Expatriate Payroll - PowerPoint Presentation

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Expatriate Payroll

BDO USA, LLP

Ronii Rizzo, Senior Tax Manager – Expatriate Services

November 4, 2015Slide2

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.

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Expatriate Payroll Services

Expatriate Payroll Services:I will introduce a host of new payroll considerations. Some considerations are as follows:Payroll reporting requirements

Additional reporting requirements

New reporting codes

Tax withholding requirements

Proper payroll forms

Split payroll

Shadow or Mirror payroll

Currency considerations (exchange rates)Cost accrualsInter-company chargebacksThese topics will be discussed in this presentation. The focus will be from a US payroll perspective.

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Overview of the Decision Making Process

The company should establish the need for an expatriate assignment.Increased activity in emerging marketsRapid globalization of business

More

countries

joining mobility trend

Attract and retain global talentLength of the Assignment

Short-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 Application

Determination of which company will bear which costsAdditional ConsiderationsVisa requirements

Relocation of familyLanguage barriers

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Assignment Letter

PositionHome and Host locationBase Salary and Possible Incentives

Housing Considerations

Housing and Utility Allowance

Housing norm

Home Retention

Additional Assignment Benefits

Goods and Service Differential

Relocation AllowanceDependent EducationAutomobileHome Visits

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Assignment Letter (Continued)

Other BenefitsHealth CareVacation

Holiday

Immigration Expenses

Taxes and Social Tax Charges

Tax Equalization

Hypothetical Tax

Foreign Tax

GeneralSignaturesDo you have an assignment template prepared?

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Let’s discuss why it is important for the payroll specialist to read and understand the assignment letter.

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Assignment Letter:Determination of applicable policies

Tax Equalization (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 taxesMay receive some compensation with a tax gross upIs there a written policy in place?American Payroll AssociationSlide9

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

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)

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Expatriate Payroll Set-up

Implement hypothetical tax withholding

Negative earnings code or pre-tax deduction

Held by the company/No remittance

Stop federal and possibly state/local/school district withholding

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Hypothetical Tax – Payroll Implementation

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Payroll Form 673

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Payroll Form W-4

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Expatriate Payroll Set-up

Assignment benefits

Imputed or actual cash

outlay

(Discuss imputed payroll code set-up)

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Hypothetical Tax – Payroll Implementation

CASH

Goods & Service

Differential

Cost of Living allowance

Living Away from home allowance

“per diem

”

US Tax Gross UpIMPUTEDHousingAutomobile

Dependent EducationAmerican Payroll AssociationSlide16

Discuss 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.

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US 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

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Shadow Payroll

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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.

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Shadow Payroll Example

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Shadow Payroll Example

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Split Payroll

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Payroll AssociationSlide23

What 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 fluctuation

Delivers cash in both host and home country

Compliance with tax withholding requirements

Allow employee to maintain eligibility for home country benefits

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Payroll

AssociationSlide24

Split Payroll Example

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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.

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Payroll

AssociationSlide26

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

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Payroll AssociationSlide27

Accruals

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.

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Payroll

AssociationSlide28

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.

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Payroll

AssociationSlide29

Payroll Audits

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Payroll

AssociationSlide30

Payroll Audits

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Payroll

AssociationSlide31

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

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Payroll

AssociationSlide32

Discussion – Specific Scenario Questions

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Payroll

AssociationSlide33

Thank 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-Charlotte

Enrolled Agent

Email:

rrizzo@bdo.com

Phone: (704) 887-4266

American Payroll

Association