Practical Tips for International Relocations Resolving Recruitment, Compensation, Real Estate, Tax a

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Practical Tips for International Relocations
Resolving Recruitment, Compensation, Real
Estate, Tax and Immigration Issues
March 2, 2006
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Recruiting a Global and Mobile Workforce
Dallas Frey, Westinghouse Electric Company
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From International to Global

• 1996
• Westinghouse Nuclear a small part of CBS a US
  company with some customers overseas.
  
• 800 Million annual sales
• Market for nuclear energy stagnant some plants
  on path to decommission.
  
• 5000 employees and shrinking. More people than
  work

• 2006
• Pure focus on nuclear a global company
  transitioning to our second foreign parent.
  
• 2.1 Billion annual sales
• Market for nuclear energy expanding rapidly most
  plants extending licenses.
  
• 9000 employees and growing. More work than
  people.
  

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Major Milestones Implications

• 1998 - British Nuclear Fuels Limited (BNFL)
  reaches agreement with CBS to buy Westinghouse
  Nuclear. Parent not based in US!
  
• 2000 - In a consolidation among nuclear
  suppliers, Westinghouse acquires Asea Brown
  Boveri (ABB) Nuclear. Brand new array of both
  employees and customers, many overseas.
• 2006 - Toshiba reaches agreement with BNFL to buy
  Westinghouse. Second foreign parent not a big
  deal to employees at this stage.

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Practical Tips from Our Experience

• Consider global mobility of your talent an
  investment rather than a cost.
  
• Select the right people, then prepare them and
  their families.
  
• Be competitive, yet be consistent.
• Partner with external experts, even if your
  volume suggests that you in-source.
  
• Measure and monitor the resulting data so that
  historical data helps you advise employees and
  plan spending.

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Compensating Transferees/ExpatriatesA Matter of
Money, Benefits, and Taxes
René J. Hulsker, Kennametal Inc.Roland Gargani,
Global Tax NetworkTrisha Crombie, Cohen
Grigsby, P.C.
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A Matter of Money, Benefits and TaxesThe Money
SideRené J. HulskerManager CompensationKennam
etal Inc.
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Money Items

• Inconvenience Allowances
• Cost Differentials
• Other

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Objectives

• Avoid financial hardship or other burdens
• Remove serious economic barriers
• Maintain internal and external equity
• Allow for repatriation

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Types of Assignment

• Long Term Assignment
• Short Term Assignment
• Extended business trips
• Indefinite Assignment or Localization

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Conclusion

• If you are not there already you will deal with
• More Extended Business Trips
• More Short Term Assignment (with or without
  family)
  
• Reduced Long Term Assignment packages

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Foreign Assignments Potential Tax
PitfallsRoland Gargani, CPA, Global Tax
NetworkTrisha Crombie, CPA, Cohen Grigsby, P.C.
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Types of Assignments Tax Considerations

• Short Term Less than 183 Days
• Tax Treaty Applicability
• Nonresident regime in Host country
• Housing / Per Diem Not Wages
• Short Term 12 Months or Less
• Away from Home for tax purposes
• Housing/Per Diem still not taxable
• Possibility of Nonresident Regime Remains in Host
  Country
  
• Tax Treaty Applicability May be able to rely on
  exemption
  
• 12 month period not always based on calendar year

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State Tax Considerations Assignments of 12
Months or Less

• Continue State Tax Withholding
• Double Tax Consideration Home State and Host
  Country
  
• Out of State Tax Credit Foreign Provincial
  Income Tax
  
• Community Property States

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Long Term Assignment More than 1 Year

• Income Tax Treaty Exemption Not Likely
• Double taxation avoided by claiming of a foreign
  tax credit
  
• Tax As A Resident in Host Country
• Exception May Apply (i.e. UK, Belgium)
• Housing/Cost of Living Now Taxable
• U.S. Assignees Benefits from Section 911
• Break state residency possible
• Reduced FIT W/H F673
• Social Security Taxes
• Certificate of Coverage 5 yrs or

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Tax Reimbursement Policies

• Tax Equalization Neither a tax benefit or
  detriment because of this assignment.
  
• U.S. Multinationals Policy of Choice
• Hypothetical Tax Retention w/ True-Up after
  returns are prepared
  
• Host Country tax - the burden of company
• Tax Protection Will Not Incur a Tax Detriment
• Benefit would stay with assigned employee
• Employee may or may not be responsible for host
  taxes
  
• Net Pay Approach
• Focus on Take Home compared to Gross Salary
• European Companies Policy of Choice?

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Tax Reimbursement Policies - Continued

• Policy No Policy
• Companies with 1st Assigned Employee
• Regardless of the Policy in Place.
• Consistency Between Employees and Countries of
  Assignment where possible
  
• Complete understanding of policy is necessary by
  the assigned employee
  
• Consider exceptions when necessary
• Other Considerations
• State/Provincial Income Tax Issues
• Social Security Issues
• Pension, Home Retention Issues

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Other Tax Reimbursement Policy Considerations

• Ending Assignment Provisions
• Phased or immediate
• Transition support the final relocation
• Family impact
• Other Tax issues
• Retroactive tax protection on stock options?
• Establishing appropriate local compensation vs.
  protecting assignment net
  

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Localization - Tax Implications to Employee

• Employee responsible for worldwide tax cost.
• U.S. expatriates have continued U.S. tax
  reporting requirements and potential U.S. tax
  liabilities.
  
• Employee uncertainty regarding current and future
  tax implications.
  
• Provide employee with Tax Briefing

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Equalized vs. Local Package

• Equalized
• Intent The employee pays approximately the same
  level of tax as he/she would have paid, had
  he/she not gone on assignment or received
  assignment related allowances.
• A Tax Neutral assignment for the employee.
• Consistent and equitable tax treatment to all tax
  equalized employees.
  
• Localized
• Intent The employee pays and bears all actual
  worldwide tax costs.

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Assignment Allowances

• Employee often weaned off the expatriate
  compensation package.
  
• Immediate elimination of certain allowances.
• Gradual (e.g., 2-3 years) elimination of all
  allowances.
  
• Employee goes (or transitions) onto local pay
  package.
  
• Consider a (one-time) buy-out of
  Assignment Allowances.

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Global Immigration Who, What, Where, When and
How
Nancy Sharp Ziegler, Cohen Grigsby,
P.C.Patrick White, AIReS
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Common Immigration Issues and ConcernsPatrick
WhiteManaging DirectorAIReS
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Introduction

• Question What are the most common issues or
  concerns that US corporations face with regard to
  immigration?
  
• Answer
• Company Policy
• Compliance Corporation and employee
• Communication
• Timing how long does it take?
• Monitoring Tracking
• Employee Mobility / Assignment Types
• Managing separation/termination
• Risk Management

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Company Policy

• Immigration policy procedures
• Relocation/Assignment Policy
• Employee offer or assignment letters
• Company Responsibility
• Centralized
• Decentralized
• Outsourced

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Compliance

• Employer/Corporation Compliance
• Focus is on corporation in the host country the
  sponsor
  
• Responsibility/Authority for Employee
• Company good-standing in host country active or
  registered entity
  
• Employee
• Length of assignment
• Activities/duties during assignment
• Employee travel prior to receiving visas/permits
• Renewals

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Communication - Process is Key

• Company
• Centralized vs. Decentralized
• Policies
• Responsibility
• Employee
• Assignment/Offer Letter
• Relocation/Assignment Policy
• Other (internal email, web site, etc.)
• Termination/Separation from the company
• Service Provider SOW/Contract

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Timing lead times for immigration

• Varies by country and visa type
• Employment visa
• Permanent visa
• Visa renewal
• Regional lead time suggestions

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Monitoring Tracking

• Clearly defining responsibility
• Redundant procedures to ensure tracking accuracy
• Audit procedures

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Employee Mobility/Assignment Types

• Employee Mobility
• US Inbound
• US Employees Outbound
• US Employees Moving between regions
• Foreign Nationals
• Assignment Types
• Short Term
• Long Term
• Permanent

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Separation/Termination

• Procedures need to be defined
• Responsibility of employee clearly communicated
• Communication with government authority

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Case Study - Germany

• Hong Kong Citizen (SAR) Relocating Germany
• Arrives in Germany without prior communication
  and a visa
  
• Puts himself and company at risk
• Financial exposure 250,000 fine
• Risk of Deportation
• Damage to Company name

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Tips

• As soon as the decision is made to relocate an
  employee internationally, confirm government
  regulations for obtaining visa/permits and
  estimated length of time to obtain visa/permits
• Be prepared for paperwork. Original documents,
  certified copies, possible translated documents.
  Ask what is required at the beginning to avoid
  any surprises that might delay the process

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Tips

• Advise employees not to travel while their visa
  is in process, unless it has been confirmed that
  it is allowed
  
• Consult with experts

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Immigration Processes and ProceduresNancy A.
Sharp Ziegler, Esq.Cohen Grigsby, P.C.
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Common Immigration Processing Concerns Issues

• Business Visitors
• Employment Authorization
• Dependents
• Spousal Employment

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Business Visitors

• Rule visa required
• Visa waiver based upon treaty or other agreement
  between countries
  
• Entry obtained using valid passport and evidence
  of date of scheduled departure (round-trip
  airline ticket)
  
• Activities limited
• Attend meetings
• Other permissible activities vary by country
• No compensation paid in destination location

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Employment Authorization

• Steps
• Work permit
• Residence permit
• Entry visa
• Local registration procedures

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Employment Authorization Processes

• China
• Employment license and invitation letter
• Single entry Z visa
• Work permit
• Residence permit
• Multiple entry Z visa

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• Germany
• Visa nationals
• Application for entry visa submitted to German
  Consulate
  
• Work permit and residence permit applications
  submitted in Germany
  
• Upon approval, visa issued by German Consulate
• Local registration processes completed after
  arrival

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• Non-visa nationals
• Enter Germany without a visa
• Work permit then residence permit applications
  submitted in Germany (employee may not begin
  working until work permit approved)
  
• Local registration processes completed

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Accompanying spouse, partner, or significant
other

• Accompanying spouse qualify as a dependent
• Common law spouses not accepted unless country
  recognizes common law marriage generally
  
• Domestic partners accepted as dependents in few
  countries
  
• United Kingdom
• Same sex and opposite sex partners
• Evidence of long standing relationship required
• Significant others accepted as dependents in few
  countries
  
• Canada Evidence of long existing relationship
  for 2 years required

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Children age 18 and over

• Not eligible for dependent status in most
  countries
  
• Exception US
• Require separate immigration status
• Can obtain student status if going to school

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Spousal Employment

• Few countries provide based upon dependent status
  
  
• US Spouses of L-1A and E-1/E/2 only
• UK All spouses and domestic partners
• Australia All spouses
• Netherlands Spouse of executive or managerial
  Intracompany Transferees

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IRS Revenue Ruling 2005-74

• IRS Finally Rules on
• Relocation Home Sale Programs

Peter Scott, ERC Worldwide
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The Issue

• How to pay the costs of disposing of the
  employees home without having those costs
  taxable to the employee and subject to payroll
  taxes
• Direct reimbursement is taxable, gross up costs
  usually incurred
  
• If Employer buys house, costs of sale not
  taxable. Rev. Rul. 72-339
  
• Basic industry program to do this is the Amended
  Value program (of which the Buyer Value Option
  program is a type) in which sale price to
  employer is based on an offer received by the
  employee from an outside buyer, to whom the
  employer then tries to sell the house

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A Little History-How Did We Get Here?

• IRS has never ruled favorably on any program in
  which sale price to employer is based on an
  outside offer obtained by the employee, has
  repeatedly questioned AV over the years

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A Little History-Continued

• In 1997, Tax Court decided Amdahl v.
  Commissioner
  
• Issue was type of deduction (ordinary or capital)
  employer gets for home sale costs
  
• Taxability of costs to employee not at issue
• Employer used relocation management companies,
  did both Assigned Sales and Appraised Value
  transactions
  
• Employer argued it never actually bought and sold
  houses, never owned a capital asset
  
• Unfortunately, Court agreed
• Result Employer gets ordinary deduction. But
  corollary (not addressed by Court) Costs should
  have been on W-2

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A Little History-Continued

• IRS agents began auditing home sale programs,
  audits gradually spread nationwide
  
• Agents initially focused on use of blank deed as
  the main reason costs were taxable (blank deed
  was a factor cited in Amdahl)
  
• Later began to focus as well on processes used,
  holding periods, amount of risk, etc
  
• ERC recommended use of two deeds in 2001, not
  because it felt blank deed was wrong, but to help
  defend audits
  

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A Little History-Continued

• In 2002, ERC insisted that IRS address the
  ongoing Amdahl audits on a national basis with a
  ruling
  
• Audits are based on Amdahl, not an official IRS
  position. Driven by field agents, not
  Washington
  
• IRS has home purchase programs itself
• Audits are inconsistent with 30-plus years of IRS
  practice, are directly contrary to IRS position
  in Amdahl case itself

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A Little History-Continued

• ERC made a detailed submission, at IRS request,
  in January 2004.
  
• ERC asked for favorable ruling on Amended Value,
  with BVO prior to appraisal
  
• ERC asked for confirmation blank deed OK

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IRS Ruling

• Rev. Rul. 2005-74 finally issued November 30,
  2005
  
• First formal IRS ruling on relocation home
  purchase programs in over 30 years, since Rev.
  Rul. 72-339
  
• Ruling is a big win for the industry
• IRS has finally blessed the AV, and the blank
  deed
  
• Gives companies a template to follow that will
  avoid any IRS problem
  
• Identifies certain practices to be avoided

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IRS Ruling

• What the ruling says
• Appraised Value transaction with blank deed,
  costs not taxable
  
• Amended Value transaction based on the eleven key
  elements, with blank deed, costs not taxable
  
• Transaction descriptions track historic ERC
  descriptions exactly
  
• In both, two separate, independent sales have
  occurred, burdens and benefits transferred to
  employer
  
• This is a key finding, because it is the two
  separate, independent sale structure that
  prevents costs being taxable. If company pays
  costs of single sale by employee, thats
  taxable.
• IRS will not follow Amdahl on such transactions

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IRS Ruling

• Ruling also describes a third transaction, that
  it will treat as taxable
  
• Facts and analysis not completely clear, but
  bad factors seem to be
  
• First sale contract is contingent on employer
  entering into the second contract (the contract
  with the outside buyer)
  
• Employee negotiates employers sale after
  employer signs outside contract
  
• Proceeds not paid to employee unless and until
  second sale closes

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IRS Ruling-Effect on BVO

• Ruling does not mention BVO
• Favorable, in that no definite adverse
  conclusion
  
• BVO is basically same procedure as an AV, but
  without initial offer
  
• Result should be that BVO is nontaxable, like AV,
  if proper procedures followed. However, not
  clear what IRS agents will do
  
• Still advisable to couple BVO with an eventual
  guaranteed buyout offer (a delayed AV). Has been
  the recommended structure for some time, even
  before the ruling
• Absolutely crucial that 11 key elements be
  followed
  
• Basically, we are in a better position with
  respect to BVOs than we were before the ruling

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IRS Ruling-Retroactivity

• Ruling is retroactive
• Shields programs that complied for past years,
  including blank deed
  
• Adverse even for past programs if facts are not
  close enough to the good programs in the
  ruling, or are like Amdahl
  
• Taxpayers do not have to follow, but IRS agents
  do have to follow, and will apply the ruling to
  all open cases
  
• Draft Coordinated Issue Paper agents had been
  following will be withdrawn, agents cannot follow
  it

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IRS Ruling-Pending Audits

• Effect on pending audits
• Agents cant simply cite Amdahl-have to apply
  ruling.
  
• Agents and Appeals Officers will try to determine
  whether taxpayers facts are more like the good
  or bad facts in the ruling
  
• Settlements are more likely
• Taxpayers who gave up or settled may be able to
  seek a refund based on the new ruling

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IRS Ruling-Pending Audits

• Taxpayer must emphasize positive aspects
• No profit pass back
• Taxpayer dealt with property and with outside
  parties as buyer and owner, like ruling and
  unlike Amdahl
  
• First contract not contingent on entering into
  the second
  
• Proceeds paid at settlement with employee

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IRS Ruling-Effect on Current Programs

• Ruling creates a safe harbor for an 11 key
  element AV that follows the procedures described
  in the ruling
  
• Programs not conforming to that model need to be
  reevaluated, and a decision made as to whether
  procedures being followed are defensible, and if
  so, are worth the risk of challenge from IRS
• Example Entering contract with buyer before
  contract with employee, and involving employee in
  dealing with results of buyer inspections, should
  be reconsidered
• Will not be clear for some time, however, what
  sorts of deviations IRS will accept or challenge
  

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IRS Ruling-Effect on Current Programs

• What about the blank deed?
• The good news IRS ruling says it is OK to use,
  will not cause program to be taxable. No longer
  necessary for federal tax purposes to use two
  deeds
• However, taking title remains a favorable factor
  under Amdahl and Grodt McKay
  
• Consequently, taxpayers will need to decide
  whether the rest of their program is strong
  enough that taking title is not necessary
  
• Two deeds still advisable in some states for
  other reasons. ERCs Public Policy committee
  intends to look at where using two deeds might
  still be considered, publish conclusions in next
  couple of months

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Ordinary v. Capital Loss

• IRS has always taken position that costs of home
  purchase and sale are capital, deductible only
  against capital gains. Rev. Rul. 82-204
  
• ERC has always taken position that houses are
  property held for sale in the ordinary course of
  a trade or business (section 1221(1)), and not
  capital assets
• Ruling is silent on this issue.
• IRS will continue to take 82-204 position, but at
  least has not emphasized it in new ruling
  
• Presumably would continue to agree that costs are
  ordinary in a fixed fee pricing method
  
• But note that ruling fully applies to such
  programs-have to meet criteria in ruling or IRS
  will seek to tax costs to employees
  

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Avoiding Audits After Rev.Rul. 2005-74

• Review and follow the 11 key elements
• Forcing a short holding period may cause program
  to fail
  
• Payment of full equity should not be delayed
  waiting for second sale to close if employee has
  vacated the house and equity is due
  
• Add a delayed AV to BVO programs
• Appraisal, guaranteed buyout offer after some
  period of marketing (e.g., 90 days)
  
• Offer not necessarily 100 of appraisal, but must
  be realistic
  
• New marketing period before acceptance
• Reconsider procedures that delay contracting with
  employee until inspection contingencies are
  removed in outside contract. Sign contract with
  employee before contract with outside buyer,
  dont involve employee in negotiations with buyer
  over inspections
• Dont organize program so there is never a
  fall-through
  

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Final Thoughts

• Rev. Rul. 2005-74 is a break-through for the
  industry, which has been seeking IRS blessing of
  the Amended Value transaction for over 30 years
  

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Discussion and QA