Designing Global Payroll and Benefit Programs
Fatima Laher and Maria Tsatas Deloitte LLP Randy Hahn
Guberman Garson Segal LLP
Agenda
Evolving Payroll and Immigration landscape
The “Payroll Gap” Analysis: Adding Value / Pursuing Compliance
Changing demographics: Heightened sensitivity to Audit risk
Disruption : Technology embedded in mobility programs
Policy trends in global mobility
Evolving Payroll and Immigration Landscape
Evolving Payroll and Immigration Landscape Global businesses are navigating an increasingly complex global and regulatory environment
Increased cross-border activity creates increased demands for mobile workforce Global, virtual business world Business Travel constitutes 50% of global airline revenue
Exposure to changing worldwide tax and audit regulations Heightened sensitivity to risk Increasing Scrutiny
Technology increases efficiency and integration in payroll process Technology enhancements and systems integration allowing more sophisticated approach to evaluating risks
Global and regulatory environment demands diversified Mobile workforce required to understand technology and tax interplay
Globalization Business
complexity and regulation
Technology Talent Pace of change
Key challenges akin to digital growth throwing up new challenges Payroll processes require a fresh outlook to accommodate needs of expatriate populations and business travellers
Challenges facing Mobility programs
A
Business Demands • Emerging Markets Requiring Talent
for Growth • Changing Employee Attitudes • Cost Pressures – Alternative to
Traditional Assignments • Talent, Development & Learning
Regulatory Compliance • Tax / Payroll • Immigration
Global, Cross-border • Different reporting laws and tax treaties • Increased levels of employee tax exposure • Inefficient tracking of international travel • Corporate obligations exist even where tax treaties
may apply • Increased visibility and coordination from immigration • Corporate exposure • Scrutiny of local authorities
Domestic • Employer obligations may include reporting of
income, withholding and tax remittance • Employees may have to file tax returns • Administrative challenges in achieving full
compliance • Risks arise because business travel is not being
tracked
The “Payroll Gap” Analysis: Adding Value / Pursuing Compliance
Payroll set-up
Flexible and scalable
To align with evolving business needs and accommodate changes in workforce demographics .
Cost effective
Program costs to remain lucrative to employees while being cost effective to organization
Layered compliance
Effectively manages risk associated with multi-jurisdictional tax laws
Business rules need to be layered onto the tax analysis and corporate data.
Technology
New tools and programs to make employee, compensation, benefits integration seamless
Managing all quarters
Payroll obligations
• Payroll legislative requirements are generally complex, in Canada as well as many other countries
• Complexity is augmented for employers with global operations • Achieving payroll compliance is a constant source of frustration for
many global organizations especially in connection with various categories of employees including international assignees and frequent business travellers (‘’FBTs’’) and in dealing with global compensation structures giving rise to different tax treatment, depending on country of assignment.
Payroll complexities
• Determining employer payroll obligations in jurisdiction of employment, employee’s residency and origin of payment
• Inadequate processes to identify and compile complete compensation subject to employer payroll requirements
• Determining taxability of various elements of remuneration, which can differ between home and host
• Particularities of equity and deferred compensation • Lack of expertise in local payroll teams to deal with payroll in cross
border situations
“Payroll Gap” analysis
• Eliminates efficiencies and conserves resources • Identifies red flags for potential non-compliance with income tax
rules • Prevents leakage
Potential cost of Payroll Non-compliance
Financial statement inaccuracies –
undisclosed liabilities
Potential disallowance of corporate tax deduction
for salary expense
Additional social security taxes and provincial
payroll taxes implications
Cost to compensate employees for
inadequate social security coverage or retirement benefits
Reputational risk
Interest and Penalties
Canadian considerations
• Cross-border business travel is high on the CRA’s audit list
• Risks areas: • Income tax • Payroll withholding • Indirect tax (GST/HST/QST/RST) • Tax treaty application • Waiver programs
• Compliance burden: • Failure to comply - Penalties, interest and tax • Temporary costs may become permanent if process
ignored • CRA aggressive audit approach
Employee Tax Compliance
Reg 102/Waivers
Corporate Tax/Reg 105
PE/Services PE
Witholding Obligations – Canadian perspective • Every person paying remuneration to employees working in Canada must withhold
Canadian income tax at source in respect of their employees’ Canadian source compensation − Withholding obligation applies to non-resident employers − Withholding obligation applies even if the employee is ultimately exempt from
Canadian taxation under the Treaty − Only exception is where a waiver is obtained authorizing no withholding
• Must also report Canadian source compensation and tax withholdings at source on annual information returns (T4 slip and T4 summary)
• Requires the non-resident employer to register and open up a payroll account with CRA
• New relief measures proposed in Budget 2015
Regulation 102 waivers
R102-J
• Simplified waiver process where the employee is exempt under the CAD 10,000 minimum test in the Canada-US treaty (CAD 5,000 for employees resident in other treaty countries)
R102-R
• Used where requirements for R102-J waivers are not met but a treaty exemption still applies
• Non-resident employee’s Canadian-source compensation is greater than CAD 10,000 / CAD 5,000, but other conditions for the treaty exemption apply
R102-J
R102-R 2
1
Two types of waiver:
The challenges …
• Business travel is actively being pursued by CRA • The Canadian rules are onerous and not intuitive, and are often perceived as
having a negative impact on investment in Canada • Essentially the ultimate taxability of income in Canada does not go hand- in-hand
with the tax withholding requirements, whereby tax withholding is due from Day 1 in Canada (both with respect to corporate to corporate payments and payments to employees)
• To be compliant, broadly the options are: • Withhold tax on Canadian sourced income and reclaim this through a tax return; or • Apply to CRA for a waiver to relax the withholding (but not the reporting) requirements; or
• Certification process effective January1, 2016 for all eligible employers • No withholding and reporting obligations for all Qualifying non resident employees under
$10K and under 45 work days in a calendar year/ 90 physical days in any 12 month period • CRA administrative process expected to be rolled out in October 2015
Changing demographics: Heightened sensitivity to Audit risk
Reinforced focus
Public Scrutiny (Media and Institutional
Shareholders) Commercial impact of negative publicity regarding non-compliant behaviors can have greater impact than fines/penalties assessed by regulators.
Decreased Revenue Bases
• Decreasing revenue bases, along with technological improvements, create enhanced capacity and more aggressive behavior by tax authorities during audits, stricter enforcement of legislation and less leniency in the negotiation of settlements and/or assessment of penalties.
• Decreases in company revenues result in less resources, technological and personnel, available to monitor and facilitate compliant operations.
Increased Scrutiny
Acceptable Risk Profile
Increased Audit Risk
Legislative Updates
Compliance
Continuously Changing
Regulations Challenge to keep current on constantly changing legislation, which increases exponentially as mobility creates need to understand interaction of rules across jurisdictions.
Management’s Risk Tolerance • Changes in management accountability and disclosure requirements have changed
C-suite’s perspective on what constitutes acceptable risk. • Changing demographics for mobile employees impacts areas of focus
Canada • Project Permanent Establishment
Concept information sharing between tax and immigration authorities
• Tax withholding reconciliation initiative • T106/Reg 105 exposure
Korea • $3,000 limit on U.S.
treaty dependent services article
Australia • Business travelers coming to Australia
from non-treaty countries, must now apply for a Tax File number visa the Australian Taxation office and then file the Australian tax return
Exposure: No matter where you are
China • Enforcement of immigration
laws with detention or imprisonment
South Africa • An individual is required to file a tax
return if his/her remuneration subject o tax in South Africa exceeds R120,000 or if no PAYE has been withheld
United States • Data sharing between tax and
immigration authorities increasing • Increase in IRS and State Revenue
audits • Regulatory changes at State level to
capture ax revenue (e.g. NY and MN)
United Kingdom • Short Term Business Visitor program to
facilitate tax compliance – recently confirmed as only option to avoid withholding tax at source
• Immigration – new work permit system with significant consequences for non-compliance; employee bans possible for between 1 and 10 years
Germany • Application of Economic
Employer concept
Singapore & Hong Kong • Laws introduced to tax equity
income for those leaving the country
Disruption : Technology embedded in mobility programs
Tax and Technology
• Technology has paved way in redefining global mobility programs • Tax is now integral function of companies’ analytics quest • Tax Analytics helps professionals make informed decisions • End to end automation / monitoring is feasible of payroll process • Data analytics tools allows tax department to see if embedded tax
rules working as intended. • Data extract can be used in data analytics tool against client specific
tax determination logic to identify data errors, tax over/underpayment, etc.
Technology – Works both ways
Policy trends in global mobility
Global tax management challenges Government spending exceeding revenues • There is an increasing need for
governments to find new sources of revenue • According to the CIA World Fact Book1,
government spending exceeds revenues in numerous countries
United Kingdom Canada
Very aggressive regarding wage withholding and tax remittances if no business traveler exemption
Business Traveler Exemption Withholding and Reporting
China Brazil
Treaty Claims Visa matters
Canada is using intercompany corporate tax withholding refund claims to gather information on Business Travelers and assess penalties for failure to withhold and report
China is seeking advanced approval and documentation to allow treaty claims for business travelers
Brazil looks to the type of visa and assessed tax for business travelers under certain visas
Country Examples
Global Indicators Time to be proactive rather than reactive • Immigration authorities sharing information with tax authorities
• U.S. IRS has sent notices to companies to produce proof of filing tax returns for L-1 visa holders
• Singapore has sent companies tax assessments in connection with travelers’ business trips exceeding 60 days
• Failure to withhold taxes for business travelers • UK payroll audits have resulted in significant penalties for not withholding on Business
Travelers • Canada has assessed penalties for failure to withhold taxes on Business Travelers
• Tax authority audits • Japan tax authorities have requested list of all Business Travelers to Japan • U.S. New York State tax auditors’ have requested corporate data records, e.g. Business
Traveler and expenses to review • OECD launched the Tax Inspectors Without Borders initiative on 13 July 2015
Immigration considerations Developments
Trends • Smart borders and entry tracking • Nationalist sentiment regarding foreign labour • Improved information sharing and changing perceptions of privacy
Developments • Stronger enforcement mechanisms to ensure compliance with
the TFWP including on-site inspections • Additional fees ($1,000 per application) and record keeping
requirement (6 years) • More criminal investigations for employers suspected of criminal
activities under the Immigration and Refugee Protection Act (IRPA)
• Improved information sharing agreements between different levels of government
• Monetary fines and a public Blacklist site
What we are seeing
Challenges • Unknown number of business trips per annum • No assessment of travel activities • No controls in place to ensure compliance and mitigate risk How can we address? • Finding alternate strategies where possible: C20 and C10 (significant
benefit to Canada) filings
• Capable of litigating broadly on topics of relevance (judicially review Service Canada decisions and CIC decisions, etc.) to influence policy and legal interpretations going forward
The changing face of Immigration compliance
• New immigration policy changes introduced 2015
• Stricter requirements for Short term business visitors and PAYE reporting (March 2014)
SINGAPORE
• Permanent residence rules relaxed, visa application procedures simplified for foreigners (July 2015)
• New Procedures for Foreigners Entering China for Short-Term Assignments (December 2014)
China
• Several immigration measures were announced, as a proactive approach, to attract, recruit, and retain talent from outside Hong Kong (March 2015)
Hong Kong
• Number of work permit quotas available Swiss-wide for non-EU/EFTA nationals and for assignees from EU/EFTA member states reduced effective 2015 (March 2015)
Switzerland
• Employers will need to arrange for the issuance of the employment pass (EP) and notification letter (NL) of their foreign employee before such foreign employee may commence work in Singapore. (March 2015)
United Kingdom
• Changes to the Temporary Work (Skilled) Visa (Subclass 457) Rate Income Threshold (July 2015)
• Changes to the Employer Nomination Scheme (June 2014)
Australia
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