Mike Johnston Senior Manager, Tax Sandra Peters Manager tax KPMG LLP...

Mike Johnston

Senior Manager, Tax

Sandra Peters

Manager tax

KPMG LLP

mjjohnston@kpmg.com; sandrapeters@kpmg.com

+1 408 367-2854; +1 408 367 1940

Thursday, October 8,, 2015

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.The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

What is a tax reimbursement plan and why is it necessary

Types of tax reimbursement plans Tax protection and examples Tax equalization and examples Tax Equalization – Payroll reporting requirements Tax Equalization – Payroll reporting for

repayments and examples Tax reimbursement plans – Administrative

matters

Why is a tax reimbursement plan necessary?◦ Tax on allowances◦ Host country (foreign) income taxes◦ Complexities created by two tax systems (home &

host country)◦ Ease of relocation of international assignees◦ Generally removes tax as a criteria to consider for

cross-border transfers◦ Competitive advantage◦ Employee goodwill

Scope◦ Specify who is covered under the plan and the

employer’s intent ◦ Differentiate between assignment types◦ Differentiate assignments based on period of length due

to varying tax factors◦ Determine the taxes covered under the plan◦ Clearly define employee and employer responsibilities◦ Ensure definitions and key language are consistent with

the plan’s intent◦ Examine areas of operation and specifically country

combinations of employees on assignment to determine suitable plan

Tax protection Tax equalization

Employee pays all home and host country income and social taxes if applicable

Employer continues to pay ER social taxes only If 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 benefit

Tax 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.

Benefits:Administration of a tax protection arrangement is generally straightforward In 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

In 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.

In 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.

Intent of tax equalization is for the employee to remain in a tax neutral position

Employer pays all actual taxes (both U.S. and foreign) on all taxable compensation

Employee settles “hypothetical” tax on standard non assignment related compensation items (i.e., bonus, equity, salary) to the employer

Payroll retains hypothetical tax withholding (not payable to the authorities) in place of actual tax withholding

A 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

Benefits:Promotes compliance with tax reporting requirements Provides 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

In this example, the employee’s retained hypothetical tax was less than his/her final hypothetical tax obligation and repayment was settled to the employer.

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 U.S. hypothetical taxes exceeded the actual tax obligations and the company realizes the benefit.

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

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 2014. What are the payroll reporting requirements?

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 2013. What are the payroll reporting requirements?

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 U.S. tax resident on assignment in the UK. The employer settles payment in 2014. 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 U.S. taxes?

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 U.S. tax resident and completed his/her assignment in 2013. The employee is living in California during 2014 and the company arranges settlement of the tax equalization payment during 2014. This is the final settlement related to the assignment. What U.S. tax gross-ups should apply to the payment?

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 arrangements◦ Form 673 Statement for Claiming Exemption From

Withholding on Foreign Earned Income and Eligible for the Exclusion(s) Provided by Section 911

◦ Form W-4 updated with “exempt status” if the employee is not subject to U.S. tax withholding because he is subject to foreign tax withholding and is not expected to have residual U.S. Federal tax obligations.

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Background:

Mike is a global engagement senior manager with more than 10 years of Big 4 experience. Mike currently manages several technology engagements overseeing delivery of core tax and related expatriate tax advisory service. Mike has lived overseas and knows first hand the many challenges of compliance with international reporting obligations.

Background:

Sandra is a global engagement manager working primarily with a large global client in KPMG’s Bay Area office. She was a manager with KPMG at the beginning of her career and returned after several years in industry. She has more than 20 years of experience and is familiar with the challenges that accompany a changing global environment.