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.
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.
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, LLPRonii Rizzo, (Managing Director – Expatriate Services)
October 6, 2016
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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
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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 (6- 12 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
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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
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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
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Let’s discuss why it is important for the payroll specialist
to read and understand the assignment letter.
American Payroll Association
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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
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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 (if applicable)
• Form W-4 and state withholding form (if applicable)
American Payroll Association
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Expatriate Payroll Set-up
•Implement hypothetical tax withholding
• Negative earnings code or pre-tax deduction
• Held by the company/No remittance
• Possibly stop federal and state/local/school district withholding
• Potential recharge/credit to the foreign entity
American Payroll Association
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Hypothetical Tax – Payroll Implementation
American Payroll Association
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Payroll Form 673
American Payroll Association
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Payroll Form W-4
American Payroll Association
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Expatriate Payroll Set-up
•Assignment benefits
• Imputed or actual cash outlay
• (Discuss imputed payroll code set-up)
American Payroll Association
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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
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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
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US Tax Gross Up Calculation
Gross Up Formula: Benefits/(1-tax rates)-Benefits = Tax Gross Up
Calculation: $3,200/(1-.0145-.062-.04)-3,200 = $421.96
*Some payroll systems have automatic gross up functions
American Payroll Association
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Shadow Payroll
American Payroll Association
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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
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Shadow Payroll Example
American Payroll Association
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Shadow Payroll Example
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Split Payroll
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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
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Split Payroll Example
American Payroll Association
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Income Tax Treaty Position
The United States has tax treaties with a number of foreign countries.
Under these treaties, residents (not necessarily citizens) of foreign
countries are taxed at a reduced rate, or are exempt from U.S. taxes on
certain items of income they receive from sources within the United States.
These reduced rates and exemptions vary among countries and specific
items of income. Under these same treaties, residents or citizens of the
United States are taxed at a reduced rate, or are exempt from foreign
taxes, on certain items of income they receive from sources within foreign
countries.
Please note that not all states accept/recognize the federal income tax
treaty.
Pennsylvania does not accept the federal tax treaty.
American Payroll Association
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Income Tax Treaty Position
Dependent Personal Services Article (varies slightly by country
combination):
General Language
…remuneration derived by an individual who is a resident of
one of the Contracting States 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 or
periods not exceeding in the aggregate 183 days in the taxable
year or the year of income of that state (may be stated as a
rolling year)
b.)the remuneration is paid by, or on behalf of, an employer or
company who is not a resident of that State; and
c.) the remuneration is not deductible in determining taxable
profits of a permanent establishment, a fixed base or a trade
or business which the employer or company has in that State.
American Payroll Association
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Income Tax Treaty Position
• If the employee qualifies for the income tax treaty position then a
Form 8233 should be completed and submitted to the IRS in advance
of the work period.
• Please note that the employee will need to acquire a US social
security number or an individual tax identification number.
• The Form 8233 may exempt federal and possibly state/local/school
district wage reporting and tax withholding, but it does not exempt
social security and Medicare wage reporting and tax withholding.
• A Form 1042-S should be submitted with the exemption code at the
end of the year.
American Payroll Association
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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.)
http://www.irs.gov/Individuals/International-
Taxpayers/Totalization-Agreements
American Payroll Association
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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
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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
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Payroll Audits
American Payroll Association
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Payroll Audits
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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
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Discussion – Specific Scenario Questions
American Payroll Association
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Thank you for your time!
Ronii Rizzo is a Managing Director 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
Email: [email protected]
Phone: (704) 887-4266
American Payroll Association