expatriate payroll - american payroll association · tax practice. ronii specializes in the...

BDO USA, LLP, a Delaware limited liability partnership, is the U.S.

member of BDO International Limited, a UK company limited by

guarantee, and forms part of the international BDO network of

independent member firms. BDO is the brand name for the BDO

network and for each of the BDO Member Firms.











Expatriate Payroll

BDO USA, LLPRonii Rizzo, (Managing Director – Expatriate Services)

October 6, 2016

Client name - Event - Presentation title


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Expatriate Defined

Expatriate: A person temporarily or

permanently residing in a country

other than that of the person’s

origin.

The term is commonly used in the

context of professionals or skilled

workers sent abroad by their

companies.

American Payroll Association



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Overview of the Decision Making Process

The company should establish the need for an expatriate assignment.• Increased activity in emerging markets

• Rapid globalization of business

• More countries joining mobility trend

• Attract and retain global talent

Length of the Assignment• Short-term (6- 12 months?)

• Long-term (12 months – 5 years?)

• Indefinite

Cost Containment• Establish Policy/Benefits (Indices/allowances vs. in-kind)

• Cost Projection for budgeting and assignment cost tracking

• Pensions/social tax contribution planning (home vs. host country plan)

• Certificate of Coverage (Totalization Agreement)

• Secondment Agreement to establish employment arrangement

• Tax Treaty Application

• Determination of which company will bear which costs

Additional Considerations• Visa requirements

• Relocation of family

• Language barriers




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Assignment letter

•Position

•Home and Host location

•Base Salary and Possible Incentives

•Housing Considerations • Housing and Utility Allowance

• Housing norm

• Home Retention

•Additional Assignment Benefits• Goods and Service Differential

• Relocation Allowance

• Dependent Education

• Automobile

• Home Visits




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Assignment Letter (Continued)

•Other Benefits• Health Care

• Vacation

• Holiday

• Immigration Expenses

•Taxes and Social Tax Charges• Tax Equalization

• Hypothetical Tax

• Foreign Tax

•General

•Signatures

Do you have an assignment template prepared?




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Let’s discuss why it is important for the payroll specialist

to read and understand the assignment letter.




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Assignment Letter:

Determination of applicable policies

•Tax Equalization

(We will use this method for our demonstrations)• Tax neutral

• No better or worse off for taxes due to the assignment

•Tax Protection• No worse off for taxes due to the assignment

•Guaranteed Net Salary

•Localized• Employee is responsible for all actual taxes

• May receive some compensation with a tax gross up

Is there a written policy in place?




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Expatriate Assignment Start - Hypothetical Tax Calculation

•What is hypothetical tax? “Stay-at-home Tax”• The tax the employee would hypothetically have to pay if the assignment had not occurred.

The hypothetical tax is not an actual tax that is remitted to a taxing authority as the company

takes responsibility to fund the worldwide actual tax liability for the employee (with some

exceptions), and collects the hypothetical tax from the employee, reducing the company’s net

global tax cost.

• Alternatively, with a net guaranteed salary the “hypothetical tax” is more figurative. It is not

actually retained by the company; rather it is included in the gross salary calculation to arrive

at a desired net pay.

•How is a hypothetical or estimated tax calculation prepared?• Company income only vs. Company and Personal income

• “U Shape Calculation” – Home Gross to Net to New Host Gross

•What US taxes should be withheld?• Federal/State/FICA/FUTA/SUTA

•What payroll forms should be completed?• Form 673 (if applicable)

• Form W-4 and state withholding form (if applicable)




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Expatriate Payroll Set-up

•Implement hypothetical tax withholding

• Negative earnings code or pre-tax deduction

• Held by the company/No remittance

• Possibly stop federal and state/local/school district withholding

• Potential recharge/credit to the foreign entity




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Hypothetical Tax – Payroll Implementation




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Payroll Form 673




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Payroll Form W-4




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Expatriate Payroll Set-up

•Assignment benefits

• Imputed or actual cash outlay

• (Discuss imputed payroll code set-up)




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Hypothetical Tax – Payroll Implementation

CASH

• Goods & Service Differential

• Cost of Living allowance

• Living Away from home

allowance

• “per diem”

• US Tax Gross Up

IMPUTED

• Housing

• Automobile

• Dependent Education




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Discuss Assignment Allowance Payroll Entries

Why are we recording the imputed benefits?

• Proper payroll reporting

• Timely reporting

Reality: Imputed benefits are not always consistent.

Recommendations:

• Know how the benefits are being paid (payroll, accounts payable, third party vendor,

expense reimbursement, company AMEX, etc.)

• Set-up data sharing from the start

• Set-up pay codes for the benefit components

• Pay benefits through a separate pay run for the US tax gross up calculation

What is the US tax gross up?

• US taxes paid on behalf of the employee as the benefit is meant to be delivered net

of taxes.




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US Tax Gross Up Calculation

Gross Up Formula: Benefits/(1-tax rates)-Benefits = Tax Gross Up

Calculation: $3,200/(1-.0145-.062-.04)-3,200 = $421.96

*Some payroll systems have automatic gross up functions




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Shadow Payroll




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What is shadow payroll?

(mirror payroll, ghost payroll)

Shadow Payroll:A key component of maintaining compliance for an

expatriate employee inbound or working abroad.

1.) Employee is paid from home country payroll and

shadowed through the host country for proper payroll

compliance.

2.)Employee is paid from the host country and shadowed

through the home country likely for pension contributions

and home country benefit participation.




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Shadow Payroll Example




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Shadow Payroll Example




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Split Payroll




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What is split payroll?

Split Payroll:A key component of maintaining compliance for an

expatriate employee inbound or working abroad

while delivering money through both payrolls.

Benefits:

• Reduce currency fluctuation

• Delivers cash in both host and home country

• Compliance with tax withholding requirements

• Allow employee to maintain eligibility for home

country benefits




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Split Payroll Example




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Income Tax Treaty Position

The United States has tax treaties with a number of foreign countries.

Under these treaties, residents (not necessarily citizens) of foreign

countries are taxed at a reduced rate, or are exempt from U.S. taxes on

certain items of income they receive from sources within the United States.

These reduced rates and exemptions vary among countries and specific

items of income. Under these same treaties, residents or citizens of the

United States are taxed at a reduced rate, or are exempt from foreign

taxes, on certain items of income they receive from sources within foreign

countries.

Please note that not all states accept/recognize the federal income tax

treaty.

Pennsylvania does not accept the federal tax treaty.




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Dependent Personal Services Article (varies slightly by country

combination):

General Language

…remuneration derived by an individual who is a resident of

one of the Contracting States in respect of an employment

exercised in the other Contracting State…shall be taxable only

in the first-mentioned State if:

a.) the recipient is present in that other State for a period or

periods not exceeding in the aggregate 183 days in the taxable

year or the year of income of that state (may be stated as a

rolling year)

b.)the remuneration is paid by, or on behalf of, an employer or

company who is not a resident of that State; and

c.) the remuneration is not deductible in determining taxable

profits of a permanent establishment, a fixed base or a trade

or business which the employer or company has in that State.




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• If the employee qualifies for the income tax treaty position then a

Form 8233 should be completed and submitted to the IRS in advance

of the work period.

• Please note that the employee will need to acquire a US social

security number or an individual tax identification number.

• The Form 8233 may exempt federal and possibly state/local/school

district wage reporting and tax withholding, but it does not exempt

social security and Medicare wage reporting and tax withholding.

• A Form 1042-S should be submitted with the exemption code at the

end of the year.




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Totalization Agreements – Certificate of Coverage

Certificate of Coverage:

• Intended to eliminate dual social taxation and to

provide additional benefit protection for workers

who have worked both in the US and another

country. (24 countries currently have totalization

agreements with the US.)

http://www.irs.gov/Individuals/International-

Taxpayers/Totalization-Agreements


http://www.irs.gov/Individuals/International-Taxpayers/Totalization-Agreements



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Other Expatriate Payroll Considerations

Currency Exchange Rates:

• Currency fluctuation must be considered whether

an employee will be on home or host country

payroll.

• Home country payroll: Employee will need

money in host currency for spending.

• Host Country Payroll: Employee will need

money in home country currency to pay bills

and save.




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Year-End Payroll Forms

•The final US Form W-2 should include

worldwide employment income and benefits. • Gather all compensation components and exchange rate

adjustments

• Year-end review of payroll and taxes

• Add any additional non US payroll compensation not previously

“shadowed”

•Reconcile the foreign payroll forms to the US

payroll form.• Discrepancies will exist as taxability and deductibility differ by

country.

•Provide an explanation of the payroll forms

to the employee.




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Payroll Audits




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Payroll Audits




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Possible Interest and Penalties

• Failure to Make Deposit of Taxes – IRC 6656 (Up to 15% of

amounts unpaid)

• Failure to Collect and Remit Taxes – IRC 6672 (Up to a 100%

penalty of the amount not collected)

• Failure to Furnish Correct Payee Statement – IRC 6722 (Greater

of $100 per statement or 5-10% of the amount required to be

reported)

• Negligence or Fraud – IRC 6662 and 6663

• Criminal Penalties – IRC 7207




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Discussion – Specific Scenario Questions




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Thank you for your time!

Ronii Rizzo is a Managing Director in the BDO Charlotte

tax practice. Ronii specializes in the taxation and

payroll reporting of U.S. nationals working abroad and

foreign nationals working in the U.S. Ronii’s experience

includes payroll consulting, preparation and review of

U.S. income tax returns, tax equalization calculations,

and general expatriate assignment consulting. Ronii is

also experienced in the transfer and set-up of newly

acquired expatriate programs.

B.S. Accounting, University of North Carolina-Charlotte

Enrolled Agent

Email: [email protected]

Phone: (704) 887-4266


mailto:[email protected]

expatriate payroll - american payroll association · tax practice. ronii specializes in the...

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