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, LLP Ronii Rizzo, Senior Tax Manager – Expatriate Services November 4, 2015

Client name - Event - Presentation title Page 2 Client name - Event - Presentation title Page 2 Client name - Event - Presentation title Page 2 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

Client name - Event - Presentation title Page 3 Client name - Event - Presentation title Page 3 Client name - Event - Presentation title Page 3 Expatriate Payroll Services Expatriate Payroll Services: I will introduce a host of new payroll considerations. Some considerations are as follows: Payroll reporting requirements Additional reporting requirements New reporting codes Tax withholding requirements Proper payroll forms Split payroll Shadow or Mirror payroll Currency considerations (exchange rates) Cost accruals Inter-company chargebacks These topics will be discussed in this presentation. The focus will be from a US payroll perspective. American Payroll Association

Client name - Event - Presentation title Page 4 Client name - Event - Presentation title Page 4 Client name - Event - Presentation title Page 4 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 ( 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 American Payroll Association

Client name - Event - Presentation title Page 5 Client name - Event - Presentation title Page 5 Client name - Event - Presentation title Page 5 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 American Payroll Association

Client name - Event - Presentation title Page 6 Client name - Event - Presentation title Page 6 Client name - Event - Presentation title Page 6 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? American Payroll Association

Client name - Event - Presentation title Page 7 Client name - Event - Presentation title Page 7 Client name - Event - Presentation title Page 7 Let’s discuss why it is important for the payroll specialist to read and understand the assignment letter. American Payroll Association

Client name - Event - Presentation title Page 8 Client name - Event - Presentation title Page 8 Client name - Event - Presentation title Page 8 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? American Payroll Association

Client name - Event - Presentation title Page 9 Client name - Event - Presentation title Page 9 Client name - Event - Presentation title Page 9 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 Form W-4 and state withholding form (if applicable) American Payroll Association

Client name - Event - Presentation title Page 10 Client name - Event - Presentation title Page 10 Client name - Event - Presentation title Page 10 Expatriate Payroll Set-up Implement hypothetical tax withholding Negative earnings code or pre-tax deduction Held by the company/No remittance Stop federal and possibly state/local/school district withholding American Payroll Association

Client name - Event - Presentation title Page 11 Client name - Event - Presentation title Page 11 Client name - Event - Presentation title Page 11 Hypothetical Tax – Payroll Implementation American Payroll Association

Client name - Event - Presentation title Page 12 Client name - Event - Presentation title Page 12 Client name - Event - Presentation title Page 12 Payroll Form 673 American Payroll Association

Client name - Event - Presentation title Page 13 Client name - Event - Presentation title Page 13 Client name - Event - Presentation title Page 13 Payroll Form W-4 American Payroll Association

Client name - Event - Presentation title Page 14 Client name - Event - Presentation title Page 14 Client name - Event - Presentation title Page 14 Expatriate Payroll Set-up Assignment benefits Imputed or actual cash outlay (Discuss imputed payroll code set-up) American Payroll Association

Client name - Event - Presentation title Page 15 Client name - Event - Presentation title Page 15 Client name - Event - Presentation title Page 15 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 American Payroll Association

Client name - Event - Presentation title Page 16 Client name - Event - Presentation title Page 16 Client name - Event - Presentation title Page 16 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. American Payroll Association

Client name - Event - Presentation title Page 17 Client name - Event - Presentation title Page 17 Client name - Event - Presentation title Page 17 US Tax Gross Up Calculation Gross Up Formula: Benefits/(1-tax rates)-Benefits = Tax Gross Up Calculation: $3,200/( )-3,200 = $ *Some payroll systems have automatic gross up functions American Payroll Association

Client name - Event - Presentation title Page 18 Client name - Event - Presentation title Page 18 Client name - Event - Presentation title Page 18 Shadow Payroll American Payroll Association

Client name - Event - Presentation title Page 19 Client name - Event - Presentation title Page 19 Client name - Event - Presentation title Page 19 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. American Payroll Association

Client name - Event - Presentation title Page 20 Client name - Event - Presentation title Page 20 Client name - Event - Presentation title Page 20 Shadow Payroll Example American Payroll Association

Client name - Event - Presentation title Page 21 Client name - Event - Presentation title Page 21 Client name - Event - Presentation title Page 21 Shadow Payroll Example American Payroll Association

Client name - Event - Presentation title Page 22 Client name - Event - Presentation title Page 22 Client name - Event - Presentation title Page 22 Split Payroll American Payroll Association

Client name - Event - Presentation title Page 23 Client name - Event - Presentation title Page 23 Client name - Event - Presentation title Page 23 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 American Payroll Association

Client name - Event - Presentation title Page 24 Client name - Event - Presentation title Page 24 Client name - Event - Presentation title Page 24 Split Payroll Example American Payroll Association

Client name - Event - Presentation title Page 25 Client name - Event - Presentation title Page 25 Client name - Event - Presentation title Page 25 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. American Payroll Association

Client name - Event - Presentation title Page 26 Client name - Event - Presentation title Page 26 Client name - Event - Presentation title Page 26 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.) Taxpayers/Totalization-Agreements American Payroll Association

Client name - Event - Presentation title Page 27 Client name - Event - Presentation title Page 27 Client name - Event - Presentation title Page 27 Accruals Proper and timely payroll reporting will allow the company to accrue and budget for compensation costs throughout the year. It will also encourage timely inter-company chargebacks to the host entity. (Avoid “year-end dumps”) With proper payroll reporting, the company will not need to accrue for possible payroll penalties and interest. American Payroll Association

Client name - Event - Presentation title Page 28 Client name - Event - Presentation title Page 28 Client name - Event - Presentation title Page 28 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. American Payroll Association

Client name - Event - Presentation title Page 29 Client name - Event - Presentation title Page 29 Client name - Event - Presentation title Page 29 Payroll Audits American Payroll Association

Client name - Event - Presentation title Page 30 Client name - Event - Presentation title Page 30 Client name - Event - Presentation title Page 30 Payroll Audits American Payroll Association

Client name - Event - Presentation title Page 31 Client name - Event - Presentation title Page 31 Client name - Event - Presentation title Page 31 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 American Payroll Association

Client name - Event - Presentation title Page 32 Client name - Event - Presentation title Page 32 Client name - Event - Presentation title Page 32 Discussion – Specific Scenario Questions American Payroll Association

Client name - Event - Presentation title Page 33 Client name - Event - Presentation title Page 33 Client name - Event - Presentation title Page 33 Thank you for your time! Ronii Rizzo is a tax manager 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 Phone: (704) American Payroll Association