Expatriate Payroll BDO USA, LLP Ronii Rizzo, (Managing Director Expatriate Services) October 6, 2016 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
Expatriate Defined Expatriate: A person temporarily or permanently residing in a country other than that of the person s origin. The term is commonly used in the context of professionals or skilled workers sent abroad by their companies. Page 2
Overview of the Decision Making Process The company should establish the need for an expatriate assignment. Increased activity in emerging markets Rapid globalization of business More countries joining mobility trend Attract and retain global talent Length of the Assignment Short-term (6-12 months?) Long-term (12 months 5 years?) Indefinite Cost Containment Establish Policy/Benefits (Indices/allowances vs. in-kind) Cost Projection for budgeting and assignment cost tracking Pensions/social tax contribution planning (home vs. host country plan) Certificate of Coverage (Totalization Agreement) Secondment Agreement to establish employment arrangement Tax Treaty Application Determination of which company will bear which costs Additional Considerations Visa requirements Relocation of family Language barriers Page 3
Assignment letter Position Home and Host location Base Salary and Possible Incentives Housing Considerations Housing and Utility Allowance Housing norm Home Retention Additional Assignment Benefits Goods and Service Differential Relocation Allowance Dependent Education Automobile Home Visits Page 4
Other Benefits Health Care Vacation Holiday Immigration Expenses Assignment Letter (Continued) Taxes and Social Tax Charges Tax Equalization Hypothetical Tax Foreign Tax General Signatures Do you have an assignment template prepared? Page 5
Let s discuss why it is important for the payroll specialist to read and understand the assignment letter. Page 6
Tax Equalization Assignment Letter: Determination of applicable policies (We will use this method for our demonstrations) Tax neutral No better or worse off for taxes due to the assignment Tax Protection No worse off for taxes due to the assignment Guaranteed Net Salary Localized Employee is responsible for all actual taxes May receive some compensation with a tax gross up Is there a written policy in place? Page 7
Expatriate Assignment Start - Hypothetical Tax Calculation What is hypothetical tax? Stay-at-home Tax The tax the employee would hypothetically have to pay if the assignment had not occurred. The hypothetical tax is not an actual tax that is remitted to a taxing authority as the company takes responsibility to fund the worldwide actual tax liability for the employee (with some exceptions), and collects the hypothetical tax from the employee, reducing the company s net global tax cost. Alternatively, with a net guaranteed salary the hypothetical tax is more figurative. It is not actually retained by the company; rather it is included in the gross salary calculation to arrive at a desired net pay. How is a hypothetical or estimated tax calculation prepared? Company income only vs. Company and Personal income U Shape Calculation Home Gross to Net to New Host Gross What US taxes should be withheld? Federal/State/FICA/FUTA/SUTA What payroll forms should be completed? Form 673 (if applicable) Form W-4 and state withholding form (if applicable) Page 8
Expatriate Payroll Set-up Implement hypothetical tax withholding Negative earnings code or pre-tax deduction Held by the company/no remittance Possibly stop federal and state/local/school district withholding Potential recharge/credit to the foreign entity Page 9
Hypothetical Tax Payroll Implementation Page 10
Payroll Form 673 Page 11
Payroll Form W-4 Page 12
Expatriate Payroll Set-up Assignment benefits Imputed or actual cash outlay (Discuss imputed payroll code set-up) Page 13
Hypothetical Tax Payroll Implementation CASH Goods & Service Differential Cost of Living allowance Living Away from home allowance per diem US Tax Gross Up IMPUTED Housing Automobile Dependent Education Page 14
Discuss Assignment Allowance Payroll Entries Why are we recording the imputed benefits? Proper payroll reporting Timely reporting Reality: Imputed benefits are not always consistent. Recommendations: Know how the benefits are being paid (payroll, accounts payable, third party vendor, expense reimbursement, company AMEX, etc.) Set-up data sharing from the start Set-up pay codes for the benefit components Pay benefits through a separate pay run for the US tax gross up calculation What is the US tax gross up? US taxes paid on behalf of the employee as the benefit is meant to be delivered net of taxes. Page 15
US Tax Gross Up Calculation Gross Up Formula: Benefits/(1-tax rates)-benefits = Tax Gross Up Calculation: $3,200/(1-.0145-.062-.04)-3,200 = $421.96 *Some payroll systems have automatic gross up functions Page 16
Shadow Payroll Page 17
What is shadow payroll? (mirror payroll, ghost payroll) Shadow Payroll: A key component of maintaining compliance for an expatriate employee inbound or working abroad. 1.) Employee is paid from home country payroll and shadowed through the host country for proper payroll compliance. 2.)Employee is paid from the host country and shadowed through the home country likely for pension contributions and home country benefit participation. Page 18
Shadow Payroll Example Page 19
Shadow Payroll Example Page 20
Split Payroll Page 21
Split Payroll: What is split payroll? A key component of maintaining compliance for an expatriate employee inbound or working abroad while delivering money through both payrolls. Benefits: Reduce currency fluctuation Delivers cash in both host and home country Compliance with tax withholding requirements Allow employee to maintain eligibility for home country benefits Page 22
Split Payroll Example Page 23
Income Tax Treaty Position The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Please note that not all states accept/recognize the federal income tax treaty. Pennsylvania does not accept the federal tax treaty. Page 24
Income Tax Treaty Position Dependent Personal Services Article (varies slightly by country combination): General Language remuneration derived by an individual who is a resident of one of the Contracting States 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 that other State for a period or periods not exceeding in the aggregate 183 days in the taxable year or the year of income of that state (may be stated as a rolling year) b.)the remuneration is paid by, or on behalf of, an employer or company who is not a resident of that State; and c.) the remuneration is not deductible in determining taxable profits of a permanent establishment, a fixed base or a trade or business which the employer or company has in that State. Page 25
Income Tax Treaty Position If the employee qualifies for the income tax treaty position then a Form 8233 should be completed and submitted to the IRS in advance of the work period. Please note that the employee will need to acquire a US social security number or an individual tax identification number. The Form 8233 may exempt federal and possibly state/local/school district wage reporting and tax withholding, but it does not exempt social security and Medicare wage reporting and tax withholding. A Form 1042-S should be submitted with the exemption code at the end of the year. Page 26
Totalization Agreements Certificate of Coverage Certificate of Coverage: Intended to eliminate dual social taxation and to provide additional benefit protection for workers who have worked both in the US and another country. (24 countries currently have totalization agreements with the US.) http://www.irs.gov/individuals/international- Taxpayers/Totalization-Agreements Page 27
Other Expatriate Payroll Considerations Currency Exchange Rates: Currency fluctuation must be considered whether an employee will be on home or host country payroll. Home country payroll: Employee will need money in host currency for spending. Host Country Payroll: Employee will need money in home country currency to pay bills and save. Page 28
Year-End Payroll Forms The final US Form W-2 should include worldwide employment income and benefits. Gather all compensation components and exchange rate adjustments Year-end review of payroll and taxes Add any additional non US payroll compensation not previously shadowed Reconcile the foreign payroll forms to the US payroll form. Discrepancies will exist as taxability and deductibility differ by country. Provide an explanation of the payroll forms to the employee. Page 29
Payroll Audits Page 30
Payroll Audits Page 31
Possible Interest and Penalties Failure to Make Deposit of Taxes IRC 6656 (Up to 15% of amounts unpaid) Failure to Collect and Remit Taxes IRC 6672 (Up to a 100% penalty of the amount not collected) Failure to Furnish Correct Payee Statement IRC 6722 (Greater of $100 per statement or 5-10% of the amount required to be reported) Negligence or Fraud IRC 6662 and 6663 Criminal Penalties IRC 7207 Page 32
Discussion Specific Scenario Questions Page 33
Thank you for your time! Ronii Rizzo is a Managing Director in the BDO Charlotte tax practice. Ronii specializes in the taxation and payroll reporting of U.S. nationals working abroad and foreign nationals working in the U.S. Ronii s experience includes payroll consulting, preparation and review of U.S. income tax returns, tax equalization calculations, and general expatriate assignment consulting. Ronii is also experienced in the transfer and set-up of newly acquired expatriate programs. B.S. Accounting, University of North Carolina-Charlotte Enrolled Agent Email: rrizzo@bdo.com Phone: (704) 887-4266 Page 34