,000$ Difference owed to Company or (Employee) 19,532$

Claim of Right?Negative Allowance?



• Bonus– Hypothetical tax at effective rate– Actual withholdings at supplemental rate

• Equity– Hypothetical vs. actual tax withholdings

• State taxes• Inpats

– Gross ups• Personal income

– Consider W-4 to increase withholdings if tax equalized

Tax equalization policy complexities that affect payroll administration


Wrap-up


Common practices that increase cost and risk

Practice Cost RiskNon-periodic compilation of payroll data makes effort to collect all compensation transactions difficult

Interest, penalties, additional costs for year-end payroll compliance and tax return corrections, excess gross ups

Missed transactions, under reporting, difficulty in validating TEQ data causing delays in finalizing TEQs

Over gross-ups may be calculated when deductions or credits are not taken into account

Prepaying/overpaying tax authorities for taxes to be refunded

Lost tax refunds,Difficulty in collecting TEQ balances back from employee

Oversimplified, inaccurate or unclear pay coding

Inaccurate benefit calculations;Duplicate payments; Missed tax deductions/creditsUncollectable TEQ balancesOverpaid TEQ balancesTime and effort to deconstruct/reconstruct pay elements accurately

Certain plans may be at risk for over/under benefitting calcs; Employee dissatisfaction (can’t tie net pay to pay slips)

Wrong foreign exchange rate Split pays incorrectly calculatedOverpayments to employees and/or tax authorities; time and efforts to correct; excess gross ups

Under reporting/Over reporting

Not cutting off payroll timely Excess payments of salary or allowances; excess gross ups

Employee dissatisfactionDifficulty in recollection

Putting expatriate policy decision-making in the hands of payroll processors is not fair or appropriate!



• Payroll administrators should not make policy decisions• Don’t over gross up

– And grosses do not have to be perfect — just close• Get updates each period as part of a standardized process

– Don’t wait until year end• Keep a grid handy that describes tax setup for each pay type• Train resources for expatriate nuances• Source and leverage “fit-for-purpose” payroll data management

technology

Best practices



4949

Avoid a duplicate payment of locally paid allowances or taxes by including a NON-TAXABLE deduction to offset the foreign paid item



• Accurate payroll data instantly available

• Reduced W-2c’s

• Reduced accounting fees

• Reduced interest and penalties

• Reduced inquiries from expatriates

• Increased recapture of tax refunds

• Elimination of tax equalization A/R

• Higher customer sat scores

Indicators of success



Questions?

Dave LeboffPresidentExpaticore+1 212 239 2625 x [email protected]

Enzo BorzaroSenior ManagerDeloitte Tax LLP+1 973 602 [email protected]

Francoise DinkinsPartnerDeloitte Tax LLP+1 703 251 [email protected]

About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/aboutfor a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2014 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited

expatriate payroll administration presentation - 20feb2014-final-r · 2014-02-25 · international,...

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