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Expatriate Compensation: Relieving some of the Pain of Year End Reporting

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Note: taxable amount (e.g., auto-lease value) may be different ... Gross-ups at higher (or lower) rates to avoid need for final equalization or reconciliation ... – PowerPoint PPT presentation

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Title: Expatriate Compensation: Relieving some of the Pain of Year End Reporting


1
Expatriate Compensation Relieving (some of)
the Painof Year End Reporting
  • Brent Bergan Claudia Howe
  • Global Tax Network SF, LLP
  • California Payroll Conference 11
  • September 12, 2008

2
Year-End International Payroll Reporting can be
  • Extremely complex and cumbersome to administer
  • Difficult to manage and properly address
    worldwide reporting and withholding
    requirements
  • A fix-up process to comply with as many of the
    worldwide reporting and withholding requirements
    as possible
  • Unless you are an expatriate tax accountant
    that actually enjoys this stuff.

3
Overview
  • Purpose of conducting a year-end payroll review
    is to help ensure compensation is correctly
    reported and appropriate withholding is remitted
  • Take away Understand complexity of issues and
    recognize importance for correct reporting and
    withholding

4
Goals for Year-End Payroll Review Process
  • Correct reporting of income
  • Correct withholding of taxes
  • Compile accurate compensation summaries
  • Essential for preparation of Home and Host
    country tax returns and Tax Equalization
    calculations

5
Types of International Assignees
  • U.S. Expatriates
  • Assignments of gt 1 year
  • U.S. Short-Term International Assignments
  • Assignments of 1 year
  • Foreign Nationals (long and short-term)
  • Non U.S. persons in the U.S. on assignment

6
Expatriate Compensation
  • Wages per IRC 3401(a)
  • all remunerationfor services performed by an
    employee for his employer, including the cash
    value of all remuneration (including benefits)
    paid in any medium other than cash

7
Expatriate Compensation (contd)
  • In general
  • Amounts paid to or on behalf of assignee are
    taxable wages, unless specific exemption
  • Consider amounts
  • Paid in Host location
  • Paid outside U.S. payroll
  • Provided via expense reimbursement

8
Expatriate Compensation (contd)Host Location
Adjustments
  • Housing
  • Utilities
  • Car
  • Note taxable amount (e.g., auto-lease value) may
    be different than the dollar amount.
  • Taxes
  • Tax services provider may be the source of this
    detail
  • Other allowances
  • Certain allowances / benefits may be exempt from,
    or subject to a reduced level of, tax in the Host
    country

9
Expatriate Compensation (contd)Home Country
Adjustments
  • Examples of amounts to include for U.S. payroll
    reporting
  • U.S. tax payments
  • e.g., payments for U.S. extensions, estimated
    taxes, balances due, etc.
  • Tax Equalization settlements
  • One-year rollover
  • Clear out tax advance account
  • Consider imputed interest on loan
  • Benefits for spouse and children
  • Visa, immigration, etc.
  • Other allowances or one-time payments paid
    through accounts payable

10
Expatriate Compensation (contd)Other Adjustments
  • Split pay
  • Are all items appropriately recorded on U.S.
    payroll?
  • Potential exchange rate issues
  • Tax preparation fees
  • Are appropriate amounts reflected in
    compensation?
  • Tax Equalization payments
  • Impact on compensation

11
Expatriate Compensation (contd)State Reporting
  • Residency termination
  • Payroll document residency termination date
  • Different rules on state by state basis
  • Transfer years
  • State reporting and withholding will be driven
    by date paid, period earned, and source of
    income
  • Non-residents
  • Obligation to report wages (and remit
    withholding) based on workdays in a state
  • Unemployment taxes due in state where company
    headquarters are located.

12
U.S. Short-Term International AssignmentsAdjustme
nts to Compensation
  • Away from Home
  • Benefits available
  • Per diems and temporary lodging
  • Does employee qualify?
  • Identify and document tax home
  • Is employee maintaining home in Home location
  • Intent
  • One year or less
  • Extension of assignment
  • Host treatment (not always consistent with U.S.)
  • Inbound to U.S.
  • Spousal and Family benefits (airfare, upgraded
    hotel, etc.)

13
Foreign Nationals Adjustments to Compensation
  • Many complexities!
  • Review on a case-by-case basis
  • Withholding Obligations
  • Various requirements and administrative
    procedures to implement
  • Potential reporting and withholding requirements
    for
  • U.S. federal
  • State
  • Social Security and Medicare
  • U.S. reporting and withholding obligations on all
    U.S. source compensation
  • Treaties
  • Qualification for treaty relief
  • Consider state and social tax issues

14
Foreign Nationals (contd)
  • Foreign Nationals on U.S. payroll
  • Confirm U.S. residency status
  • U.S. payroll reporting and withholding for
    Non-residents
  • U.S. source income
  • Foreign source income
  • Split payroll in U.S. and/or Shadow Payroll in
    Home Country
  • Consider indirect payments (e.g., contributions
    to pension or medical plan)
  • U.S. payroll reporting and withholding
    requirements

15
Reporting Process(all assignee types)
  • Payroll Reporting
  • Technical obligation to report payments as made
  • Consider practical approach of quarterly or
    annually
  • Early Cutoff
  • Technical obligation to report when paid
  • Consider establishing early cutoff for capture of
    payments made outside the U.S. (e.g., November 1,
    2005 through October 31, 2006 are reported on
    2006 W-2)

16
Adjustments to Withholding Taxes
  • Sample Considerations
  • U.S. Expatriates
  • In general, increases to U.S. state and/or U.S.
    Social Security wage bases will require a
    corresponding gross-up for state and/or social
    security taxes.
  • U.S. Expatriates assignment gt 5 years
  • U.S. Social Security may not apply if covered
    under Totalization agreement
  • ST Assignments and Foreign Nationals
  • In general, increases to wage base will require a
    corresponding gross-up
  • Review each tax separately

17
Adjustments to Federal Taxes U.S. Expatriates
  • U.S. Federal gross-up
  • Assume increase to federal wages
  • Gross-up required?
  • U.S. Federal withholding
  • Typically stopped for expatriates
  • Year-end payroll adjustments
  • Additional issues
  • Form 673
  • Correct form to use?
  • Other requirements?
  • Statement of Foreign tax withholdings - IRC Sec
    3401(a)(8)(ii)

18
Impact of TIPRA on Federal Withholding
  • Form 673
  • Should be collected every year or at least the
    first two years
  • Is a current form on file?
  • Exempts wages that are exempt under the Foreign
    Earned Income (FEI) exclusion.
  • FEI exclusion may not exempt all compensation
  • This issue potentially compounded by TIPRA
  • Watch year-end payroll adjustments
  • Supplemental wages
  • Year-end payroll adjustments may be considered
    supplemental wages
  • Potential mandatory 35 federal withholding tax
    if other supplemental wages exceed 1,000,000 for
    year
  • TIPRA Tax Increase Prevention and Reconciliation
    Act of 2005

19
Form 673 and Beyond
  • Potential additional requirements to exempt wages
    from U.S. federal withholding
  • 3401 Statement (preferred method)
  • Assignee subject to mandatory foreign withholding
  • Assignee attaches statement to W-4 to exempt all
    wages from federal withholding
  • 3401 statement with W-4 overrides mandatory 35
    withholding requirement for supplemental wages in
    excess of 1,000,000
  • W-4 with foreign tax credit (alternative method)
  • Requires tax cost projection to complete W-4
  • Does not exempt mandatory 35 withholding
  • No longer required to be provided to IRS if more
    than 10 exemptions
  • Former assignees may not need federal gross-ups
    if foreign tax credit carryovers (but difficult
    to have W-4 apply)

20
Year-End Gross-Up Process Additional
Consideration
  • Consider
  • Gross-ups to cover underpayment penalties
  • Gross-downs for assignees with negative
    compensation
  • Conversion of actual tax to hypothetical
    withholding for short-term assignees subject to
    foreign tax
  • Gross-ups at higher (or lower) rates to avoid
    need for final equalization or reconciliation
  • Foreign tax carryovers and current or future
    benefit available on employees individual income
    tax return
  • Foreign gross-ups to minimize tax compliance
    requirements in future years

21
Final Steps
  • W-2 Summaries
  • Provide assignees with W-2 summary and
    explanation to avoid shock of large W-2 or
    year-end adjustments
  • Clearly indicate gross-up amounts (with
    explanation) to help assignees understand
    gross-ups concept
  • Provide tax firm with detail of gross-up
  • Lack of gross-up detail may result in increased
    (unnecessary) tax costs to company
  • Non U.S. payroll
  • Ensure detail of adjustments (including
    gross-ups) is reported to foreign country entity
    / payroll

22
Summary
  • Purpose of conducting a year-end payroll review
  • Help ensure compensation is correctly reported
    and appropriate withholding is remitted
  • Goals
  • Correct reporting of income
  • Correct withholding of taxes
  • Compile accurate compensation summaries
  • Take away Understand complexity of issues and
    recognize importance for correct reporting and
    withholding

23
Discussion

24
  • Thank You!
  • Brent Bergan, Partner, Global Tax Network SF, LLP
    bbergan_at_GlobalTaxNetwork.com
  • Claudia A. Howe, Partner, Global Tax Network SF,
    LLP chowe_at_GlobalTaxNetwork.com
  • Global Tax Network SF, LLP
  • 260 State Street
  • Los Altos, CA 94022
  • Phone 1.650.947.9490
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