Paying Expats: Managing Expatriate Payroll Tax & Administration Issues

Paying Expats: Managing Expatriate Payroll Tax & Administration Issues Sue Wines, CPP, VP, SIRVA Global Compensation and Payroll Services sue.wines@sirva.com Dave Holcomb, SIRVA Global Compensation and Payroll Services Dave.Holcomb@SIRVA.com

Speaker Info Sue Wines, CPP, VP, SIRVA Global Compensation and Payroll Services Sue Wines is the global compensation and payroll services practice leader for SIRVA Relocation, responsible for building best practices, enhancing system functionality and creating a world class compensation service for SIRVA s global assignment clients. These services include cost estimates, letters of assignment, pay instructions and balance sheet, payroll reconciliations and global compensation collection. Wines is a member of the Strategic Payroll Leadership Task Force, working on the Global Issues Committee, for the American Payroll Association. Dave Holcomb, SIRVA Global Compensation and Payroll Services Dave Holcomb leads our Compensation Specialists and Cost Projection Specialists as the subject matter expert and manager of ongoing compensation services for our large clients. Dave manages day to day operations, guides client implementations and projects to completion, and is responsible for successful team delivery of compensation services. Prior to joining SIRVA, Dave was the Expatriate Tax Manager at Xerox Relocation and Assignment Service, responsible for worldwide tax and compensation matters for relocation clients. Prior to that he was the Manager of Expatriate Tax Programs at Motorola, Inc., where he managed the Company s worldwide expatriate tax program.. He has also held Expatriate Tax Manager positions at Arthur Andersen and Deloitte, including a 4-year assignment to Al Khobar, Saudi Arabia.

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Paying Expats: Managing Expatriate Payroll Tax & Administration Issues SIRVA Worldwide Sue Wines, CPP VP, Global Compensation and Payroll Services Dave Holcomb, CPA Manager, Global Compensation and Payroll Services Presented to C4CM November 21 2014 PAYING EXPATS : AGENDA Best Practices for International Payrolls Tax Treaties and Totalization Agreements Reportable versus Non-Reportable Tax Equalization Wages versus Expenses Current Trends in Global Compensation Administration Challenges in Expatriate Payroll Administration Success! 2 1

Best Practices for International Payrolls Payroll Deductions, Adjustments and Credits Best Practice : International Payroll Payroll administration for international assignments is complicated Payment Delivery Imputed Income Compliance Risks Process Foreign Allowances Benefits in Kind Host Country Obligations Exchange Rate Fluctuation Multiple Sources of Payment Shadow Payroll Reports Tax Equalization Policy Limitation of Payroll Systems Split Payroll Delivery Tax Gross-ups Multiple Employers Global Oversight Keys to successful management: Define roles and responsibilities Identify your resources Create standardized processes Measure your success 4 2

Planning for Payroll Delivery Letter of Assignment Compensation Worksheet Periodic Updates PAYROLL DELIVERY 5 US Perspective on International Assignments US citizen or permanent resident working outside the US US Expatriate US Inpatriate Non-US national working in the US Non-US national working outside of their home country Third Country National 6 3

US Reporting Requirements Report Worldwide Income All cash compensation in both home and host country Benefits-in-kind for both home and host country Tip: Follow US rules for non-taxable items (i.e. household goods shipment, 401(k), pretax deductions) General Treatment of International Assignment Compensation Hypothetical Withholding CompensationReduction Based on home country tax laws assignee pays no more or no less tax than if they had stayed at home Housing Norm (Offset) / Auto Norm Compensation Reduction Value of cost of home country housing or auto, usually when no costs incurred at home Expatriate Premiums Foreign Service Premium Hardship Allowance Transportation Allowance COLA (Goods & Services Differential Compensation Addition Various payments (inducements) to the assignee for accepting the assignment in the host location Employer Paid Taxes at Host Compensation Addition Payments to host authorities to cover local taxes due Tax Equalization Settlements Compensation Addition (if refund due employee) or Compensation Reduction or Itemized Deduction on Tax Return (if refund due employer) Work with your tax provider to choose the method of treatment is appropriate for your company 7 Tax Treaties and Totalization Agreements Help to minimize tax when US citizens work abroad 4

Tax Treaties Tax treaties provide relief from double income taxes Treaties allow an exemption from host country tax if three conditions are met: The recipient is present in the other country for a period or periods not exceeding a specified number of days Generally 183 days per year The year can be a calendar year, a tax year or a 12-month period The remuneration is paid by, or on behalf of, an employer who is not a resident of the host country The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State (i.e., cannot charge wages to host) Be aware of economic employer interpretation US has 67 income tax treaties in force Totalization Agreements provide relief from double social taxes Employer applies for a Certificate of Coverage from US Social Security Administration Provides an exemption from both employee and employer portion of social tax Generally provides an exemption for a maximum of 5 years, although some countries allow an extension for extenuating circumstances US has 25 Totalization Agreements in force 9 US Totalization Agreement Countries Australia Germany Poland Austria Greece Portugal Belgium Ireland Slovak Republic Canada Italy South Korea Chile Japan Spain Czech Republic Luxembourg Sweden Denmark Netherlands Switzerland Finland Norway United Kingdom France 10 5

Reportable versus Non-Reportable The differences between reportable and non-reportable payments to overseas employees Reportable versus Non-Reportable One year or more (but generally less than 5 years) Employee moved changed tax home All international premiums and allowances are reportable as taxable compensation Long Term Assignment Short Term Assignment Intended to last less than one year Employee does not move his tax home Duplicate living reimbursements generally not taxable follow rules for US expense reimbursements under an accountable plan Per diems at or below government rates nontaxable for US income reporting Employee generally lives at home and works for short periods in the host country Rotational Commuter Extended Business Travelers OR Permanent Move Local Plus Others 12 6

Sample Taxable / Reportable* Long-Term Assignments Auto Allowance Hardship Premium Awards Housing / Utility Allowance Base Salary Housing Norm Deduction Bonus Hypothetical Tax Cost of Living Allowance Intercultural Training Family Danger Pay Language Training Family Education Reimbursements Lease Cancellation Fees Equity Non-Qualified Moving Expenses Foreign Service Premium Pension Distributions Fringe Benefits Rest and Relaxation Furniture Allowance Tax Reimbursements *Where/how compensation is delivered may affect taxability. Please consult with your tax partner for taxability matters. 13 Sample Non-Taxable* Long-term Language training Employee Intercultural training Employee Qualified moving expense reimbursements Short-term Per diems allowance under IRS limit Lodging costs Travel costs Employee *Where/how compensation is delivered may affect taxability. Please consult with your tax partner for taxability matters. 14 7

Tax Equalization How Tax Equalization works and why it is so essential Tax Equalization Basically it s a guarantee from the Company that the employee s tax cost will not change during the assignment Treat employee as if he/she never left the home country Some reasons why Companies have a tax equalization program: Allows for a more mobile workforce Host country tax rate not a factor in decision to accept the assignment Employee s income is inflated, so likely to be subject to a higher tax rate Company provides allowances to expat tax-free and must pay the tax to keep the expat whole 16 8

Wages versus Expenses Both wages and expenses require special handling and collection Wages versus Expenses Global Compensation Collection Process Gather all possible sources of compensation Payroll sources (home and host) Non-Payroll Sources (accounts payable teams, relocation provider, third party pension provider, equity administrator, travel desk) Create a taxability grid with your tax provider Record on the appropriate tax form Home and Host Payroll Business Expenses Qualified Moving Expenses Wages T Reimbursements NT Household goods shipment Assignment Allowances T Per diem for short term Non-Qualified Moving Expenses Other NT Temp Living T Home Leave T NT Travel NT Meals T Housing paid to landlord T 18 9

Current Trends Best Practice Current global compensation administration trends and best practices Best Practice : Global Oversight Establish global oversight of the process Subject matter expertise Collaborates well with all stakeholders HR, Payroll, Finance, Tax Providers Standardized process creates opportunities for simplification and scalability 20 10

Best Practice : Cost Estimates Prepare cost estimates for all assignments Can be used as an approval document for the business Allows proper budgeting for assignment costs Allows Finance Department to set up accruals Create budget to actual reports Confirm whether assignment is cost effective Determine whether global mobility program is in budget Plan for future assignments based on success / failure of projecting costs on previous assignments Taxes Taxes are the single most expensive item Plan accordingly 21 Best Practice : Global Design Global System/ Data Repository identify the system of record Corporate Account Name: Housing Allowance UK Pay Code: Housing Allowance LTA US Pay Code: Long Term Housing Singapore Pay Code: Allowance Housing Map local payroll codes to centralized chart of accounts Use separate codes for different elements Example : Relocation Taxable is not a sufficient description for reporting and planning Result: global reporting capability (internal and for tax providers) 22 11

Best Practice : Global Process Procedure Manuals Assignment Compensation Worksheet Global Compensation Collection Local Payroll Processing Global Payroll Reconciliation Global Training of Users Change Management Procedures Reporting Deadlines Quarterly Review of Process Effectiveness 23 Best Practice : Effective Communication Establish ongoing communication methods Include all stakeholders HR / Payroll / Global Mobility Teams Accounts Payable / T&E Teams / Finance Assignment Data provider Tax provider Submit payroll changes prior to deadlines Single point of contact for assignee Alert assignee prior to changes 24 12

Best Practice : Centralized Payroll Administration Establish centralized control point Identify all payroll contacts Establish calendars and deadlines Agree on format for exchange of data Reconciliation and audit schedules Reporting Outsource the administrative process? 25 Best Practice : Effective Audits Create audit processes Identify variances in pay / deductions comparing prior pay period and current pay period Reconcile local payroll results to assignment balance sheet When errors are identified and corrected, adjust payroll prior to next pay period 26 13

Best Practice: Simplify Split Payrolls Define split payroll delivery method based on company policy, not employee request Avoid percentage splits Note: Some payroll splits may be mandated by local legislation 27 Best Practice : Monitor Supplemental Pay Monitor supplemental payments and withhold additional hypothetical tax at time of payment METHODS: Recalculation Marginal Rate 28 14

Best Practice : Frequent Shadow Payrolls Payments made in the host country payroll may need to be recorded as taxable income in the home country as well Consult with tax provider on necessity of shadow payrolls and taxable elements Record shadow payroll income regularly Audit to confirm shadow payroll delivers zero net pay to assignee 29 Best Practice : Comprehensive Compensation Collection Collect gross to net global payroll results in a single database Avoid This Collect additional compensation from non-payroll sources Accounts payable Third parties providing benefits in kind Expense processors 30 15

Challenges Challenges in expatriate payroll administration and how to overcome them Challenges / Solutions Annual Compensation Collection is completed in a RUSH and often results in W2C s Implement monthly (or at least quarterly) compensation collection schedules My local finance groups don t send their information on time or the data is incomplete. Data collected should be audited each time collected, compared to the benefits defined on their Letter of Assignment, and variances from month to month resolved prior to the next collection date Define a clear escalation path when data is late or incomplete 32 16

Challenges / Solutions Assignees are sometimes paid twice when split payrolls are used. Payroll results for international assignees should be reconciled on a global basis My local payroll teams don t put the changes to allowances into their payroll system on time. Payroll results for international assignees should be reconciled on a global basis 33 Challenges / Solutions Our assignees don t know who to contact when their allowance payments change. A centralized point of contact should be assigned to alert assignees in advance of compensation changes and to answer their queries Train centralized contacts to be able to explain to the assignees why elements of their compensation move up and down during assignment What other challenges does your organization face? 34 17

Success! Key indicators that let you know your program is a success Success! Assignee Satisfaction Great support system allows them to concentrate on what they were sent to accomplish Achieves Global Business Goals Right people in the right places when they are needed Compliant (Legislative as well as Policy) W-2 s are on time and accurate Minimal exceptions to policy Cost Effective Program Establish accruals Measure budget to actual No surprises 36 18

Questions? Sue Wines (sue.wines@sirva.com) Dave Holcomb (dave.holcomb@sirva.com) 19