Ronii Rizzo Senior Tax Manager Expatriate Services November 4 2015 Expatriate Defined Expatriate A person temporarily or permanently residing in a country other than that of the persons origin ID: 775117
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Slide1
Expatriate Payroll
BDO USA, LLP
Ronii Rizzo, Senior Tax Manager – Expatriate Services
November 4, 2015
Slide2Expatriate 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.
American Payroll Association
Slide3Expatriate Payroll Services
Expatriate Payroll Services:I will introduce a host of new payroll considerations. Some considerations are as follows:Payroll reporting requirementsAdditional reporting requirementsNew reporting codesTax withholding requirementsProper payroll formsSplit payrollShadow or Mirror payrollCurrency considerations (exchange rates)Cost accrualsInter-company chargebacksThese topics will be discussed in this presentation. The focus will be from a US payroll perspective.
American Payroll Association
Slide4Overview of the Decision Making Process
The company should establish the need for an expatriate assignment.Increased activity in emerging marketsRapid globalization of businessMore countries joining mobility trendAttract and retain global talentLength of the AssignmentShort-term (6 - 12 months?)Long-term (12 months – 5 years?)IndefiniteCost ContainmentEstablish Policy/Benefits (Indices/allowances vs. in-kind)Cost Projection for budgeting and assignment cost trackingPensions/social tax contribution planning (home vs. host country plan)Certificate of Coverage (Totalization Agreement)Secondment Agreement to establish employment arrangementTax Treaty ApplicationDetermination of which company will bear which costsAdditional ConsiderationsVisa requirementsRelocation of familyLanguage barriers
American Payroll Association
Slide5Assignment Letter
PositionHome and Host locationBase Salary and Possible IncentivesHousing Considerations Housing and Utility AllowanceHousing normHome RetentionAdditional Assignment BenefitsGoods and Service DifferentialRelocation AllowanceDependent EducationAutomobileHome Visits
American Payroll Association
Slide6Assignment Letter (Continued)
Other BenefitsHealth CareVacationHolidayImmigration ExpensesTaxes and Social Tax ChargesTax Equalization Hypothetical TaxForeign TaxGeneralSignaturesDo you have an assignment template prepared?
American Payroll Association
Slide7Let’s discuss why it is important for the payroll specialist to read and understand the assignment letter.
American Payroll Association
Slide8Assignment Letter:Determination of applicable policies
Tax Equalization (We will use this method for our demonstrations)Tax neutralNo better or worse off for taxes due to the assignmentTax ProtectionNo worse off for taxes due to the assignmentGuaranteed Net SalaryLocalizedEmployee is responsible for all actual taxesMay receive some compensation with a tax gross upIs there a written policy in place?
American Payroll Association
Slide9Expatriate 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 GrossWhat US taxes should be withheld?Federal/State/FICA/FUTA/SUTAWhat payroll forms should be completed?Form 673Form W-4 and state withholding form (if applicable)
American Payroll Association
Slide10Expatriate Payroll Set-up
Implement hypothetical tax withholdingNegative earnings code or pre-tax deductionHeld by the company/No remittanceStop federal and possibly state/local/school district withholding
American Payroll Association
Slide11Hypothetical Tax – Payroll Implementation
American Payroll Association
Slide12Payroll Form 673
American Payroll Association
Slide13Payroll Form W-4
American Payroll Association
Slide14Expatriate Payroll Set-up
Assignment benefitsImputed or actual cash outlay(Discuss imputed payroll code set-up)
American Payroll Association
Slide15Hypothetical Tax – Payroll Implementation
CASH
Goods & Service DifferentialCost of Living allowanceLiving Away from home allowance“per diem”US Tax Gross UpIMPUTEDHousingAutomobileDependent Education
American Payroll Association
Slide16Discuss Assignment Allowance Payroll Entries
Why are we recording the imputed benefits?Proper payroll reportingTimely 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 startSet-up pay codes for the benefit componentsPay benefits through a separate pay run for the US tax gross up calculationWhat 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.
American Payroll Association
Slide17US Tax Gross Up Calculation
Gross Up Formula: Benefits/(1-tax rates)-Benefits = Tax Gross UpCalculation: $3,200/(1-.0145-.062-.04)-3,200 = $421.96*Some payroll systems have automatic gross up functions
American Payroll Association
Slide18Shadow Payroll
American Payroll Association
Slide19What 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.
American Payroll Association
Slide20Shadow Payroll Example
American Payroll Association
Slide21Shadow Payroll Example
American Payroll Association
Slide22Split Payroll
American
Payroll Association
Slide23What is split payroll?
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 fluctuationDelivers cash in both host and home countryCompliance with tax withholding requirementsAllow employee to maintain eligibility for home country benefits
American
Payroll
Association
Slide24Split Payroll Example
American Payroll Association
Slide25Other 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.
American
Payroll
Association
Slide26Totalization 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
American
Payroll
Association
Slide27Accruals
Proper and timely payroll reporting will allow the company to accrue and budget for compensation costs throughout the year. It will also encourage timely inter-company chargebacks to the host entity. (Avoid “year-end dumps”)With proper payroll reporting, the company will not need to accrue for possible payroll penalties and interest.
American
Payroll
Association
Slide28Year-End Payroll Forms
The final US Form W-2 should include worldwide employment income and benefits. Gather all compensation components and exchange rate adjustmentsYear-end review of payroll and taxesAdd 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.
American
Payroll
Association
Slide29Payroll Audits
American
Payroll
Association
Slide30Payroll Audits
American
Payroll
Association
Slide31Possible 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 6663Criminal Penalties – IRC 7207
American
Payroll
Association
Slide32Discussion – Specific Scenario Questions
American
Payroll
Association
Slide33Thank you for your time!
Ronii Rizzo is a tax manager 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-CharlotteEnrolled AgentEmail: rrizzo@bdo.comPhone: (704) 887-4266
American
Payroll
Association