managing the complexities of global and multistate travel taxation carolinas payroll conference...
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Managing the Complexities of Global and Multistate Travel Taxation
Carolinas Payroll Conference
November 7, 2014
KPMG LLP
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ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER
PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR
(ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
Notwithstanding anything to the contrary set forth herein, you (and your employees, representatives, or other agents) may disclose to any and all persons, without limitation of
any kind, the tax treatment and tax structure of any transaction, and all materials of any kind (including opinions or other tax analyses) that are provided to you by KPMG LLP
related to such tax treatment and tax structure, effective immediately upon commencement of discussions with KPMG LLP.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
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Agenda
Provide an overview of the issues associated with mobile employees including:
– Current State of Business Travel
– Risk Factors & Exposure
– Multi-jurisdictional Withholding Issues
Domestic
Global
– Special Issues Surrounding Equity & Other Incentive Compensation
– Employment Tax Reporting & Withholding Survey
– What Can Be Done?
– Hope for the Future?
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Current State of Business Travel
Business travel remains strong
For calendar 2013 a global corporation identified 140,000 individual business trips.
Many organizations have developed “swat teams” of frequent business travelers who are on the road more often than at home
Costs associated with “business travel” often less than traditional international assignment
Business travel is, for the most part, unregulated
Most organizations do not track foreign or domestic business travel for any purpose other than expense reimbursement
Most organizations do not utilize a time capture system which contains a “location” field
In a recent poll of KPMG’s IES clients, 100% of the responding organizations rated the controls in place around their business travelers as “lacking” or “severely lacking”
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What is Your “Traveler” Profile?
Organizations “at risk”
Companies that have a population of employees who travel frequently
Organizations which have operations in CA, CT or NY, with employees from other states traveling there
Companies with global operations in non-treaty countries
Public companies with equity/incentive compensation plans in place
Organizations with extremely high paid employees in “deal making” roles, e.g. PE firms, M&A teams, etc.
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Business Travel Defined
Generally less than 12 months “away from home”
Assignments < 183 days
May qualify for tax treaty exemption
Assignments > 183 days, but < 12 months
The taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year (§162(a))
“Realistic expectation” of assignment length (R.R. 93-86)
Indefinite assignments
Change in assignment length
Traveling expenses (meals, lodging, transportation, etc.) deductible / excludable when “temporarily” away from home on business
Per diems treated as “substantiated” for U.S. income tax purposes under “accountable plan” rules
Government table sets limits
Assignments > 12 months
Reimbursements for meals, lodging, transportation, etc. are taxable income
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Identifying Potential Exposures
Frequent business travel can create multiple types of exposure
Corporate Level
Corporate Tax
– Nexus (domestic)
– Permanent Establishment (global)
Payroll / Compliance
– Failure to report income and/or withhold income tax
– Failure to withhold/pay social insurance
Reputational – issue specific, media exposure
Individual level
Compliance - Failure to file / pay individual income tax
Immigration - Failure to obtain proper work permits/visas
Criminal - Employee detainment
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Why is This Important?
The identification and assessment of tax on business travelers (domestically and internationally) continues to be a focus
Government regulation will continue to increase
Federal
IRS to conduct employment tax audits of 6,000 businesses
IRS audits to focus on:
Fringe Benefits
Officer Compensation
Worker Classification (“contractor” vs. “employee”)
State - Payroll Audit Emphasis
Global
Emphasis on ST business travelers
Equity / Deferred Compensation
There has been significant movement by organizations to implement procedures to assess their exposure
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Increasingly mobile workforces
Increased scrutiny by tax authorities
Corporate, payroll tax compliance
Localities joining in
Broader use of equity awards
Complexity around awards
Difficulty in controlling the process
Focus by media
Corporate monetary and brand risk
Multi-jurisdictional withholding – A perfect storm
RegulatoryActivity/Tax Compliance
Mobile Employees
Long Term Awards
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Multi-Jurisdictional Income Tax Withholding - What you Need to Know
?
Some jurisdictions have de minimis thresholds that must be identified and
monitored.
Ignorance is no defense.Company officers could be
liable for under withheld amounts.
Increased audit enforcement by states.
Payroll systems could be ineffective.
What Employers Need to Know
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Multi-Jurisdictional Withholding – What Are the Problems?
Employers cannot track employee movement on a daily basis
Employers cannot collect and maintain required documentation for proper wage allocation
Payroll systems cannot allocate wages correctly to match time spent in multiple jurisdictions
Inconsistent policies and procedures for monitoring a mobile workforce
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Varying Approaches to Managing Business Travelers
Partial Compliance
Establish a system for all or select employees who perform services in specific jurisdictions to track source income.
Non-compliance
Not complying with nonresident withholding rules regardless of where compensation was sourced as earned.
Full Compliance
Developing/utilizing a system to ensure proper withholding and source recognition of earnings in nonresident jurisdictions.
Any approach that does not involve withholding and remitting taxes on all wages earned, could have an associated tax exposure, including penalty and interest assessment.
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Multistate withholding risks and control obstacles
Barriers to compliance
– Time and expense system limitations
– Third-party vendors unable to comply
– Corporate culture
– Employee impact
– Employers cannot track employee movement on a daily basis
– Inconsistent policies and procedures for monitoring a mobile workforce
Potential risk associated with noncompliance
Aggressive enforcement for almost a decade
– Audit risk
– Public relations
– Tax principal/penalty/interest assessments
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Nonresident state income tax withholding
In general, employers are required to withhold SIT on nonresidents of a state if services are or were performed by the employee in that state
Section 114 (former Public Law 104-95) exception – “retirement/pension income”
– Applicable to qualified pension income only
– Generally not applicable for equity compensation, bonus, deferred comp, etc.
Exceptions/limitations:
– De minimis rules of certain states (not always applicable to equity compensation)
– Reciprocal agreements between states
– Telecommuting (convenience of the employer doctrine)
– Exemption certificate allocation and pre-allocation of time spent
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As of September 1, 2014
States with de minimis rules or exceptions
States without de minimis rules or exceptions
States with no withholding provision
Nonresident withholding de minimis jurisdictions
AK
HI
DC
SD
MT
WA
OR
CA
NV
ID
UTCO
WY
AZ NM
NE
KS
OK
TX
MN
IA
MO
AR
LA
WI
IL
MI
IN OH
MS
KY
TN
AL GA
FL
SC
NC
VA
PA
WV
NY
ME
NH
MDDE
NJ
MA
RICT
VT
ND
Source: KPMG LLP International Executive Services.
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The Concept of the “Stealth Assignee”
Frequent business travel to a specific host location can create an unexpected tax or “document” exposure
Highly compensated employees can create this exposure with a minimal amount of travel
Median family income State of NY – $55,980 (source: US Census Bureau)
Executive with $1 million in annual compensation reaches this level in 14 work days
In many circumstances exposure is created almost immediately
State of North Carolina – tax withholding/filing obligation created with first dollar of NC-source income
Korea – $3,000 limit for treaty exemption
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Consider This…
New York State Nonresident Withholding Example
NYS nonresident SIT rules (general)
– Regular wages allocated to NY according to ratio of NY workdays to total workdays (14-day de minimus)
– Equity compensation – no annual de minimus; multi-year allocation
State Income Tax Exposure / Risks (employer)
– Tax: 100% of the unpaid tax that should have been withheld on the employee’s NY
compensation
– Penalties & Interest: Late Payment: .5% / month of tax not paid up to 25% of total original tax Failure to File: 5% of unpaid tax + 50% of the calculated interest Interest – rate varies by quarter
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Consider This…
New York State Nonresident Withholding Example
Facts: A salaried employee with an annual salary of $100k works 25% of his time in NY. Also has $100k of non-qualified stock option gain. Employer sources $0 to NYS
Potential State Income Tax Exposure for the Year:
– NY Tax on wages $857 (single – 0 allowances)
– NY tax on stock NQSO $2,758 (supplemental rate)
– Estimated Late Pay Penalty $1,030
– Estimated Negligence Penalty $325
– Estimated Interest $290 Total Potential Exposure $5,260
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Consider This…
New York State Nonresident Withholding Example
– $5,260 State Tax Assessment per Individual / Year
5 Individuals $26,300 @ 3 years = $78,900
10 Individuals $52,600 @ 3 years = $157,800
50 Individuals $263,000 @ 3 years = $789,000
100 Individuals $526,000 @ 3 years = $1,578,000
– Includes NY Tax, penalty & interest
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State withholding audit activity (samples)
New York
– Aggressive enforcement for almost a decade
– Large assessments especially on allocation of equity compensation
California
– Aggressive since the mid-90s
– New initiative for auditor hiring/training
– San Francisco Payroll Expense Tax (being phased out)
Minnesota – Cancellation of WI reciprocity, taxation of nonresident equity compensation
Connecticut
– Enacted New York’s de minimis regulations as their own
– Uptick in Connecticut audits
Increase in audit activity in states that border a state with no personal income taxes
– Massachusetts, Georgia, etc.
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An International Twist…
Example – Financial Services Client
Total compensation expense of $31,528 M
Employing approx 284,000 people
Average salary of highly compensated employees - $222,000
Global operations: UK, Brazil, Korea, NY, CA
Assumptions
Approx 5% of employees travel frequently domestically (45 days +)
Approx 2.5% of employees travel to UK (30 days +)
Approx .5% employees travel to Brazil (24 days +)
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It can add up
Potential domestic non-resident withholding exposure
$222,000 x 14,200 (5% of employees) x 20% (45/240 days worked in NR state) x 8% (avg. tax rate of NY/CA) = $50M
Potential UK tax exposure
$222,000 x 7,100 (2.5% of employees) x 12.5% (30/240 days worked in UK) x 40% (tax rate in UK) = $79M
Potential Brazilian tax exposure
$222,000 x 1,420 (.5% of employees) x 10% (24/240 days worked in Brazil) x 27.5% = $9M
TOTAL = $138M for one year
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Income Tax Treaties Can Help
Effect of income tax treaties
Residency article (Tie Breaker)
Dependent personal services article
Double taxation article
Does not cover Social Security taxes
Does not directly cover state taxes
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Income Tax Treaties - Residence
Article 4 of Most Treaties
(1) The term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature.
(2) Where by reason of the provision of paragraph 1, an individual is a resident of both Contracting States, then his residence shall be determined as follows:
(a) He shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);
(b) If the State in which he has his center of vital interest cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
(c) If he has an habitual abode in both State or in neither of them, he shall be deemed to be a resident of the State of which he is a national
(d) In any other case, decided by competent authorities of the Contracting States
Saving Clause
A Contracting State may tax its residents (as determined under Article 4(Residence)) and by reason of citizenship may tax its citizens, as if the Convention had not come into effect.
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Income Tax Treaties - Dependent Personal Services Article
United States/Mexico treaty example:
(1) Salaries, wages and other similar remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
(2) Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a contracting State 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 not exceeding in the aggregate 183 days in a 12-month period; and
(b) The remuneration is paid by, or on behalf of, an employer who is not a resident of that other state; and
(c) The remuneration is not borne as such by a permanent establishment or a fixed base which the employer has in that other state.
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Income Tax Treaties – Common Mishaps / Misperceptions
Chargebacks / Cross-charges
Use of Technical Services / Management Services Agreements
Transfer pricing concerns
Potential corporate PE issues
Extensions or ad hoc travel following assignment
May not cover all individual taxes (e.g. U.S. states may not recognize treaties)
Limited treaty network or DPS clause
May not eliminate withholding requirement
Canada requires withholding waiver in advance of business travel, regardless of treaty exemption
Does not cover social taxes
Totalization agreement network much more limited
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Current DPS Treaty Countries
Australia Finland Italy Netherlands Slovenia U.K.
Austria France Jamaica New Zealand South Africa Venezuela
Belgium Germany Japan Norway Spain
Canada Greece Kazakstan Pakistan Sweden
China Hungary Korea Philippines Switzerland
Cyprus Iceland Latvia Poland Thailand
Czech Rep. India Lithuania Portugal Trinidad & Tobago
Denmark Indonesia Luxembourg Romania Tunisia
Egypt Ireland Mexico Russia Turkey
Estonia Israel Morocco Slovak Republic
Ukraine
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KPMG survey information by country
EuropeBelgiumCyprus Germany Greece Kazakhstan IrelandNorway PortugalSpain Sweden Switzerland United Kingdom
Africa Botswana Morocco South Africa
Americas CanadaCosta RicaHondurasMexicoUnited States
AsiaChinaHong KongIndiaJapanKoreaMalaysiaSingapore
Australia
Current or increasein audit activity
Source: KPMG Member Firms
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Assessing Global Risk
Review of 25 global locations to understand Tax, P & I exposure
Specifically regarding employer compliance for equity compensation: reporting/withholding
Takeaways:
Frequently, country taxing authorities will levy penalties and interest against the employer for failure to operate payroll withholding and/or reporting, even if the income is reported on the annual tax return
Penalty and interest amounts vary widely across countries:
– China: Up to 500% of underpaid tax
– Hong Kong: Up to 300% of tax due to under reporting + fine
– Poland: Fines of up to PLN 18,000,000 (approx. $5.3M)
– Singapore: Up to 200% of tax due to under reporting
– Thailand: Up to 100% of underpaid tax + fine
– Venezuela: Up to 500% of underpaid tax
Tax authorities may agree to mitigate penalty/interest charges if employer voluntarily discloses compliance failure
The Equity Compensation Equation
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Equity awards and related compensation
Basis for equity based compensation typically spans multiple years
Employers required to allocate gain based upon time an employee performs services in a particular jurisdiction.
Highly compensated individuals, such as C suite executives, travel to numerous states while executing their responsibilities.
States are aware of such employee movements and are becoming more aggressive in their enforcement efforts with respect to employer withholding.
Public corporations, private equity firms, financial institutions and non-U.S. based companies with U.S. presence are key audit targets
Bonus allocation challenges, i.e., withholding current year taxes based on prior year services related to bonus payment
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Equity compensation does not always follow general de minimis rules
Can require record keeping to reflect awards from grant date through exercise
Treatment varies greatly from country to country, state to state
Example – While NYS has a 14 day de minimis for SIT withholding, equity compensation is taxable immediately upon income recognition based on all days spent in state
The Equity Compensation Equation
Employment Tax Withholding and Reporting Survey
Survey objectives, methodology, and key findings
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Survey Objectives
The survey was performed to gauge employer position and perception regarding nonresident/multistate withholding
Designed to have the results shared in “white paper” format in order to provide a broad based view into organizational treatment
Survey Methodology
Electronic survey sent to KPMG clients in March, 2013
103 organizations responded and provided input
Respondents included large and middle market employers in many industries
All responses anonymous
Employment tax withholding and reporting survey
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Mining
Insurance
Food, Drink & Consumer Goods
Conglomerates, En-gineering & Industrial
Products, Metals
Chemicals
Aerospace & Defense
Retail
Oil & Gas
Building & Construction
Healthcare
Information Technology & Software
Banking & Finance
0% 10% 20% 30% 40% 50%
2%
2%
2%
2%
3%
3%
4%
4%
5%
8%
11%
13%
Other
Power & Utilities
Electronics
Transportation
Real Estate
Pharmaceuticals
Media
Investment Man-agement
Internet & Social Media
Energy and Natural Resources
Communications
Automotive Manufac-turers & Suppliers
0% 10% 20% 30% 40% 50%
31%
0%
0%
1%
1%
1%
1%
1%
1%
1%
1%
1%Other
Business Process Outsourcing
Charitable Foundation
Cleaning Service
CPA firm
Education
Engineering
Management Consulting
Manufacturing
Non profit Zionist organization
Professional Services
Scientific and educational
Industry
Does not add up to 100% due to rounding
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Less than 5,000 5,000 to less than 10,000
10,000 to less than 25,000
25,000 to less than 50,000
50,000 or more 0%
20%
40%
60%
80%
100%
40%
11% 13%17% 19%
Respondents – Number of employees
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All of the above
Cash balance
Equity awards
Salary
0% 20% 40% 60%
41%
3%
24%
52%
15%
53%
32%
Yes, it is a major issueYes, it is a growing issueNo
Majority say U.S. nonresident state withholding/reporting is a growing issue with salary as the top concern with respect to compliance and/or risk
Q. Is U.S. nonresident state withholding/reporting a major or growing issue for your organization with respect to compliance and/or risk?
Q. What type of compensation is this concern centered around?
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Yes, we have pro-ceduresin place
Yes, we have technology
in place
Yes, we have both procedures
and technology in place
No0%
20%
40%
60%
80%
100%
27%
2%
22%
49%
51%: Procedures and/or technology in place
Half say they do not have procedures and/or technology in place to monitor employee work travel and remit/report taxes accordingly
Q. Do you currently have procedures and/or technology in place to monitor employee work travel and remit/report taxes accordingly?
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Among those who have procedures in place to monitor employee work travel and remit/report taxes
89%
7% 4%
Corporate complianceReputational risk (brand damage)Monetary risks
Most say corporate compliance is the main driver for having procedures in place
Q. What is the main driver for having procedures in place?
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Among those who do not have procedures and/or technology in place to monitor employee work travel and remit/report taxes
Less than 6 months
6 to less than 12 months
12 to less than 24 months
24 months or more
Do not anticipate implementing a
program
0%
20%
40%
60%
80%
100%
10% 8%12%
18%
51%
Half anticipate implementing procedures and/or technology to monitor employee work travel and remit/report taxes
Q. Do you anticipate implementing such a program in the next:…
48%: Anticipate implementing
Does not add up to 100% due to rounding
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Excellent Good Poor We are looking for other alternatives
0%
20%
40%
60%
80%
100%
10%
43%
34%
13%
Nearly half are dissatisfied with the ability of their current processes/systems to effectively source salary and equity awards
Q. How would you rate your current processes/systems to effectively source salary and equity awards to multiple states?
47%: Poor/Looking for other alternatives
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No, we would not provide additional support to these employees
Yes, gross-up additional tax costs and pro-vide tax return preparation support for other
than primary work states
Yes, provide tax return preparation support for other than primary work states
Yes, gross-up additional tax costs
0% 20% 40% 60% 80% 100%
75%
8%
2%
15%
Only one quarter say their organization currently provides additional tax support to employees working in multiple states
Q. Does your organization currently or expect to provide tax support to employees working in multiple states?
25%: Yes
Multi-jurisdictional Withholding
What can be done?
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Multi-jurisdictional withholding – What can be done
Evaluation/assessment
– Identify jurisdictions and employees likely to have material activity
– Identify records/sources that provide indicators of activity
– Determine pay types, e.g., base comp, equity, bonus, etc.
Compliance policy design
– Determine processes
– Methodology of data capture (travel records, employee data entry, etc.)
– Real-time compliance
– Communication and training to/for employees
– Internal audit procedures
Practical issues/concerns
– Phased roll-outs
– IT/Technology/Security issues
– Deployment Timeframes Voluntary Disclosure Programs
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Narrowing the field - How to filter?
All Employees
Business Travelers
BusinessTravelers with
PotentialExposure
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The road to compliance
Collection Assessment ActionCommunicati
onGovernance Compliance
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Collection
Employee/delegate input, IP address, smart phone, location services
Single versus multiple platforms
User acknowledgement/reminders
Timing of submission and locking data
Data storage warehouse
Security (IT Risks)
Collection Assessment ActionCommunicati
onGovernance Compliance
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 33372WDC
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Assessment
U.S. Considerations
State de minimis rules
Reciprocity Agreements
State specific exemptions
Global Considerations
Double tax agreements, social security, immigration
Risk profile
Collection Assessment ActionCommunicati
onGovernance Compliance
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Action
Allocation between multiple jurisdictions
Payroll calculations
Delivery of pay
Store allocations and track for long term incentives
Integration/Connectivity with multiple systems and stakeholders
Employee compliance (tax returns, visa, work permits etc.)
Collection Assessment ActionCommunicati
onGovernance Compliance
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Communication
Employee communications (including reminders)
Policy awareness (funding of taxes, multi jurisdiction filing requirements, payroll calculations versus final liabilities)
Ongoing and new hire training
Identify and publish contacts
Collection Assessment ActionCommunicati
onGovernance Compliance
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Governance
Policy owners
Travel policies
Internal audits (e.g., expense reports)
Non compliance sanctions/penalties
Quarterly reviews
External audit support
Collection Assessment ActionCommunicati
onGovernance Compliance
Hope for the Future?
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Hope for the Future?
Mobile Workforce State Income Tax Simplification Act of 2013
Primary Goal – Harmonize the state tax treatment of multi-state business travelers
Primary Provisions:
Individual will not be subject to tax in a nonresident state if present for no more than 30-days
Employer not subject to wage reporting / tax withholding
Employer may rely on employee’s estimate of time spent in nonresident state unless
Employer has actual knowledge of employee fraud, or
Employer maintains a time / attendance system that tracks where employee performs services
Applicable to “wages & other remuneration”
A “day” consists of a part of a day if only one nonresident state involved
If multiple states, then the state in which most time is spent
Does not include time spent in a state while in transit
Does not apply to professional athletes / entertainers
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Hope for the Future?
Mobile Workforce State Income Tax Simplification Act of 2013
Introduced into the Senate on 11/05/13
16 Bi-partisan cosponsors
Latest Action – Read twice and referred to the Committee on Finance
Prognosis: 22% chance of being enacted
Contact details
Vincent E. Rieck, CPATax Managing DirectorGlobal Mobility ServicesPhone 704-335-5392Charlotte, NC