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

2. 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

3. 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

4. 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

5. Global Payroll
September 17, 2018

6. 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

7. 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

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

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

22. 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

23. 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

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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. Expat Tax – Foreign Withholding
In accordance with IRS Sec. 3401(a)(8)(A)(ii) and Treas. Reg. Sec (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

33. 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

34. 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

35. 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.
September 17, 2018

36. 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

37. 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

38. 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

39. 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, (vs. $4,480).
September 17, 2018

40. 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

41. 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

42. 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

43. Question & Answers
September 17, 2018

44. 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

45. 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

46. Global Mobility Tax, LLP
Brent Bergan
Partner, Global Mobility Tax, LLP
260 State Street, Los Altos, CA 94022
Phone:
Travis Call
Manager, Global Mobility Tax, LLP
3214 N University Ave., No. 133, Provo, UT 84604
Phone:
September 17, 2018