Payroll Withholding for Internationally Mobile Employees APA Carolinas November 8, 2014 Presenters • Paul Rubino, CPA – Director at Global Mobility Tax – Specializes in global tax mitigation for companies & their international employees, international payroll delivery & structuring, tax equalization policy design global equity planning • Anupam Singhal – Co-founder of Monaeo – Formerly Tech Investor at Silver Lake and General Atlantic – MBA, Harvard. BS, Carnegie Mellon © Copyright Global Mobility Tax LLP and Monaeo Inc. All rights reserved. Global Mobility Tax, LLP • Founded in 2003 • 6 U.S. Locations and over 70 network locations globally • We are a CPA firm providing strategy, consulting, and individual tax services to organizations that relocate employees on domestic and international assignments • Our network of international affiliates enables our firm to serve companies globally • We provide up-front payroll and tax advice, as well as income tax preparation support, and year-end payroll services. © Copyright Global Mobility Tax, LLP. All rights reserved. Monaeo, Inc. • Technology firm founded in 2011 • Leverages location data analytics to help companies and individuals make smarter business decisions • Helps companies identify and reduce tax exposures from employee travel • Solution has been taken to 150+ countries, all 50 states • 5-10x ROI on PE/nexus, payroll withholding and income allocation issues © Copyright Global Mobility Tax, LLP. All rights reserved. Agenda & Objectives • Identifying global employees and their payroll options • Expatriates on U.S. payroll – Shadow Payroll - how and when to apply – Social Taxes for the Expatriate – Methods to Reduce/Eliminate US Withholding – Simplifying Tax Treaties for payroll purposes • Inpatriates on U.S. Payroll • State Taxation and Withholding- NC/SC specific • Solutions- Tax gross-ups and Year End Comp Review • Audit Climate • Process enhancements and technology options © Copyright Global Mobility Tax, LLP. All rights reserved. Assignee Types • Expatriate (Expat) – U.S. citizen or permanent resident outside the U.S. • Inpatriate (Inpat) – Non-U.S. national working in the U.S. • Third-Country National (TCN) – Non-U.S. national working outside of home country © Copyright Global Mobility Tax, LLP. All rights reserved. Assignment & Payroll Types • • • • Rotational / Commuter / Business Traveler Short-term (Up to 1 year) Long-term (Greater than 1 year) Permanent Transfer/Localized/Tax Equalized • • • • Home country payroll Host country payroll Split payroll Shadow Payroll © Copyright Global Mobility Tax, LLP. All rights reserved. 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 © Copyright Global Mobility Tax, LLP. All rights reserved. Compensation Subject to Tax • Typical expatriate compensation components (in addition to base, bonus, commissions, 401(k), etc.): – – – – – – – – – – – – – Relocation allowance Hypothetical retained tax (pre-tax deduction) Home leave Taxable relocation Temporary housing Housing & Utilities (housing norm > pre-tax deduction) Goods & Services Allowance (COLA) Local Transportation & Auto Equalization settlement Foreign/US taxes paid Visa & Immunizations Tax Gross-ups – home & host Miscellaneous foreign benefits--could include lease-break, maid services, etc. © Copyright Global Mobility Tax, LLP. All rights reserved. Compensation Subject to Tax (cont’d) • Payments by the foreign entity and/or external third parties (Relo Company): – All taxable payments made in the foreign location on behalf of the employee must also be captured in the Company’s reporting process. – Exchange rates--If taxable relocation payments are made by foreign entities or third parties, all payments must be converted to U.S. dollars at the exchange rate that applies on the date of payment. Average exchange rates are allowed for amounts paid evenly over a period of time. © Copyright Global Mobility Tax, LLP. All rights reserved. Negative Comp (Pre-Tax Deduction) • Hypothetical tax – A compensation reduction retained by employer (generally replaces actual home country withholding) – Most commonly based on home country tax laws (in US, might include Fed, State, FICA/Med) • 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 © Copyright Global Mobility Tax, LLP. All rights reserved. Tax Reimbursements • Common tax reimbursement methods Tax loans / Tax advances: • Employer pays the required actual home/host country taxes; • Loans/Advances are generally added to compensation; • If not added to compensation, loan agreement with employee needs to be executed and imputed interest added to compensation for interest-free loan; • Loans should never be executed for executive employees (Section 402 of Sarbanes-Oxley Act). Tax gross up: • Employer pays the additional tax due on assignment compensation, plus the tax on the tax; • Tax gross ups are added to compensation. © Copyright Global Mobility Tax, LLP. All rights reserved. Compensation Subject to W-2 Reporting • All wages and any other compensation for services performed in the United States are U.S. sourced. • Location of service performance or delivery location of payroll determines the source of the income for W-2 purposes. © Copyright Global Mobility Tax, LLP. All rights reserved. Compensation Not Subject to W-2 Reporting • Permanent transfers to foreign entities on foreign payroll • If no U.S. Employee Sourced Services Income (ECI) + no U.S. Payroll delivery + no U.S. Employer control, then no U.S. W-2 Income! © Copyright Global Mobility Tax, LLP. All rights reserved. Foreign Country Shadow Payroll • Many countries have reporting and withholding requirements • Such countries will require a “shadow payroll” implementation – Pay delivery still initially in U.S., 100% reporting in U.S. – Secondary reporting mechanism in host country; – Enables remittance of foreign taxes and required local compensation reporting © Copyright Global Mobility Tax, LLP. All rights reserved. Social Security, Medicare and State Disability • FICA taxes must be currently withheld – no exemption from withholding for expatriates on US payroll. • The expatriate may be exempt from the foreign country’s social taxes based on a Totalization Agreement (Social Tax Treaty) that the U.S. has with that country. • State Disability Insurance should continue as usual. © Copyright Global Mobility Tax, LLP. All rights reserved. What about Foreign Social Tax? • The expatriate may be exempt from the foreign country’s social taxes based on a Totalization Agreement (social tax treaty) that the U.S. has with that country. – 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 © Copyright Global Mobility Tax, LLP. All rights reserved. Methods Used to Reduce or Eliminate U.S. Tax Withholding – IRS Form W-4 with attachment(s) – IRS Form 673 – Foreign earned income exclusion – Foreign housing exclusion – Mandatory foreign income tax withholding – Treaty exceptions © Copyright Global Mobility Tax, LLP. All rights reserved. IRS Form 673 • Foreign Earned Income Exclusion – Up to $99,200 (2014) 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 in excess of a base amount determined by the IRS annually is excludable from taxable income © Copyright Global Mobility Tax, LLP. All rights reserved. Foreign Income Tax Withholding • In accordance with IRS Sec. 3401 • 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 – Countries with mandatory withholding • Canada, UK, China – Countries with no mandatory withholding • Hong Kong, Singapore (assessment in following year) © Copyright Global Mobility Tax, LLP. All rights reserved. Tax Treaties • If treaty is in force and employee is in country less than 183 days, then not taxable in foreign country- Calendar vs. Fiscal vs. “Rolling” tax years • Same true for employees in the US for less than 183 days under a treaty • Compensation charges must be borne by home country © Copyright Global Mobility Tax, LLP. All rights reserved. Impact of Income Tax Treaties • The U.S. has tax treaties with many countries under which U.S. citizens or residents may be able to receive favorable tax treatment. The purpose of a tax treaty is to ensure that citizens or residents of the two treaty countries are not taxed by both countries on the same income. • Tax treaties often provide relief to expatriates on short-term assignments / business trips under three general conditions. • The wording of each treaty is slightly different and must be reviewed before relying on general rules. © Copyright Global Mobility Tax, LLP. All rights reserved. Inpatriate – Tax Classification • Tax classification is important as it determines: – US tax filing status and related requirements for an individual. – US Employer payroll reporting requirements. • For US tax purposes, there are 2 alternatives – US Resident – US Nonresident • Individuals are resident aliens if they pass either the ‘Green Card’ test or the ‘substantial presence test’. – Individuals who do not pass either of these tests are nonresident aliens. © Copyright Global Mobility Tax, LLP. All rights reserved. Payroll Withholding – U.S. Resident • U.S. resident aliens are generally subject to same federal employment taxes, and withholding on their worldwide income as US Citizens. • Withholding procedures should follow same rules / procedures for U.S. employees (working in the U.S.) • Form W4 required to reduce, adjust withholding © Copyright Global Mobility Tax, LLP. All rights reserved. Payroll Withholding – U.S. Non-Resident • Only U.S.-source income is subject to federal employment taxes and withholding. – No withholding on wages paid for work done outside the U.S. – Required withholding for wages paid for work inside the U.S., unless exempt under tax code or tax treaty © Copyright Global Mobility Tax, LLP. All rights reserved. Inpatriate & US Non-Resident – Payroll Withholding – Special IRC Exemption • Exemption from tax withholding via the tax code: – Present in the US not more than 90 days – Compensation not greater than $3,000 – Employed by foreign employer © Copyright Global Mobility Tax, LLP. All rights reserved. Inpatriate & U.S. Non-Resident – Payroll Withholding - Exemptions • Exemption from tax withholding via Tax Treaty include the following: – F- and J- visa holders if employed by a foreign employer. (This does not apply to US employers) – Employees of foreign governments and international organizations – Employees under Dependent Personal Services clause • Specific country treaty provisions / interpretations must be reviewed! © Copyright Global Mobility Tax, LLP. All rights reserved. Inpatriates and Social Security Tax • In general, Social Security and Medicare tax (FICA) apply to wages paid for work done in the U.S. – Regardless of employee or employer’s citizenship or residence. • Temporary exemptions offered: – Totalization Agreements (usually up to 5 years and if paid from foreign payroll) – Nonresident aliens with F, J or M visas © Copyright Global Mobility Tax, LLP. All rights reserved. Non-U.S. Employees Working in the U.S. What are the alternatives for employer and payroll compliance? • Add employees to U.S. payroll – Social Security Number or ITIN required – ITIN (Individual Tax ID number) may not be issued until tax return is filed in some cases – Prepare Form W2 at year-end to report US taxable wages • Initiate Shadow or Dummy payroll – Outsource or Insource – Social Security or ITIN required – Prepare Form W2 at year-end to report US taxable wages © Copyright Global Mobility Tax, LLP. All rights reserved. If Non-U.S. Employees Cannot Be Placed on Payroll • Employee reports wages on Form 1040 or 1040NR • Employee will likely be subject to underwithholding penalties • Employer penalties for failure to report and withhold income tax and FICA are possible © Copyright Global Mobility Tax, LLP. All rights reserved. State Taxation and Withholding • Whether an expatriate continues to be liable for state income tax during the foreign assignment period varies from state to state. – Most states follow a residency or domicile approach to taxation. – Some states have “bright-line” laws that involve time tests. © Copyright Global Mobility Tax, LLP. All rights reserved. State Withholding Rules • State tax withholdings should continue during the foreign assignment unless residency is broken. • A liability in that state may exist for trailing liabilities (stock options, bonuses, commissions, etc) or be incurred for business trips back to the state. • Each state has a minimum threshold for when nonresident taxpayers need to report their state-source wages. © Copyright Global Mobility Tax, LLP. All rights reserved. State Tax Considerations • Most states generally follow the U.S. Federal definition of wages and tax withholding • State filing / reporting requirement may exist even when no such requirement for Federal © Copyright Global Mobility Tax, LLP. All rights reserved. North Carolina • Generally cannot break residency during foreign assignment. • Accepts Foreign Tax Credit against state income • Recognizes the Foreign Earned Income Exclusion © Copyright Global Mobility Tax, LLP. All rights reserved. South Carolina • Can break residency if shown that a move to foreign country is permanent. • Does not accept the Foreign Tax Credit against state income • Recognizes the Foreign Earned Income Exclusion © Copyright Global Mobility Tax, LLP. All rights reserved. Year-End Comp Review Service • Year-End Compensation Review is a service that GMT and other firms offer to ensure that the clients are in compliance with the US reporting requirements. • All income (salary, bonus, foreign allowances, expenses and benefits) paid should be analyzed for possible inclusion in the assignees’ W-2s. © Copyright Global Mobility Tax, LLP. All rights reserved. Benefits for the Client • Minimize compliance-related financial risk. • Minimize or eliminate potential tax underpayment penalties due to untimely withholding and/or under withholding of income and or social taxes. • Ensure tax gross-ups made by the company are properly credited to the company as well as paid and included in the correct year’s compensation. • Avoid time and resources needed to amend W-2’s. • Reduce risk of receiving notices, especially from States due to improper reporting or withholding. © Copyright Global Mobility Tax, LLP. All rights reserved. GMT Action Specifics GMT reviews compensation, expense reimbursements & tax payment details: – Review assignment letters to ensure all compensation, expenses & allowances are captured; – Analyze Relocation & Expense details to determine taxability; – Review Home/Host country tax payments to ensure they are included in compensation if paid by Company; – Calculate Tax Gross-ups for Final US payroll & Forms W2; – Provide estimated W-2 adjustments to Client + any outstanding issues for Client review and follow-up. © Copyright Global Mobility Tax, LLP. All rights reserved. Annual Spend US TAXES COMPLIANCE COST LOCATIONBASED $4 $350 $10 trillion billion billion Source: IRS Data, industry reports, Monaeo analysis © Copyright Monaeo Inc. All rights reserved. . "Politically, who better to go after than those who do not even claim to be residents of the state?” - Brian Gordon, former NYC audit head, Dept. of Finance & Taxation © Copyright Monaeo Inc. All rights reserved. Odds Are Stacked Against Us 80% Audit Rate 60% Domestic • NY • CA • PA • OH • MA • NJ • WA, TX, FL (corp) Int’l • • • • • • US Canada UK India China … 1,300 of global 2,000 companies likely to be audited this year 40% 63% 20% 31% 17% 21% 0% $250-$500m $500m-$1B $1-5B $5B+ Assets Source: 2011 IRS Data Book • Industry: Technology A day in the life of a company… • HQ: California, USA • Employees: 1,000 • Travelers: 200 (active) New York Washington Texas UK © Copyright Monaeo Inc. All rights reserved. …FAST FORWARD 3 YEARS $1,400,000 audit exposure + costs © Copyright Monaeo Inc. All rights reserved. ? ? ? ? ? © Copyright Monaeo Inc. All rights reserved. ? ? ? ? ? Audit Exposure 20% $1,300,000 withholding misallocation in payroll W/H exposure © Copyright Monaeo Inc. All rights reserved. Time and Resources Spent Payroll and Tax Staff Travelers 480 400 hours hours Tax Advisors $40k fees © Copyright Monaeo Inc. All rights reserved. $100,000 in audit costs Current Process is Inadequate Ad hoc • No timely visibility • Unknown exposures • Manual, inefficient • Inaccurate, incomplete Costly | Painful | Risks Credibility © Copyright Monaeo Inc. All rights reserved. Where do you start? Have a process. What? DIAGNOSE REBALANCE PREVENT periodically review exposures ‘true-ups’ and ‘tuneups’ anticipate, avoid, comply - Payroll w/h - Payroll w/h - Nexus - New jurisdictions - Continuous (or frequent) monitoring of employee travel - PE - New legal entities - Feedback to business teams © Copyright Monaeo Inc. All rights reserved. - Extract actionable insights for tax, payroll, HR processes Where do you start? Have a process. How? IDENTIFY STAKEHOLDERS IDENTIFY DATA SOURCES - Tax – domestic, international? - Timesheets - Payroll? - Travel logs; travel authorizations - HR – mobility, exec comp & benefits? - T&E records - At-risk traveler population - Calendars © Copyright Monaeo Inc. All rights reserved. Leverage Technology AUTOMATIC TRAVEL LOGGING © Copyright Monaeo Inc. All rights reserved. DATA & REPORTS FOR AUTOMATED COMPLIANCE & AUDITS Increase Compliance . © Copyright Monaeo Inc. All rights reserved. Save on Taxes © Copyright Monaeo Inc. All rights reserved. Cost-Benefit SAVINGS • Eliminate exposures 5-10x ROI - Employment tax (e.g., payroll w/h) - Corporate tax (e.g., UBT in NYC, apportionment) • Optimize tax planning - Real-time footprint views (nexus/PE) - Early-warning alerts • Minimize time, resource, and pain in an audit © Copyright Monaeo Inc. All rights reserved. Questions? © Copyright Global Mobility Tax LLP and Monaeo Inc. All rights reserved. Contact Info Paul Rubino, Director at Global Mobility Tax, LLP 2023 N. Atlantic Ave, Suite 230, Cocoa Beach, FL 32931 321.613.3521 [email protected] Anupam Singhal, Co-founder of Monaeo, Inc. 110 Fifth Avenue, 5th Floor, New York, NY 10011 307.504.2623 [email protected] © Copyright Global Mobility Tax LLP and Monaeo Inc. All rights reserved.