April 19, 2023 1

Global Payroll & Taxation of International Assignments

Brent Bergan, CPATravis Call, CPA

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Global Mobility Tax, LLP

We are a CPA firm providing strategy, consulting, and individual tax services to organizations that relocate employees on domestic and international assignments

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Agenda (Part I)Global Payroll (Brent)

BenefitsChallenges (internal and external)Reporting IssuesForeign Payroll – UK, Singapore, and China

ExamplesSuccess Factors

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Agenda (Part II)Expat Tax (Travis)

Assignee, Assignment, and Payroll TypesReporting RequirementsShort term versus Long termU.S. Federal and California Income TaxSocial Security and Medicare TaxTax Reimbursements with ExampleClaim of Right

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GLOBAL PAYROLL

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Global Payroll – Wouldn’t it be nice!One Process

more control over number of payroll runsOne Database

reduction in overall costsOne Mission

employees are paid timely and accurately in all locations

One Teamclear focus on daily tasks and overall objectives

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Global Payroll – Challenges (Internal)Employee communicationLanguage, time zone, cultural differencesLocal region resistance to changeStandard practices across regionsData reporting to Global payroll regionsEquity reporting

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Global Payroll – Challenges (External)Legislation – addressing global versus local

differencesVendor management – one versus many

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Global Payroll – Challenges with Global EquityMany types of awards

ISO, NQSO, RSU, ESPP, SARSMulti-year earnings period

Grant, vest, and exercise date concerns; valuation

Globally mobile workforceMultiple jurisdiction considerationsImpact of international tax treaty and social

tax agreements

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Global Payroll – Reporting IssuesU.S. reporting and withholding requirementsForeign location reporting and withholding

requirementsCompany tax equalization policy

considerationsSplit payroll arrangementsShadow payroll requirements

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Global Payroll – Split PayrollEmployment arrangement must support job

responsibilitiesCompensation must support responsibilities

Individual is employed and paid in 2 countries

Payroll administration impactWhat is individuals tax residency status in

Country ACountry B

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Global Payroll – Split PayrollEmployer payroll reporting requirements

Country ACountry B

Wage and tax withholding considerationsTax planning opportunity - ?Split payroll arrangements are not as

common today

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Global Payroll – Shadow PayrollAlso known as

Ghost payrollDummy payrollMirror payroll

This is a mechanism which enables local wage reporting and tax withholding for an employee working abroad.

Wage reporting and tax withholding take place

No cash/funds are provided to the employee

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Global Payroll – Reporting Issues (cont.)Which employees are impacted?What is the time period of concern?Where was the employee during this period?Does each location have a tax and payroll

reporting requirement?Does the foreign withholding impact the U.S.

payroll?Is there a trailing liability?

Bonus/equity paid out in a different location than where it was earned resulting in potential tax liability in multiple jurisdictions after the assignment period

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Global Payroll – Foreign PayrollNon-U.S. payrolls may have rules inconsistent

with the U.S. payroll reporting and withholding requirements.

“Income” for U.S. reporting purposes may not be “income” in the non-U.S. location.

Some countries require (or prohibit) certain tax reimbursement methodologies (e.g., the UK requires Current-Year Gross-up).

Reporting and withholding requirements can vary significantly by country.

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Global Payroll – Foreign Payroll – UKPay As You Earn (PAYE) System

Monthly reporting and payment of taxModified PAYE available

Quarterly reporting and payment of tax

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Global Payroll – Foreign Payroll – SingaporeTax Assessment System

Reporting of income and payment of tax is due the following year

Exit Tax – In the year of repatriation, an exit tax filing is due before the assignee leaves the country

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Global Payroll – Foreign Payroll – ChinaMonthly Tax Filing System

Reporting of income and payment of tax is due monthly and each month constitutes a complete tax period

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Global Payroll – Success FactorsDocument compensation payments

Identify stakeholders and systems Payroll systems Expense account Accounts payable

Determine use of outside vendorsScope the adequacy of the international payroll

systemCoordinate global payroll reporting

Strong central coordination is vitalConsider making periodic site visits

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Global Payroll – Success Factors (cont.)Determine home and host country taxation

requirementsLegislation could vary significantly by location

Use technology to support the processLeverage the use of outside vendors

Payroll alternativeSubject matter expertiseStreamlined processAccess to technology

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TAXATION OF INTERNATIONAL ASSIGNMENTS (EXPAT TAX)

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Expat Tax – Assignee TypesExpatriate

U.S. citizen or permanent resident outside the U.S.

InpatriateNon-U.S. national in the U.S.

Third-Country National (TCN)Non-U.S. national outside of their home

country

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Expat Tax – Assignment TypesShort-term

Less than 1 yearLong-term

Greater than 1 yearRotational / Commuter / Business Traveler

Generally works in host country and lives in home country

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Expat Tax – Payroll TypesHome country payrollHost country payrollSplit payroll

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Expat Tax – Global Payroll in ActionIdentify payroll reporting and withholding

requirementsUnderstand impact of assignment types and

tax reimbursement methodsReview strategies for collecting and

reporting assignment-related payments

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Expat Tax – Reporting RequirementsWage reporting (U.S. centric)

Worldwide income must be reported Cash payouts in home and host countries Benefits-in-kind in home and host countries Non-taxable items in home and host countries

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Expat Tax – Common Compensation ItemsBase salaryBonusEquityHypothetical taxHousing normCost of living

allow.Housing allow.Utilities allow.

Education allow.Tax equalizationLanguage lessonsHome leaveTransportation

allow.Tax

reimbursementsRelocation allow.Tax preparation

fee

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Expat Tax – Negative CompensationHypothetical tax

A compensation reduction retained by employer (generally replaces actual home country withholding)

Most commonly based on home country tax laws

Housing normHypothetical cost of home country housing

retained monthly by employerGenerally a function of base salary, family size,

and maintenance of primary residence in home country

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Expat Tax – Relocation ExpensesDirect relocation expenses

Shipping of household goods / U.S. storageTravel from home to host country

Indirect relocation expensesImmigration servicesInternational HR servicesTax services

Losses sustained by the moveSale of carSale of home

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Expat Tax – U.S. Federal Income TaxMethods used to reduce or eliminate U.S. tax

withholding:IRS Form 673

Foreign earned income exclusion Foreign housing exclusion

Mandatory foreign withholding statementIRS Form W-4

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Expat Tax – IRS Form 673Foreign earned income exclusion

Up to $92,900 (2011) of foreign source income earned during the assignment period is excludable from taxable income

One of two tests must be met Bona Fide Residence Physical Presence Test

Foreign housing exclusionCost of foreign housing that is in excess of a

base amount determined by the IRS annually is excludable from taxable income

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Expat Tax – Foreign WithholdingIn accordance with IRS Sec. 3401(a)(8)(A)(ii)

and Treas. Reg. Sec. 31.3401(a)(8(A)-1(b)Used when compensation is foreign source

and subject to a mandatory foreign country tax withholding

Home country payroll should document the mandatory foreign withholding and maintain a copy in the employee file

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Expat Tax – IRS Form W-4Completed by the U.S. international assignee

to inform the employer of the expectation to qualify for foreign earned income and housing exclusions and/or to qualify for the claim of foreign tax credits, and thereby eligible for a reduction in current tax withholdings

Countries with mandatory withholdingCanada, UK, China

Countries with no mandatory withholdingHong Kong, Singapore (assessment in

following year)

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Expat Tax – California Income TaxCalifornia tax withholdings should continue

during the foreign assignment unless California residency is broken under one of the two tests available:Bright-Line Test: Employment related contract,

>18 months, <45 days, income from intangibles <$200K

Facts & Circumstances Test: Intent not to return to CA (subjective test)

Each state has its own residency rules, some similar to the facts and circumstances test, that may make state residency difficult to terminate

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Expat Tax – Social Security & Medicare TaxTotalization Agreements:

The employee must remain an employee of the Home country and pay Home country social taxes.

The Company must apply for a “Certificate of Coverage” in the Home country.

The Certificate of Coverage must be kept with the Host country payroll file to substantiate non-withholding in the event of a payroll audit.

http://www.ssa.gov/international/agreement_descriptions.html

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Expat Tax – Tax ReimbursementsCommon ways to protect assignees from

excess taxTax Equalization (TEQ)

Process to ensure that assignee pays no more / no less tax than s/he would have paid if they did not leave their home country

Tax Protection Process to ensure that assignee pays no more tax

than s/he would have paid if they did not leave their home country

If the assignee pays less tax, they retain the tax savings

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Expat Tax – Tax Reimbursements (cont.)Common tax reimbursement methods

Tax loans / Tax advances Employer pays the required actual home/host

country taxes Loans/Advances are generally added to

compensationTax gross up

Employer pays the additional tax due on assignment compensation, plus the tax on the tax

Tax gross ups are generally added to compensation

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Expat Tax – Tax Reimbursements (cont.)How should repayments made to the

company under terms of a tax reimbursement program be handled?If repaid during the same calendar year?If repaid during a subsequent calendar year?

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Expat Tax – Tax Reimbursements ExampleCompany owes assignee $4,480.

Need to deliver $4,480 net to assignee.TEQ settlement is wages to assignee (i.e.,

assignee incurs tax on this amount). Assume: 25% federal, 9.55% CA, and 1.45%

Medicare (assume maxed out on OASDI and CASDI).

With no gross up, assignee would incur U.S. federal tax of $1,120; CA State tax of $427.84; and Medicare tax of $64.96; resulting in a net in-pocket amount of $2,867.20 (vs. $4,480).

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Expat Tax – Tax Reimbursements ExampleCompany should:

Gross-up the $4,480 payment.Report $7,000 as wages.Remit $2,520 as withholding (on behalf of

assignee). Federal tax of $1,750 California tax of $668.50 Medicare tax of $101.50

Pay the employee a net payment of $4,480.

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Expat Tax – Claim of Right DoctrineThe tax treatment of an amount that was

included in taxable income in a previous year because the taxpayer appeared to have a right to the income, but is then returned to the payor of the income in a later year, is governed by the “claim of right” doctrine

IRC Section 1341(a)

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Expat Tax – Claim of Right Doctrine (cont.)The general rule:

An item was included in gross income for a prior tax year because it appeared that the taxpayer had an unrestricted right to the item;

A deduction is allowable for the future tax year in which the income is returned to the payor because it was established after the close of the prior tax year that the taxpayer did not have an unrestricted right to the item or to a portion of the item; and

The amount of the deduction exceeds $3,000

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Question & Answers

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Brent BerganPartner, Global Mobility TaxPartner, Global Mobility Tax, LLP (California

CPA)Experience – tax policy planning, foreign

country taxation, global equity awards, and the design, implementation and administration of international assignment programs

6 years as managing partner of expatriate tax consulting firm

7 years as Director of Tax at Oracle Corporation

Senior Manager with Ernst & Young in Palo Alto, CA

Board of Directors of WIPA

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Travis CallManager, Global Mobility TaxManager, Global Mobility Tax, LLP (California

CPA)Experience – U.S. tax compliance and

consulting for globally mobile employees, tax policy planning, foreign country taxation, global payroll and compensation review, and the design, implementation and administration of international assignment programs

3 ½ years as manager at Global Mobility Tax4 years in Global Employer Services at

Deloitte TaxInter-mountain Relocation Council Board

Member

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Global Mobility Tax, LLPBrent Bergan

Partner, Global Mobility Tax, LLP 260 State Street, Los Altos, CA 94022 Phone: 650.947.9490 Email: brent.bergan@glomotax.com

Travis CallManager, Global Mobility Tax, LLP

3214 N University Ave., No. 133, Provo, UT 84604 Phone: 801.850.6271 Email: travis.call@glomotax.com

www.glomotax.com