Presentation on theme: "California Payroll Conference"— Presentation transcript:
1 California Payroll Conference September 11 and 12, 2014Overview of tax reimbursement plans and related payroll reporting requirementsRajiv ThadaniPrincipal, TaxKPMG LLP(408)
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3 Agenda What is a tax reimbursement plan and why is it necessary Types of tax reimbursement plansTax protection and examplesTax equalization and examplesTax Equalization – Payroll reporting requirementsTax Equalization – Payroll reporting for repayments and examplesTax reimbursement plans – Administrative matters
5 Tax reimbursement plans Why is a tax reimbursement plan necessary?Tax on allowancesHost country (foreign) income taxesComplexities created by two tax systems (home & host country)Ease of relocation of international assigneesGenerally removes tax as a criteria to consider for cross-border transfersCompetitive advantageEmployee goodwill
6 Tax reimbursement plans – key attributes ScopeSpecify who is covered under the plan and the employer’s intentDifferentiate between assignment typesDifferentiate assignments based on period of length due to varying tax factorsDetermine the taxes covered under the planClearly define employee and employer responsibilitiesEnsure definitions and key language are consistent with the plan’s intentExamine areas of operation and specifically country combinations of employees on assignment to determine suitable plan
10 Tax protection – Key characteristics Employee pays all home and host country income and social taxes if applicableEmployer continues to pay ER social taxes onlyIf the taxes the employee pays exceed the home country tax obligation the employee would have incurred had he/she not accepted the assignment, the company will reimburse the excess taxes the employee paid.If the actual taxes the employee pays to the home and host country are less than the tax the employee would have paid in the home country had he/she not accepted the assignment, the employee retains the benefitTax protection is most often used by employers having a small work force of expatriates who go to an assignment country for a limited time and do not move from one country to another.
11 Tax protection – Benefits and disadvantages Administration of a tax protection arrangement is generally straightforwardIn comparison to tax equalization, which will be discussed later, it may be less costly to the employer due to compounding effect of company funded tax payments under tax equalization. This depends on the country combinations and comparative tax rates.Disadvantages:May restrict employee mobilityInequality for employees in different home and host countriesMay result in employee cash flow issues because of fundingGreater risk of non compliance with tax reporting requirements
12 Tax protection – Example 1 U.S. taxpayer assigned to the U.K. Employee Compensation$ ,000US Federal Income Tax (Net of FTC and Exclusions)$ - 0 -Actual U.K. Tax$ 75,000Total Actual Tax“Hypothetical” U.S. Tax Liability$ (37,500)Amount Due to Employee for Reimbursement$ 37,500US Tax Gross-up on Reimbursement$ 18,200Employer Tax Costs$ 55,700Employee Tax CostsIn this example, the employee funded the UK taxes for a cash outlay of $75,000 before receiving reimbursement of $37,500. This example illustrates the cash flow concerns that may arise at the employee level.
13 Tax protection – Example 2 U.S. taxpayer assigned to Singapore Employee Compensation$ ,000US Federal Income Tax (Net of FTC and Exclusions)$ 5,000Actual Singapore Income Tax$ 22,500Total Actual Tax$ 27,500“Hypothetical” U.S. Tax Liability$ (37,500)Employer Tax Costs$ 0Employee Tax CostsEmployee Tax Windfall$ 10,000In this example, the employee paid the lesser of the actual taxes paid to the US and Singapore and receives a tax windfall of $10,000 relative to his stay at home hypothetical tax obligation.
15 Tax equalization – Key characteristics Intent of tax equalization is for the employee to remain in a tax neutral positionEmployer pays all actual taxes (both U.S. and foreign) on all taxable compensationEmployee settles “hypothetical” tax on standard non assignment related compensation items (i.e., bonus, equity, salary) to the employerPayroll retains hypothetical tax withholding (not payable to the authorities) in place of actual tax withholdingA tax equalization settlement calculation is prepared after finalizing the home and host country tax returns comparing the retained hypothetical tax to the employee’s final.Payment is made either from the employee to the company or company to the employee based on the employee’s final hypothetical tax position.Overwhelmingly accepted as the preferred method by global companies for U.S. expatriates
16 Tax equalization – Benefits and disadvantages Promotes compliance with tax reporting requirementsProvides equal tax treatment for employeesSupports mobility of expatriates to various country locationsMay lead to tax cost savings depending on country combinationsDisadvantages:Administratively time consumingMay be costly due to the compounding effect of company funded tax payments
17 Tax equalization – Example 1 U.S. taxpayer assigned to the U.K. Summary:EmployeeEmployerSalary150,000Actual Federal US Income Tax ObligationUK Taxes75,000Employee Hypothetical Taxes(37,500)Net Compensation112,500197,500Final Hypothetical Tax Obligation(42,500)Tax Equalization Settlement Balance5,000(5,000)Total Tax Costs Including Equalization Settlement Repayment42,50032,500In this example, the employee’s retained hypothetical tax was less than his/her final hypothetical tax obligation and repayment was settled to the employer.
18 Tax equalization – Example 2 U.S. taxpayer assigned to the Singapore In this example, the employee’s retained hypothetical tax was more than his/her final obligation. The company realizes an overall tax cost savings of $7,500 (net of settlement), primarily driven by lower Singapore taxes. Retained US hypothetical taxes exceeded the actual tax obligations and the company realizes the benefit.SummaryEmployeeEmployerSalary150,000Actual Federal US Income Tax Obligation5,000Singapore Taxes22,500Employee Hypothetical Taxes(37,500)Net Compensation112,500132,500Final Hypothetical Tax Obligation(35,000)Tax Equalization Settlement Balance2,500Total Tax Costs Including Equalization Settlement Repayment35,000(7,500)
20 Tax equalization – Payroll reporting requirements Hypothetical taxes withheld from an employee’s salary under an employer tax equalization program reduces the amount of income subject to tax.Since the hypothetical tax retained is not gross income to the employee, FIT withholding and FICA and FUTA taxes do not apply.Payroll retains hypothetical taxes during each per pay period and reports a negative adjustment to compensation for taxes retained in each period.Tax equalization settlement repayments paid to the company from the employee generally do not reduce reportable compensation unless repaid in the same year. Repayment is subject to claim of right reporting under IRC Section 1231 and is not reportable as compensation.Tax equalization settlement payments owed to the employee should be settled net of taxes and reported in compensation
21 Tax Equalization – Payroll Reporting for Repayments
22 Tax equalization – Payroll reporting for repayments Example 1.The employee’s 2013 final hypothetical tax obligation reconciled per his/her tax equalization settlement exceeds his retained hypothetical taxes by $5,000. The employee pays the company $5,000 for settlement in What are the payroll reporting requirements?
23 Tax equalization – Payroll reporting for repayments Example 2.The employee’s 2013 final hypothetical tax obligation reconciled per his/her tax equalization settlement exceeds his retained hypothetical taxes by $5,000. The employee pays the company $5,000 for settlement in What are the payroll reporting requirements?
24 Tax equalization – Payroll reporting for repayments Example 3.The employee’s 2013 tax equalization settlement balance reflects that the employer owes the employee $5,000 for settlement. The employee is a US tax resident on assignment in the UK. The employer settles payment in The employee is no longer a State tax resident and his/her wages have exceeded the FICA base limit. Should the payment be grossed-up for US taxes?
25 Tax equalization - Payroll reporting for repayments Example 4.The employee’s 2013 tax equalization settlement balance reflects that the employer owes the employee $5,000 for settlement. The employee is a US tax resident and completed his/her assignment in The employee is living in California during 2014 and the company arranges settlement of the tax equalization payment during This is the final settlement related to the assignment. What US tax gross-ups should apply to the payment?
27 Tax reimbursement plans – Administrative matters For each tax year of the assignment, payroll should maintain the following forms, with appropriate exemptions and exclusions, when operating both tax protection and tax equalization arrangementsForm 673 Statement for Claiming Exemption From Withholding on Foreign Earned Income and Eligible for the Exclusion(s) Provided by Section 911Form W-4 updated with “exempt status” if the employee is not subject to US tax withholding because he is subject to foreign tax withholding and is not expected to have residual US Federal tax obligations.
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30 Rajiv Thadani, Principal KPMG LLP Background:Rajiv is a global engagement lead for various technology clients in KPMG’s Bay Area office. He joined KPMG in 2001 having previously worked with Arthur Andersen. He has more than 17 years of experience providing a vast array of international tax and human resources services. Prior to relocating to the United States, Rajiv has worked in Belgium, United Kingdom, and India, and is familiar with the tax and HR challenges that accompany the international assignments.