April 19, 2023 1
Global Payroll & Taxation of International Assignments
Brent Bergan, CPATravis Call, CPA
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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
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Agenda (Part I)Global Payroll (Brent)
BenefitsChallenges (internal and external)Reporting IssuesForeign Payroll – UK, Singapore, and China
ExamplesSuccess Factors
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Agenda (Part II)Expat Tax (Travis)
Assignee, Assignment, and Payroll TypesReporting RequirementsShort term versus Long termU.S. Federal and California Income TaxSocial Security and Medicare TaxTax Reimbursements with ExampleClaim of Right
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GLOBAL PAYROLL
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Global Payroll – Wouldn’t it be nice!One Process
more control over number of payroll runsOne Database
reduction in overall costsOne Mission
employees are paid timely and accurately in all locations
One Teamclear focus on daily tasks and overall objectives
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Global Payroll – Challenges (Internal)Employee communicationLanguage, time zone, cultural differencesLocal region resistance to changeStandard practices across regionsData reporting to Global payroll regionsEquity reporting
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Global Payroll – Challenges (External)Legislation – addressing global versus local
differencesVendor management – one versus many
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Global Payroll – Challenges with Global EquityMany types of awards
ISO, NQSO, RSU, ESPP, SARSMulti-year earnings period
Grant, vest, and exercise date concerns; valuation
Globally mobile workforceMultiple jurisdiction considerationsImpact of international tax treaty and social
tax agreements
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Global Payroll – Reporting IssuesU.S. reporting and withholding requirementsForeign location reporting and withholding
requirementsCompany tax equalization policy
considerationsSplit payroll arrangementsShadow payroll requirements
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Global Payroll – Split PayrollEmployment arrangement must support job
responsibilitiesCompensation must support responsibilities
Individual is employed and paid in 2 countries
Payroll administration impactWhat is individuals tax residency status in
Country ACountry B
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Global Payroll – Split PayrollEmployer payroll reporting requirements
Country ACountry B
Wage and tax withholding considerationsTax planning opportunity - ?Split payroll arrangements are not as
common today
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Global Payroll – Shadow PayrollAlso known as
Ghost payrollDummy payrollMirror 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
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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
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Global Payroll – Foreign PayrollNon-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.
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Global Payroll – Foreign Payroll – UKPay As You Earn (PAYE) System
Monthly reporting and payment of taxModified PAYE available
Quarterly reporting and payment of tax
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Global Payroll – Foreign Payroll – SingaporeTax 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
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Global Payroll – Foreign Payroll – ChinaMonthly Tax Filing System
Reporting of income and payment of tax is due monthly and each month constitutes a complete tax period
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Global Payroll – Success FactorsDocument compensation payments
Identify stakeholders and systems Payroll systems Expense account Accounts payable
Determine use of outside vendorsScope the adequacy of the international payroll
systemCoordinate global payroll reporting
Strong central coordination is vitalConsider making periodic site visits
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Global Payroll – Success Factors (cont.)Determine home and host country taxation
requirementsLegislation could vary significantly by location
Use technology to support the processLeverage the use of outside vendors
Payroll alternativeSubject matter expertiseStreamlined processAccess to technology
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TAXATION OF INTERNATIONAL ASSIGNMENTS (EXPAT TAX)
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Expat Tax – Assignee TypesExpatriate
U.S. citizen or permanent resident outside the U.S.
InpatriateNon-U.S. national in the U.S.
Third-Country National (TCN)Non-U.S. national outside of their home
country
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Expat Tax – Assignment TypesShort-term
Less than 1 yearLong-term
Greater than 1 yearRotational / Commuter / Business Traveler
Generally works in host country and lives in home country
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Expat Tax – Payroll TypesHome country payrollHost country payrollSplit payroll
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Expat Tax – Global Payroll in ActionIdentify payroll reporting and withholding
requirementsUnderstand impact of assignment types and
tax reimbursement methodsReview strategies for collecting and
reporting assignment-related payments
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Expat Tax – Reporting RequirementsWage 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
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Expat Tax – Common Compensation ItemsBase salaryBonusEquityHypothetical taxHousing normCost of living
allow.Housing allow.Utilities allow.
Education allow.Tax equalizationLanguage lessonsHome leaveTransportation
allow.Tax
reimbursementsRelocation allow.Tax preparation
fee
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Expat Tax – Negative CompensationHypothetical tax
A compensation reduction retained by employer (generally replaces actual home country withholding)
Most commonly based on home country tax laws
Housing normHypothetical cost of home country housing
retained monthly by employerGenerally a function of base salary, family size,
and maintenance of primary residence in home country
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Expat Tax – Relocation ExpensesDirect relocation expenses
Shipping of household goods / U.S. storageTravel from home to host country
Indirect relocation expensesImmigration servicesInternational HR servicesTax services
Losses sustained by the moveSale of carSale of home
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Expat Tax – U.S. Federal Income TaxMethods used to reduce or eliminate U.S. tax
withholding:IRS Form 673
Foreign earned income exclusion Foreign housing exclusion
Mandatory foreign withholding statementIRS Form W-4
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Expat Tax – IRS Form 673Foreign 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 exclusionCost of foreign housing that is in excess of a
base amount determined by the IRS annually is excludable from taxable income
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Expat Tax – Foreign WithholdingIn accordance with IRS Sec. 3401(a)(8)(A)(ii)
and Treas. Reg. Sec. 31.3401(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
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Expat Tax – IRS Form W-4Completed 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 withholdingCanada, UK, China
Countries with no mandatory withholdingHong Kong, Singapore (assessment in
following year)
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Expat Tax – California Income TaxCalifornia 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
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Expat Tax – Social Security & Medicare TaxTotalization 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.
http://www.ssa.gov/international/agreement_descriptions.html
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Expat Tax – Tax ReimbursementsCommon ways to protect assignees from
excess taxTax 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
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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
compensationTax 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
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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?
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Expat Tax – Tax Reimbursements ExampleCompany 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 $2,867.20 (vs. $4,480).
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Expat Tax – Tax Reimbursements ExampleCompany 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.
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Expat Tax – Claim of Right DoctrineThe 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)
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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
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Question & Answers
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Brent BerganPartner, Global Mobility TaxPartner, 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
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Travis CallManager, Global Mobility TaxManager, 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 Tax4 years in Global Employer Services at
Deloitte TaxInter-mountain Relocation Council Board
Member
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Global Mobility Tax, LLPBrent Bergan
Partner, Global Mobility Tax, LLP 260 State Street, Los Altos, CA 94022 Phone: 650.947.9490 Email: [email protected]
Travis CallManager, Global Mobility Tax, LLP
3214 N University Ave., No. 133, Provo, UT 84604 Phone: 801.850.6271 Email: [email protected]
www.glomotax.com
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