Short Term Assignments and Extended Business Travelers An Old Problem with a Renewed Focus

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1 Short Term Assignments and Extended Business Travelers An Old Problem with a Renewed Focus Jill Gillis Mikolajczak & Delphine Swierc Global Tax Network February 25, 2010

2 Circular 230: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in our communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalty or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Our advice in our communication is limited to the conclusions specifically set forth herein and is based on the completeness and accuracy of the facts and assumptions as stated. Our advice may consider tax authorities that are subject to change, retroactively and/or prospectively. Such changes could affect the validity of our advice. Our advice will not be updated for subsequent changes or modifications to applicable law and regulations, or to the judicial and administrative interpretations thereof. 1

3 Delphine Swierc, CPA Delphine is the Managing Director in GTN s New England practice. Based in Connecticut, she has more than 25 years of experience in assisting multinational companies move their human capital across borders in a tax efficient manner. Delphine specializes in the national and international tax and social security aspects of executive remuneration. She also has extensive experience of advising on overseas tax planning, international social security issues, tax return preparation, expatriate policy development, and international remuneration planning. She is responsible for managing the delivery of global tax consulting and compliance services for international assignees of multinational corporations. Delphine was a Tax Managing Director in KPMG LLP s International Executive Services practice prior to joining GTN. Delphine earned her degree in Business Administration from the University of Texas at Austin and majored in accounting. She is a Certified Public Accountant in California, Connecticut, and Texas. Professional memberships include the American Institute of Certified Public Accountants and the Connecticut Society of Certified Public Accountants. 2

4 Jill Gillis Mikolajczak, CPA Jill is the Managing Director of GTN s Northern CA office. She has worked with a variety of multi-national companies and their international transferees of the last 18 years. Jill has lived and worked in India and South Korea and has traveled extensively throughout the United States, Asia, South and Central America, Mexico and Europe for her clients. This broad range of experience allows her to share knowledge on the personal and business rewards and challenges of living and working in another country. Moreover, Jill s understanding of business cultures and management styles gives her a unique positioning to deliver insights into working with individuals from other countries. Previously, Jill worked for E&Y, Arthur Andersen, and Deloitte as a Senior Tax Manager in their expatriate tax practices. Jill received her degree in Business Administration from the University of Wisconsin Milwaukee majoring in accounting. Jill is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and Wisconsin Institute of Certified Public Accountants. 3

5 Agenda With You Today Making the News Compliance and Business Considerations US Income Tax Requirements State Income Tax Requirements Host Country Considerations Policy Development, Identification, and Tracking 4

6 Making the News 23% of respondents indicated increased number of training/developmental assignments Notable quotes Knowledge transfer will be handled in short project type of assignments. Shift from long term to short term assignments. We are using reporting to give us headlights to assignments that extend for an excessive time period or include many extensions. Training assignments typically are 1-5 months and basically like a business trip Source: AIRINC s 2010 Mobility Outlook Survey 5

7 Compliance and Business Considerations 6

8 Compliance and Business Considerations Immigration Heightened sensitivity Consult counsel for correct entry authorization based on facts and circumstances Denial of travel or future work authorization at employer and/or employee level for non-compliance Information may be shared with tax authorities Corporate tax Inadvertent creation of permanent establishment Transfer pricing considerations Deductibility of expenses 7

9 Compliance and Business Considerations Individual tax Filing requirements in home and host locations Remittance of tax balances that may be due Other considerations Payroll reporting and withholding in home and host Identification, documentation, and tracking Policy adoption and implementation Impact on stock awards 8

10 Hazards Associated with Non-Compliance Corporate reputation damaged Penalty and interest assessment and potential prosecution Corporate Individual Financial exposure Audits and reviews by regulatory bodies Withdrawal from market 9

11 US Income Tax Requirements 10

12 Compensation Wages defined (IRC 3401 (a)) all remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other that cash Taxation of resident alien employees vs. nonresident alien Sourcing of income Statutory exception for nonresident alien taxpayers US presence is 90 days or less Services are performed for a foreign employer not engaged in a US trade or business US$3,000 or less in compensation 11

13 Travel Away from Home Nontaxable benefits available if Expenses are ordinary and necessary Incurred in pursuit of a trade or business Incurred while away from home Realistic expectation of one year or less in single location Reimbursed via an accountable business expense reimbursement plan Housing, meals & incidentals, transportation Payments for family members are generally taxable Payments in excess of federal per diem rates are taxable Taxable benefits if reimbursed by a nonaccountable plan Miscellaneous 2% itemized deduction for employee 12

14 Travel Away from Home Employee qualification Identify and document tax home Regular or principal place of business OR Regular place of abode in a real and substantial sense Itinerant employees Home maintained in country of origin Tax home does not shift Duplicated living expenses Does policy require maintenance of home in country of origin Intent Document realistic expectation of one year or less at initiation Document change of intent during assignment Extension of assignment beyond one year will change US tax treatment Series of assignments to same location may be considered indefinite Host treatment (not always consistent with US) 13

15 Relocation Expenses Deductible expenses and excludible reimbursements Moving household goods and personal effects (including in-transit and/or foreign-move storage expenses) Traveling (including lodging but NOT meals) to the new home Expenses must be reasonable Distance test (50 miles) Time test (39 weeks transfer exception) 14

16 Responsibility for Tax Withholding An employer is required by law to withhold appropriate taxes each pay period Withholding taxes may include: U.S. federal FICA (Social Security & Medicare) State Local Unemployment (federal & state) The amount and types of taxes required to be withheld will vary 15

17 Relief from Double Taxation Foreign tax credits Treaty exemption Foreign earned income and housing exclusions NOT available for short term assignments where away from home rules are employed 16

18 Foreign Tax Credits (FTC) Helps alleviate double taxation Qualifying foreign income and social taxes Limited to amount of US federal income tax on foreign source income Credit cannot exceed foreign tax paid or accrued Calculation based on baskets of income FTC carryback (1year) and carryover (10 years) 17

19 Treaty Relief U.S. Model Income Tax Convention Article 15 Dependent Personal Services, Paragraph 2 remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: A) The recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the taxable year concerned; B) The remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and C)The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. 18

20 State Income Tax Requirements 19

21 State Income Tax Requirements Residency status Different rules on state by state basis Safe harbor provisions Domicile states Short term assignees Outbound from the US will generally continue to be taxed as residents Inbound from outside the US will generally be taxed as residents upon arrival New York exception for maintaining living quarters less than 11 months in the calendar year 20

22 State Income Tax Requirements Non-Residents Employer obligation to report wages and remit withholding on state source income (e.g., based on workdays in a state) De-minimis thresholds adopted by Arizona Connecticut Colorado DC Georgia Hawaii Idaho Maine New Mexico New York Oklahoma South Carolina Utah Wisconsin Personal income tax not imposed by Alaska Florida Nevada New Hampshire South Dakota Tennessee Texas Washington Wyoming 21

23 State Income Tax Requirements Nonresidents (continued) Reciprocity agreements Absent exception to withholding, employer has an obligation to withhold from the first day employment is exercised in another state Federal treaty exemption is not followed by all states 22

24 State Income Tax Requirements Mobile Workforce State Income Tax Fairness and Simplification Act (H.R. 2110) Pending legislation 30-day standard for nonresident taxation Refers only to state authority to tax Definition of a day Excludes professional athletes, professional entertainers, and certain public figures 23

25 State Income Tax Requirements Telecommuter Tax Fairness Act (H.R. 2600) Convenience vs. necessity of employer Adopted by Delaware, Nebraska, New Jersey, New York, and Pennsylvania Under consideration by Oregon New York aggressively pursuing Eliminate potential double taxation by states Nonresident tax imposed on compensation attributable to physically present or working in state 24

26 Host Country Considerations 25

27 Host Country Considerations Potential inconsistent treatment with US laws Compensation Deductions Residency Treaty provision Domestic law absent treaty Social taxes Corporate tax implications Reporting, withholding, and tax compliance requirements 26

28 Host Country Considerations Foreign tax planning Varies by country Timing and structure of payments Timing of assignment initiation Split payroll Expatriate concessions Dual contracts Social security totalization agreements 27

29 Social Security Totalization Agreements Employee remains on home country social tax system Eliminates dual coverage and taxation Totalized benefits Certificate of Coverage required Please refer to: and 28

30 Social Security Totalization Agreements The United States has bilateral Social Security agreements with the following 24 countries: Australia Austria Belgium Canada Chile Czech Rep. Denmark Finland France Germany Greece Ireland Italy Japan Korea (South) Luxembourg Netherlands Norway Poland Portugal Spain Sweden Switzerland UK Agreements pending or under negotiation: Mexico 29

31 Canadian Income Tax Act s6(6) Temporary Work Site Rules Initial two year assignments are generally temporary Possible to consider extension to three years Not realistic if extended beyond three years Exclusions from taxable wages available for Travel to/from temporary work site and permanent Canadian home Value of housing Per diem for food Applicable to inbound and outbound assignees Permanent home required to be maintained in home country Document intent 30

32 United Kingdom Treaty exemption Advance application required to not operate PAYE Annual reporting requirement including names of exempt employees Temporary workplace rules Up to 24 months Ordinary commuting, housing, and utilities are exempt from income or deductible as expense Per diems in accordance with UK published rates 31

33 Policy Development, Identification, and Tracking 32

34 Compliance Considerations Challenges to achieving compliance include Budgetary restraints Competing internal priorities Inadequate policies or lack of adherence Means to identify and track mobile employees Payroll systems (internal/external) Unable to capture location to apportion income Unable to apportion income to multiple jurisdictions Lack of understanding of underlying issues by business leaders 33

35 Policy Development Build business case for need Seek internal champion to sponsor Coordinate with other corporate policies Solicit input from business leaders Maintain flexibility in order to meet changing business needs Establish firm guidelines in administration Explore alternative means to identify and track frequent travelers Communicate policy requirements within organization Implement internal controls Monitor compliance Review and revise regularly 34

36 Policy Development Consider tax equalization component A Tax Neutral assignment for the employee Consistent and equitable tax treatment to all covered employees Intent Employee pays approximately the same level of tax as they would have paid had they not gone on assignment or received assignment related allowances Consider cash flow for the employee 35

37 Identification and Tracking Historical means have included Travel services Immigration and relocation vendors Cell phone records Expense reports Internal security cards By happenstance Reactive solution that may result in failure to comply with requirements of affected jurisdictions Lost opportunity for effective tax planning to help mitigate costs 36

38 Identification and Tracking Proactive solutions Questionnaires Development of centralized database that monitors time spent in any location Modification of existing time reporting system to capture location Explore third party vendors that might provide capabilities 37

39 Questions? 38

40 Jill Gillis Mikolajczak Managing Director Global Tax Network CA, LLC P.O. Box Palo Alto, CA Phone: (650) Contact Details Delphine M. Swierc Managing Director Global Tax Network New England, LLC 1771 Post Road East, #204 Westport, CT Phone: (203)