Global Payroll & Taxation of International Assignments

1. Global Payroll & Taxation of International Assignments Brent Bergan, CPA Travis Call, CPA

2. Global Mobility Tax, LLP • We are a CPA firm providing strategy, consulting, and individual tax services to organizations that relocate employees on domestic and international assignments

3. Agenda (Part I) • Global Payroll (Brent) • Benefits • Challenges (internal and external) • Reporting Issues • Foreign Payroll – UK, Singapore, and China Examples • Success Factors

4. Agenda (Part II) • Expat Tax (Travis) • Assignee, Assignment, and Payroll Types • Reporting Requirements • Short term versus Long term • U.S. Federal and California Income Tax • Social Security and Medicare Tax • Tax Reimbursements with Example • Claim of Right

5. Global Payroll

6. Global Payroll – Wouldn’t it be nice! • One Process • more control over number of payroll runs • One Database • reduction in overall costs • One Mission • employees are paid timely and accurately in all locations • One Team • clear focus on daily tasks and overall objectives

7. Global Payroll – Challenges (Internal) • Employee communication • Language, time zone, cultural differences • Local region resistance to change • Standard practices across regions • Data reporting to Global payroll regions • Equity reporting

8. Global Payroll – Challenges (External) • Legislation – addressing global versus local differences • Vendor management – one versus many

9. Global Payroll – Challenges with Global Equity • Many types of awards • ISO, NQSO, RSU, ESPP, SARS • Multi-year earnings period • Grant, vest, and exercise date concerns; valuation • Globally mobile workforce • Multiple jurisdiction considerations • Impact of international tax treaty and social tax agreements

10. Global Payroll – Reporting Issues • U.S. reporting and withholding requirements • Foreign location reporting and withholding requirements • Company tax equalization policy considerations • Split payroll arrangements • Shadow payroll requirements

11. Global Payroll – Split Payroll • Employment arrangement must support job responsibilities • Compensation must support responsibilities • Individual is employed and paid in 2 countries • Payroll administration impact • What is individuals tax residency status in • Country A • Country B

12. Global Payroll – Split Payroll • Employer payroll reporting requirements • Country A • Country B • Wage and tax withholding considerations • Tax planning opportunity - ? • Split payroll arrangements are not as common today

13. Global Payroll – Shadow Payroll • Also known as • Ghost payroll • Dummy payroll • Mirror payroll • This is a mechanism which enables local wage reporting and tax withholding for an employee working abroad. • Wage reporting and tax withholding take place • No cash/funds are provided to the employee

14. Global Payroll – Reporting Issues (cont.) • Which employees are impacted? • What is the time period of concern? • Where was the employee during this period? • Does each location have a tax and payroll reporting requirement? • Does the foreign withholding impact the U.S. payroll? • Is there a trailing liability? • Bonus/equity paid out in a different location than where it was earned resulting in potential tax liability in multiple jurisdictions after the assignment period

15. Global Payroll – Foreign Payroll • Non-U.S. payrolls may have rules inconsistent with the U.S. payroll reporting and withholding requirements. • “Income” for U.S. reporting purposes may not be “income” in the non-U.S. location. • Some countries require (or prohibit) certain tax reimbursement methodologies (e.g., the UK requires Current-Year Gross-up). • Reporting and withholding requirements can vary significantly by country.

16. Global Payroll – Foreign Payroll – UK • Pay As You Earn (PAYE) System • Monthly reporting and payment of tax • Modified PAYE available • Quarterly reporting and payment of tax

17. Global Payroll – Foreign Payroll – Singapore • Tax Assessment System • Reporting of income and payment of tax is due the following year • Exit Tax – In the year of repatriation, an exit tax filing is due before the assignee leaves the country

18. Global Payroll – Foreign Payroll – China • Monthly Tax Filing System • Reporting of income and payment of tax is due monthly and each month constitutes a complete tax period

19. Global Payroll – Success Factors • Document compensation payments • Identify stakeholders and systems • Payroll systems • Expense account • Accounts payable • Determine use of outside vendors • Scope the adequacy of the international payroll system • Coordinate global payroll reporting • Strong central coordination is vital • Consider making periodic site visits

20. Global Payroll – Success Factors (cont.) • Determine home and host country taxation requirements • Legislation could vary significantly by location • Use technology to support the process • Leverage the use of outside vendors • Payroll alternative • Subject matter expertise • Streamlined process • Access to technology

21. Taxation of International Assignments (Expat Tax)

22. Expat Tax – Assignee Types • Expatriate • U.S. citizen or permanent resident outside the U.S. • Inpatriate • Non-U.S. national in the U.S. • Third-Country National (TCN) • Non-U.S. national outside of their home country

23. Expat Tax – Assignment Types • Short-term • Less than 1 year • Long-term • Greater than 1 year • Rotational / Commuter / Business Traveler • Generally works in host country and lives in home country

24. Expat Tax – Payroll Types • Home country payroll • Host country payroll • Split payroll

25. Expat Tax – Global Payroll in Action • Identify payroll reporting and withholding requirements • Understand impact of assignment types and tax reimbursement methods • Review strategies for collecting and reporting assignment-related payments

26. Expat Tax – Reporting Requirements • Wage reporting (U.S. centric) • Worldwide income must be reported • Cash payouts in home and host countries • Benefits-in-kind in home and host countries • Non-taxable items in home and host countries

27. Expat Tax – Common Compensation Items • Base salary • Bonus • Equity • Hypothetical tax • Housing norm • Cost of living allow. • Housing allow. • Utilities allow. • Education allow. • Tax equalization • Language lessons • Home leave • Transportation allow. • Tax reimbursements • Relocation allow. • Tax preparation fee

28. Expat Tax – Negative Compensation • Hypothetical tax • A compensation reduction retained by employer (generally replaces actual home country withholding) • Most commonly based on home country tax laws • Housing norm • Hypothetical cost of home country housing retained monthly by employer • Generally a function of base salary, family size, and maintenance of primary residence in home country

29. Expat Tax – Relocation Expenses • Direct relocation expenses • Shipping of household goods / U.S. storage • Travel from home to host country • Indirect relocation expenses • Immigration services • International HR services • Tax services • Losses sustained by the move • Sale of car • Sale of home

30. Expat Tax – U.S. Federal Income Tax • Methods used to reduce or eliminate U.S. tax withholding: • IRS Form 673 • Foreign earned income exclusion • Foreign housing exclusion • Mandatory foreign withholding statement • IRS Form W-4

31. Expat Tax – IRS Form 673 • Foreign earned income exclusion • Up to $92,900 (2011) of foreign source income earned during the assignment period is excludable from taxable income • One of two tests must be met • Bona Fide Residence • Physical Presence Test • Foreign housing exclusion • Cost of foreign housing that is in excess of a base amount determined by the IRS annually is excludable from taxable income

32. Expat Tax – Foreign Withholding • In accordance with IRS Sec. 3401(a)(8)(A)(ii) and Treas. Reg. Sec. 31.3401(a)(8(A)-1(b) • Used when compensation is foreign source and subject to a mandatory foreign country tax withholding • Home country payroll should document the mandatory foreign withholding and maintain a copy in the employee file

33. Expat Tax – IRS Form W-4 • Completed by the U.S. international assignee to inform the employer of the expectation to qualify for foreign earned income and housing exclusions and/or to qualify for the claim of foreign tax credits, and thereby eligible for a reduction in current tax withholdings • Countries with mandatory withholding • Canada, UK, China • Countries with no mandatory withholding • Hong Kong, Singapore (assessment in following year)

34. Expat Tax – California Income Tax • California tax withholdings should continue during the foreign assignment unless California residency is broken under one of the two tests available: • Bright-Line Test: Employment related contract, >18 months, <45 days, income from intangibles <$200K • Facts & Circumstances Test: Intent not to return to CA (subjective test) • Each state has its own residency rules, some similar to the facts and circumstances test, that may make state residency difficult to terminate

35. Expat Tax – Social Security & Medicare Tax • Totalization Agreements: • The employee must remain an employee of the Home country and pay Home country social taxes. • The Company must apply for a “Certificate of Coverage” in the Home country. • The Certificate of Coverage must be kept with the Host country payroll file to substantiate non-withholding in the event of a payroll audit. • http://www.ssa.gov/international/agreement_descriptions.html

36. Expat Tax – Tax Reimbursements • Common ways to protect assignees from excess tax • Tax Equalization (TEQ) • Process to ensure that assignee pays no more / no less tax than s/he would have paid if they did not leave their home country • Tax Protection • Process to ensure that assignee pays no more tax than s/he would have paid if they did not leave their home country • If the assignee pays less tax, they retain the tax savings

37. Expat Tax – Tax Reimbursements (cont.) • Common tax reimbursement methods • Tax loans / Tax advances • Employer pays the required actual home/host country taxes • Loans/Advances are generally added to compensation • Tax gross up • Employer pays the additional tax due on assignment compensation, plus the tax on the tax • Tax gross ups are generally added to compensation

38. Expat Tax – Tax Reimbursements (cont.) • How should repayments made to the company under terms of a tax reimbursement program be handled? • If repaid during the same calendar year? • If repaid during a subsequent calendar year?

39. Expat Tax – Tax Reimbursements Example • Company owes assignee $4,480. • Need to deliver $4,480 net to assignee. • TEQ settlement is wages to assignee (i.e., assignee incurs tax on this amount). • Assume: 25% federal, 9.55% CA, and 1.45% Medicare (assume maxed out on OASDI and CASDI). • With no gross up, assignee would incur U.S. federal tax of $1,120; CA State tax of $427.84; and Medicare tax of $64.96; resulting in a net in-pocket amount of $2,867.20 (vs. $4,480).

40. Expat Tax – Tax Reimbursements Example • Company should: • Gross-up the $4,480 payment. • Report $7,000 as wages. • Remit $2,520 as withholding (on behalf of assignee). • Federal tax of $1,750 • California tax of $668.50 • Medicare tax of $101.50 • Pay the employee a net payment of $4,480.

41. Expat Tax – Claim of Right Doctrine • The tax treatment of an amount that was included in taxable income in a previous year because the taxpayer appeared to have a right to the income, but is then returned to the payor of the income in a later year, is governed by the “claim of right” doctrine • IRC Section 1341(a)

42. Expat Tax – Claim of Right Doctrine (cont.) • The general rule: • An item was included in gross income for a prior tax year because it appeared that the taxpayer had an unrestricted right to the item; • A deduction is allowable for the future tax year in which the income is returned to the payor because it was established after the close of the prior tax year that the taxpayer did not have an unrestricted right to the item or to a portion of the item; and • The amount of the deduction exceeds $3,000

43. Question & Answers

44. Brent BerganPartner, Global Mobility Tax • Partner, Global Mobility Tax, LLP (California CPA) • Experience – tax policy planning, foreign country taxation, global equity awards, and the design, implementation and administration of international assignment programs • 6 years as managing partner of expatriate tax consulting firm • 7 years as Director of Tax at Oracle Corporation • Senior Manager with Ernst & Young in Palo Alto, CA • Board of Directors of WIPA

45. Travis CallManager, Global Mobility Tax • Manager, Global Mobility Tax, LLP (California CPA) • Experience – U.S. tax compliance and consulting for globally mobile employees, tax policy planning, foreign country taxation, global payroll and compensation review, and the design, implementation and administration of international assignment programs • 3 ½ years as manager at Global Mobility Tax • 4 years in Global Employer Services at Deloitte Tax • Inter-mountain Relocation Council Board Member

46. Global Mobility Tax, LLP • Brent Bergan • Partner, Global Mobility Tax, LLP • 260 State Street, Los Altos, CA 94022 • Phone: 650.947.9490 • Email: brent.bergan@glomotax.com • Travis Call • Manager, Global Mobility Tax, LLP • 3214 N University Ave., No. 133, Provo, UT 84604 • Phone: 801.850.6271 • Email: travis.call@glomotax.com www.glomotax.com