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Slide 1
Overview of tax reimbursement plans and related payroll
reporting requirements Rajiv Thadani Principal, Tax KPMG LLP
[email protected] (408)367-2765 California Payroll Conference
September 11 and 12, 2014
Slide 2
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.
Slide 3
Agenda 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
Slide 4
Tax Reimbursement Plans
Slide 5
Tax reimbursement plans 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
Slide 6
Tax reimbursement plans key attributes Scope Specify who is
covered under the plan and the employers 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 plans intent Examine areas of operation and specifically
country combinations of employees on assignment to determine
suitable plan
Slide 7
Types of Tax Reimbursement Plans
Slide 8
Types of tax reimbursement plans Tax protection Tax
equalization
Slide 9
Tax protection
Slide 10
Tax protection Key characteristics 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.
Slide 11
Tax protection Benefits and disadvantages 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
mobility Inequality for employees in different home and host
countries May result in employee cash flow issues because of
funding Greater risk of non compliance with tax reporting
requirements
Slide 12
Tax protection Example 1 U.S. taxpayer assigned to the U.K. 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.
Slide 13
Tax protection Example 2 U.S. taxpayer assigned to Singapore In
this example, the employee paid the lesser of the actual taxes paid
to the US and Singapore and receives a tax windfall of $10,000
relative to his stay at home hypothetical tax obligation.
Slide 14
Tax Equalization
Slide 15
Tax equalization Key characteristics 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 employees final. Payment is made
either from the employee to the company or company to the employee
based on the employees final hypothetical tax position.
Overwhelmingly accepted as the preferred method by global companies
for U.S. expatriates
Slide 16
Tax equalization Benefits and disadvantages Benefits: Promotes
compliance with tax reporting requirements Provides equal tax
treatment for employees Supports mobility of expatriates to various
country locations May lead to tax cost savings depending on country
combinations Disadvantages: Administratively time consuming May be
costly due to the compounding effect of company funded tax
payments
Slide 17
Tax equalization Example 1 U.S. taxpayer assigned to the U.K.
In this example, the employees retained hypothetical tax was less
than his/her final hypothetical tax obligation and repayment was
settled to the employer.
Slide 18
Tax equalization Example 2 U.S. taxpayer assigned to the
Singapore In this example, the employees 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 US hypothetical taxes
exceeded the actual tax obligations and the company realizes the
benefit.
Slide 19
Tax Equalization Payroll Reporting Requirements
Slide 20
Tax equalization Payroll reporting requirements Hypothetical
taxes withheld from an employees 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
Slide 21
Tax Equalization Payroll Reporting for Repayments
Slide 22
Tax equalization Payroll reporting for repayments Example 1.
The employees 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?
Slide 23
Tax equalization Payroll reporting for repayments Example 2.
The employees 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?
Slide 24
Tax equalization Payroll reporting for repayments Example 3.
The employees 2013 tax equalization settlement balance reflects
that the employer owes the employee $5,000 for settlement. The
employee is a US 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 US taxes?
Slide 25
Tax equalization - Payroll reporting for repayments Example 4.
The employees 2013 tax equalization settlement balance reflects
that the employer owes the employee $5,000 for settlement. The
employee is a US 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
US tax gross-ups should apply to the payment?
Slide 26
Tax Reimbursement Plans Administrative Matters
Slide 27
Tax reimbursement plans Administrative matters 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 US tax withholding because he is subject to foreign tax
withholding and is not expected to have residual US Federal tax
obligations.
Slide 28
Questions
Slide 29
Thank you for your attention Please complete your
evaluation
Slide 30
Rajiv Thadani, Principal KPMG LLP Background: Rajiv is a global
engagement lead for various technology clients in KPMGs Bay Area
office. He joined KPMG in 2001 having previously worked with Arthur
Andersen. He has more than 17 years of experience providing a vast
array of international tax and human resources services. Prior to
relocating to the United States, Rajiv has worked in Belgium,
United Kingdom, and India, and is familiar with the tax and HR
challenges that accompany the international assignments.