BDO USA LLP 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: 477082
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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.
American Payroll AssociationSlide3
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.
American Payroll AssociationSlide4
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
American Payroll AssociationSlide5
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
American Payroll AssociationSlide6
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?
American Payroll AssociationSlide7
Let’s discuss why it is important for the payroll specialist to read and understand the assignment letter.
American Payroll AssociationSlide8
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)
American Payroll AssociationSlide10
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
American Payroll AssociationSlide11
Hypothetical Tax – Payroll Implementation
American Payroll AssociationSlide12
Payroll Form 673
American Payroll AssociationSlide13
Payroll Form W-4
American Payroll AssociationSlide14
Expatriate Payroll Set-up
Assignment benefits
Imputed or actual cash
outlay
(Discuss imputed payroll code set-up)
American Payroll AssociationSlide15
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.
American Payroll AssociationSlide17
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
American Payroll AssociationSlide18
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.
American Payroll AssociationSlide20
Shadow Payroll Example
American Payroll AssociationSlide21
Shadow Payroll Example
American Payroll AssociationSlide22
Split Payroll
American
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
American
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.
American
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
American
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.
American
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.
American
Payroll
AssociationSlide29
Payroll Audits
American
Payroll
AssociationSlide30
Payroll Audits
American
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
American
Payroll
AssociationSlide32
Discussion – Specific Scenario Questions
American
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