Title: Expatriate Compensation: Relieving some of the Pain of Year End Reporting
1Expatriate 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
2Year-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.
3Overview
- 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
4Goals 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
5Types 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
6Expatriate 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
7Expatriate 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
8Expatriate 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
9Expatriate 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
10Expatriate 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
11Expatriate 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.
12U.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.)
13Foreign 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
14Foreign 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
15Reporting 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)
16Adjustments 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
17Adjustments 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)
18Impact 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
19Form 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)
20Year-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
21Final 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 -
22Summary
- 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
23Discussion
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