1. California Payroll Conference
September 11 and 12, 2014
Shadow Payroll
Michele Honomichl
Executive Chairman & Chief Strategy Officer
Celergo Global Payroll

2. Agenda Introductions What is a Shadow Payroll?
When do I need a Shadow Payroll?
What is included in a Shadow Payroll calculation?
What is a Tax Matrix?
Tax Calculation Examples
How do I manage a Shadow Payroll?

3. What Is A Shadow Payroll?
Expatriate Payrolls
Host Shadow Payroll
Home Shadow Payroll

4. Expatriate Payrolls Consists of Multiple Components
Compensation Balance Sheet
Tax Equalization
Benefits In Kind
Split Payments
Calculation of Taxes at the Host
Calculation of Taxes at the Home (Countries that tax on worldwide income)

5. Host Shadow Payroll Calculation of taxes at Host Location
Often referred to as “Shadow Payroll”
Typically Employer pays this Tax on behalf of the Employee
Typically Grossed-up or Rolled Over

6. Home Shadow Payroll
Typically occurs in Countries with WW Income Requirements
United States
Switzerland
South Africa
A Few Others
Host Taxes can also be included in Home Payroll on an Off-Cycle Basis

7. Types of Host Tax Programs
Employee is on Tax Equalization and the Employer pays the Host Tax (Gross-up needed)
Employee is treated like a local, on local payroll and pays host tax (No gross-up needed)
Employee is on a home payroll but pays host taxes via a “Host Tax Deduction” on home payroll (No gross-up needed)

8. Home Shadow Payroll Includes: Calculates:
Full Compensation Package (Regardless where paid)
Benefits In Kind
Host Taxes
Calculates:
Social Insurances
US: Medicare, SS, sometimes State & Federal

9. When Do I Need A Shadow Payroll?
Long Term Expatriate
Local Rules On Foreign Workers 9

10. Long Term Expatriate
Most Expatriates on Long Term Assignment will need Host Tax Calculations if Withholding is required in Country
Most Countries Require Withholding – Some do not (Hong Kong, & France, etc.)
Long-Term is often defined from a Tax Perspective as Greater Than 183 Days
Some countries Calculate 183 days based on Jan1 to Dec31
Others count from start date in country
Some Countries Require Calculations at 90 or Less Days

11. Foreign Workers
Some Countries Require Host Tax Calculations Even If Employee Is Not An Expat
Based on Work Performed
Determined by Local Country Rules
Required if Work is Billed to Local Entity

12. Compliance
Host Tax Payrolls (Withholding) are often required by Host Locations
May be dependent on Visa Type
May be required to maintain Drilling or Business Permits
Need To calculate to not Incur Penalties
May be Audited more regularly

13. Withholding Submissions
Expatriate Host Taxes Payments can be tricky:
Modified Scheme – Expat Taxes submitted separately from Local Taxes under same Company Tax ID (Example: UK)
One Company Tax Id: Expat Taxes must be submitted with Local Taxes (Example: Germany)
By Individual: Expat Taxes are remitted for each individual (Example: Spain)

14. What Is Included In A Shadow Calculation?
Compensation Package
Benefits In Kind Taxes

15. Compensation Package Compensation Package Includes: Salary
Expatriate Allowances (COLA, Housing Allowance, Car Allowance, Foreign Service Premiums)
Expatriate Deductions (Hypo Taxes, Housing Norm, Transportation Norm, etc.)
Home Country Deductions (Pension, Insurance, etc.)
All Included Regardless Where Paid!

16. Benefits In Kind Determine Taxability First
Relocation Provider Payments
Rent, Storage, Property Mgmt., Training, etc.
Usually Sent To Company Each Month/Cycle
Internal Payments by Accounts Payable
Gathered from each Host/Home Location
Usually every Cycle or Quarterly
Typically Need To Be Grossed-up
Often Processed Off-cycle

17. Taxes
If on Tax Equalization, Host Taxes are Taxable at the Home Location if the home location taxes Worldwide Income
Taxes include Income and maybe Social (Totalization Agreements)
US Taxes on Worldwide Income
Income Is Reduced by the Hypo Tax and then Increased by the Host Tax
The Differential Between the Home and Host Taxes is the Company’s Expense

18. Host Tax Calculations Example
What Is A Tax Matrix?
Host Tax Calculations
Example

19. Matrix For Host Tax Calculation
Lists All Elements Paid to or On Behalf of the Expatriate
Compensation: Salary, Cola, Transportation Allowances, etc.
Benefits in Kind: Rent, Property Management, Storage, etc.
Relocation Allowances: Cultural Training, Moving Expenses
Review Taxability for Each Element
Best Practices: Tax Return Provider in that Country Approve the Matrix and Review Annually
Provide Payroll with Documentation for Host Tax Calculation

20. Tax Matrix Example Norway: Long Term Expatriates Compensation Elements
Taxability for Income Tax and Social Security Tax
Example
Amount to Gross-Up

21. Tax Calculation Examples
UK to Germany
US to Germany
US to Germany (With Off Cycle in US)

22. Example Calculation 1 Long-term Expatriate Home: United Kingdom
Host: Germany
Split Delivery

23. Example Calculation 2 Long-term Expatriate Home: United States
Host: Germany
Split Payroll
Separate Cash versus Tax Mechanism

24. Example Calculation 3 Long-term Expatriate Home: United States
Host: Germany
100% Home Delivery of Funds
Use of Off Cycle for Grossing-Up Benefits in Kind and Host Taxes

25. How Do I Manage A Shadow Payroll?
Changes
Memo Updates
Consistency
Auditing

26. Changes
Ensure changes to Comp Sheet are included at Host and Home Payrolls
Coordinate Benefit Update Timing with Updating the Host
Confirm Changes were Implemented at Host by Reviewing Pay Slips

27. Benefit In Kind Updates
Set-up a Calendar for Benefit In Kind Updates
Review Data to Ensure Proper Exchange Rate is Utilized
Confirm Host Payroll has Properly Included Benefits In Kind via Pay Slips
Ensure Data is Captured in Correct Tax Year

28. Consistency Set-up Payroll Calendar for Host Payrolls
Processing More Often Is Better
Provide Same Format Each Month to Host Locations
Request Same Format for Collection of AP and Relocation Items
Training Is Essential To Ensure Proper Tax Compliance

29. Auditing
Review Pay Slips or Reports from Each Cycle to Ensure Changes were Processed
Watch Trends for Missing Data
Check for Taxability and Gross-up
Refine Process After Each Tax Year

30. Conclusion Shadow Payrolls Are Necessary Consistency Is Very Important
Compliance Is Based On Accurate and Timely Data Loads
Host Calculations are More of an Art Than A Science

31. Thank you for your attention
Questions? Please feel free to contact Michele Honomichl at