Global Payroll & Taxation of International Assignments Brent Bergan, CPA Travis Call, CPA September 17, 2018

Global Mobility Tax, LLP We are a CPA firm providing strategy, consulting, and individual tax services to organizations that relocate employees on domestic and international assignments September 17, 2018

Agenda (Part I) Global Payroll (Brent) Benefits Challenges (internal and external) Reporting Issues Foreign Payroll – UK, Singapore, and China Examples Success Factors September 17, 2018

Agenda (Part II) Expat Tax (Travis) Assignee, Assignment, and Payroll Types Reporting Requirements Short term versus Long term U.S. Federal and California Income Tax Social Security and Medicare Tax Tax Reimbursements with Example Claim of Right September 17, 2018

Global Payroll September 17, 2018

Global Payroll – Wouldn’t it be nice! One Process more control over number of payroll runs One Database reduction in overall costs One Mission employees are paid timely and accurately in all locations One Team clear focus on daily tasks and overall objectives September 17, 2018

Global Payroll – Challenges (Internal) Employee communication Language, time zone, cultural differences Local region resistance to change Standard practices across regions Data reporting to Global payroll regions Equity reporting September 17, 2018

Global Payroll – Challenges (External) Legislation – addressing global versus local differences Vendor management – one versus many September 17, 2018

Global Payroll – Challenges with Global Equity Many types of awards ISO, NQSO, RSU, ESPP, SARS Multi-year earnings period Grant, vest, and exercise date concerns; valuation Globally mobile workforce Multiple jurisdiction considerations Impact of international tax treaty and social tax agreements September 17, 2018

Global Payroll – Reporting Issues U.S. reporting and withholding requirements Foreign location reporting and withholding requirements Company tax equalization policy considerations Split payroll arrangements Shadow payroll requirements September 17, 2018

Global Payroll – Split Payroll Employment arrangement must support job responsibilities Compensation must support responsibilities Individual is employed and paid in 2 countries Payroll administration impact What is individuals tax residency status in Country A Country B September 17, 2018

Global Payroll – Split Payroll Employer payroll reporting requirements Country A Country B Wage and tax withholding considerations Tax planning opportunity - ? Split payroll arrangements are not as common today September 17, 2018

Global Payroll – Shadow Payroll Also known as Ghost payroll Dummy payroll Mirror payroll This is a mechanism which enables local wage reporting and tax withholding for an employee working abroad. Wage reporting and tax withholding take place No cash/funds are provided to the employee September 17, 2018

Global Payroll – Reporting Issues (cont.) Which employees are impacted? What is the time period of concern? Where was the employee during this period? Does each location have a tax and payroll reporting requirement? Does the foreign withholding impact the U.S. payroll? Is there a trailing liability? Bonus/equity paid out in a different location than where it was earned resulting in potential tax liability in multiple jurisdictions after the assignment period September 17, 2018

Global Payroll – Foreign Payroll Non-U.S. payrolls may have rules inconsistent with the U.S. payroll reporting and withholding requirements. “Income” for U.S. reporting purposes may not be “income” in the non-U.S. location. Some countries require (or prohibit) certain tax reimbursement methodologies (e.g., the UK requires Current-Year Gross-up). Reporting and withholding requirements can vary significantly by country. September 17, 2018

Global Payroll – Foreign Payroll – UK Pay As You Earn (PAYE) System Monthly reporting and payment of tax Modified PAYE available Quarterly reporting and payment of tax September 17, 2018

Global Payroll – Foreign Payroll – Singapore Tax Assessment System Reporting of income and payment of tax is due the following year Exit Tax – In the year of repatriation, an exit tax filing is due before the assignee leaves the country September 17, 2018

Global Payroll – Foreign Payroll – China Monthly Tax Filing System Reporting of income and payment of tax is due monthly and each month constitutes a complete tax period September 17, 2018

Global Payroll – Success Factors Document compensation payments Identify stakeholders and systems Payroll systems Expense account Accounts payable Determine use of outside vendors Scope the adequacy of the international payroll system Coordinate global payroll reporting Strong central coordination is vital Consider making periodic site visits September 17, 2018

Global Payroll – Success Factors (cont.) Determine home and host country taxation requirements Legislation could vary significantly by location Use technology to support the process Leverage the use of outside vendors Payroll alternative Subject matter expertise Streamlined process Access to technology September 17, 2018

Taxation of International Assignments (Expat Tax) September 17, 2018

Expat Tax – Assignee Types Expatriate U.S. citizen or permanent resident outside the U.S. Inpatriate Non-U.S. national in the U.S. Third-Country National (TCN) Non-U.S. national outside of their home country September 17, 2018

Expat Tax – Assignment Types Short-term Less than 1 year Long-term Greater than 1 year Rotational / Commuter / Business Traveler Generally works in host country and lives in home country September 17, 2018

Expat Tax – Payroll Types Home country payroll Host country payroll Split payroll September 17, 2018

Expat Tax – Global Payroll in Action Identify payroll reporting and withholding requirements Understand impact of assignment types and tax reimbursement methods Review strategies for collecting and reporting assignment-related payments September 17, 2018

Expat Tax – Reporting Requirements Wage reporting (U.S. centric) Worldwide income must be reported Cash payouts in home and host countries Benefits-in-kind in home and host countries Non-taxable items in home and host countries September 17, 2018

Expat Tax – Common Compensation Items Base salary Bonus Equity Hypothetical tax Housing norm Cost of living allow. Housing allow. Utilities allow. Education allow. Tax equalization Language lessons Home leave Transportation allow. Tax reimbursements Relocation allow. Tax preparation fee September 17, 2018

Expat Tax – Negative Compensation Hypothetical tax A compensation reduction retained by employer (generally replaces actual home country withholding) Most commonly based on home country tax laws Housing norm Hypothetical cost of home country housing retained monthly by employer Generally a function of base salary, family size, and maintenance of primary residence in home country September 17, 2018

Expat Tax – Relocation Expenses Direct relocation expenses Shipping of household goods / U.S. storage Travel from home to host country Indirect relocation expenses Immigration services International HR services Tax services Losses sustained by the move Sale of car Sale of home September 17, 2018

Expat Tax – U.S. Federal Income Tax Methods used to reduce or eliminate U.S. tax withholding: IRS Form 673 Foreign earned income exclusion Foreign housing exclusion Mandatory foreign withholding statement IRS Form W-4 September 17, 2018

Expat Tax – IRS Form 673 Foreign earned income exclusion Up to $92,900 (2011) of foreign source income earned during the assignment period is excludable from taxable income One of two tests must be met Bona Fide Residence Physical Presence Test Foreign housing exclusion Cost of foreign housing that is in excess of a base amount determined by the IRS annually is excludable from taxable income September 17, 2018

Expat Tax – Foreign Withholding In accordance with IRS Sec. 3401(a)(8)(A)(ii) and Treas. Reg. Sec. 31.3401(a)(8(A)-1(b) Used when compensation is foreign source and subject to a mandatory foreign country tax withholding Home country payroll should document the mandatory foreign withholding and maintain a copy in the employee file September 17, 2018

Expat Tax – IRS Form W-4 Completed by the U.S. international assignee to inform the employer of the expectation to qualify for foreign earned income and housing exclusions and/or to qualify for the claim of foreign tax credits, and thereby eligible for a reduction in current tax withholdings Countries with mandatory withholding Canada, UK, China Countries with no mandatory withholding Hong Kong, Singapore (assessment in following year) September 17, 2018

Expat Tax – California Income Tax California tax withholdings should continue during the foreign assignment unless California residency is broken under one of the two tests available: Bright-Line Test: Employment related contract, >18 months, <45 days, income from intangibles <$200K Facts & Circumstances Test: Intent not to return to CA (subjective test) Each state has its own residency rules, some similar to the facts and circumstances test, that may make state residency difficult to terminate September 17, 2018

Expat Tax – Social Security & Medicare Tax Totalization Agreements: The employee must remain an employee of the Home country and pay Home country social taxes. The Company must apply for a “Certificate of Coverage” in the Home country. The Certificate of Coverage must be kept with the Host country payroll file to substantiate non-withholding in the event of a payroll audit. http://www.ssa.gov/international/agreement_descriptions.html September 17, 2018

Expat Tax – Tax Reimbursements Common ways to protect assignees from excess tax Tax Equalization (TEQ) Process to ensure that assignee pays no more / no less tax than s/he would have paid if they did not leave their home country Tax Protection Process to ensure that assignee pays no more tax than s/he would have paid if they did not leave their home country If the assignee pays less tax, they retain the tax savings September 17, 2018

Expat Tax – Tax Reimbursements (cont.) Common tax reimbursement methods Tax loans / Tax advances Employer pays the required actual home/host country taxes Loans/Advances are generally added to compensation Tax gross up Employer pays the additional tax due on assignment compensation, plus the tax on the tax Tax gross ups are generally added to compensation September 17, 2018

Expat Tax – Tax Reimbursements (cont.) How should repayments made to the company under terms of a tax reimbursement program be handled? If repaid during the same calendar year? If repaid during a subsequent calendar year? September 17, 2018

Expat Tax – Tax Reimbursements Example Company owes assignee $4,480. Need to deliver $4,480 net to assignee. TEQ settlement is wages to assignee (i.e., assignee incurs tax on this amount). Assume: 25% federal, 9.55% CA, and 1.45% Medicare (assume maxed out on OASDI and CASDI). With no gross up, assignee would incur U.S. federal tax of $1,120; CA State tax of $427.84; and Medicare tax of $64.96; resulting in a net in-pocket amount of $2,867.20 (vs. $4,480). September 17, 2018

Expat Tax – Tax Reimbursements Example Company should: Gross-up the $4,480 payment. Report $7,000 as wages. Remit $2,520 as withholding (on behalf of assignee). Federal tax of $1,750 California tax of $668.50 Medicare tax of $101.50 Pay the employee a net payment of $4,480. September 17, 2018

Expat Tax – Claim of Right Doctrine The tax treatment of an amount that was included in taxable income in a previous year because the taxpayer appeared to have a right to the income, but is then returned to the payor of the income in a later year, is governed by the “claim of right” doctrine IRC Section 1341(a) September 17, 2018

Expat Tax – Claim of Right Doctrine (cont.) The general rule: An item was included in gross income for a prior tax year because it appeared that the taxpayer had an unrestricted right to the item; A deduction is allowable for the future tax year in which the income is returned to the payor because it was established after the close of the prior tax year that the taxpayer did not have an unrestricted right to the item or to a portion of the item; and The amount of the deduction exceeds $3,000 September 17, 2018

Question & Answers September 17, 2018

Brent Bergan Partner, Global Mobility Tax Partner, Global Mobility Tax, LLP (California CPA) Experience – tax policy planning, foreign country taxation, global equity awards, and the design, implementation and administration of international assignment programs 6 years as managing partner of expatriate tax consulting firm 7 years as Director of Tax at Oracle Corporation Senior Manager with Ernst & Young in Palo Alto, CA Board of Directors of WIPA September 17, 2018

Travis Call Manager, Global Mobility Tax Manager, Global Mobility Tax, LLP (California CPA) Experience – U.S. tax compliance and consulting for globally mobile employees, tax policy planning, foreign country taxation, global payroll and compensation review, and the design, implementation and administration of international assignment programs 3 ½ years as manager at Global Mobility Tax 4 years in Global Employer Services at Deloitte Tax Inter-mountain Relocation Council Board Member September 17, 2018

Global Mobility Tax, LLP Brent Bergan Partner, Global Mobility Tax, LLP 260 State Street, Los Altos, CA 94022 Phone: 650.947.9490 Email: brent.bergan@glomotax.com Travis Call Manager, Global Mobility Tax, LLP 3214 N University Ave., No. 133, Provo, UT 84604 Phone: 801.850.6271 Email: travis.call@glomotax.com www.glomotax.com September 17, 2018