TalentTakeaways webinar & podcast series Revealing the Risks Associated with Global Compensation Programs
Jul 28, 2015
TalentTakeawayswebinar & podcast series
Revealing the Risks Associated with Global
Compensation Programs
Revealing the Risks Associated with Global Compensation Programs2
Global Compensation Risks
Legal &Financial Risks
Labor LawsEmployment Taxes
Payroll ReportingCorporate Income Tax
Revealing the Risks Associated with Global Compensation Programs3
Michael BussaPartner – Human Capital Practice, Ernst & Young
Special Guest Presenter
Revealing the Risks Associated with Global Compensation
Programs
Revealing the Risks Associated with Global Compensation Programs4
Circular 230 and Financial Statement Disclosure
Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions
These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice
Revealing the Risks Associated with Global Compensation Programs5
Today’s Discussion
1. Challenges to mitigating payroll risks
2. Overview of the current tax and regulatory landscape
3. Mitigating the risks of payroll non-compliance globally
4. Aligning global corporate income tax deduction and payroll reporting policies
5. Minimizing employment and labor law risks emanating from under reported compensation income
Revealing the Risks Associated with Global Compensation Programs6
Challenges to Mitigating Payroll Risks
Need for coordinated
approach amongst functional groups
Constant IT releases
Evolving data requirements
and dependencies
Tax and regulatory
developments
Tax and regulatory authorities
enforcement efforts
Increasing number of legal
entities/businesses to manage
globallyExpanded
employee types – cross border/
frequent business travelers
Revealing the Risks Associated with Global Compensation Programs7
Challenges to Mitigating Payroll Risks (continued)
Over the last several years, EY has identified over 600 significant payroll/compensation-related announcements from tax and regulatory bodies around the world aimed at employers and their employees!
Need for coordinated
approach amongst functional groups
Constant IT releases
Evolving data requirements
and dependencies
Tax and regulatory
developments
Tax and regulatory authorities
enforcement efforts
Increasing number of
legal entities/ businesses to
manage globallyExpanded
employee types – cross border/
frequent business travelers
Revealing the Risks Associated with Global Compensation Programs8
Current Tax and Regulatory Landscape
Announcements are issued in a wide variety of forms and from numerous authoritative bodies
Announcements address changes to tax, immigration, and foreign exchange laws, regulations, interpretations and practices
Certain procedural announcements issued indicate that taxing authorities will review compliance with tax law changes in upcoming audit cycles
Continued and increasing enforcement of applicable laws and regulations to drive…….”the Great Revenue Grab”!
Harmonization amongst regulatory bodies and countries to identify employees potentially subject to taxation in their jurisdictions. For example:- Taxing authorities using immigration, travel and workplace data- Exchange of information between countries regarding income and assets
Revealing the Risks Associated with Global Compensation Programs
Current Tax and Regulatory Landscape (continued)
9
Africa: Tax – 20Immigration- 13
Asia_Pac: Tax – 135Immigration- 26Fx – 7
Europe: Tax – 292
Immigration- 77Fx – 4
Americas: Tax – 29
Immigration- 3Fx – 1
Middle East: Immigration- 5
Revealing the Risks Associated with Global Compensation Programs10
Current Tax and Regulatory Landscape (continued)
Types of Announcements
Subject areas addressed in relation to compensation/ payroll Impacted Employee Types
Proposed/final law/regulations Individual taxation Local nationals
Rulings Payroll reporting/tax withholding Cross-border/permanent transfers
Court decisions Social security/employment taxes Seconded on international work assignment
Procedural/administrative guidance
Taxation of compensation income Frequent business travelers
Voluntary disclosures/abatements Corporate income tax deductibility “C suite” executives
Visa quotas Cross-border tax implications
FX limits/restrictions Pension payments/contributions
Income tax treaties Immigration quota limits/exemptions
Totalization agreements Cross-border income apportionment
Sanctions Currency transfers
Revealing the Risks Associated with Global Compensation Programs11
Mitigating the Risks of Payroll Non-Compliance Globally
Challenge – Ongoing Tax and Regulatory Developments
Ongoing validation that changes are implemented
and operating as instructed
Stay abreast of tax and regulatory developments
Assess impact of tax and regulatory changes to organization and employees
Identify stakeholders; secure buy-in and assign
responsibilities
Develop action plan for implementing changes
Revealing the Risks Associated with Global Compensation Programs12
Mitigating the Risks of Payroll Non-Compliance Globally (continued)
Meeting the Challenge of ongoing Tax and Regulatory Developments
Stay abreast of tax and regulatory developments
• Adopt robust process to timely identify applicable tax and regulatory changes
• Monitor authorities’ communication channels for announcements, releases, guidance, etc.
• Consider assistance from 3rd party providers
Revealing the Risks Associated with Global Compensation Programs13
Mitigating the Risks of Payroll Non-Compliance Globally (continued)
Meeting the Challenge of Ongoing Tax and Regulatory Developments
Assess impact of tax and regulatory changes to organization and employees
Determine specific tax or regulatory implications taking into account:
• Proposed/final laws and regulations
• Organizations’ risk posture
• Existing rulings/agreements with authorities
• Payroll/HR/IT system capabilities and limitations
• Market practice
• Cross-border/mobile employees
• Tax and regulatory issues specific to equity, incentive and non-cash compensation
• Financial/economic impact to organization and employees
Revealing the Risks Associated with Global Compensation Programs14
Mitigating the Risks of Payroll Non-Compliance Globally (continued)
Develop action plan for implementing changes
• Adopt positions to be taken
• Identify relevant functional areas of the organization required to be involved
• Assess data requirements
• Determine if significant gaps exist requiring corrective and/or remedial action
Meeting the Challenge of Ongoing Tax and Regulatory Developments
Revealing the Risks Associated with Global Compensation Programs15
Mitigating the Risks of Payroll Non-Compliance Globally (continued)
Identify stakeholders; secure buy-in and assign responsibilities
• Identify stakeholders across functional areas such as; payroll, HR, tax, accounting, executive compensation, mobility, general counsel’s office, and IT.
• Adopt and implement action plan and accountability matrix
• Perform testing and adjust where needed
• Provide training to payroll teams and other functional areas
Meeting the Challenge of Ongoing Tax and Regulatory Developments
Revealing the Risks Associated with Global Compensation Programs16
Mitigating the Risks of Payroll Non-Compliance Globally (continued)
Ongoing validation that changes are implemented and operating as instructed
Implement processes and controls/variance analysis to proactively validate payrolls are operating as instructed, with support from relevant functional groups. Special attention should be given to:
• Align payrolls coming on line for first time(e.g., where payroll reporting/w/h not previously required and triggered by law/regulatory change
• Special reporting/disclosure requirements
• Timely remittance of withholding and employer taxes
• Cross-border/mobile employees
• Equity, incentive and non-cash compensation
Meeting the Challenge of Ongoing Tax and Regulatory Developments
Revealing the Risks Associated with Global Compensation Programs17
Aligning Global Corporate Income Tax Deduction and Payroll Reporting Policies
Company X
Employee
$100K Cash Compensation
Corporate Income Tax Considerations
Payroll Considerations
• Corporate income tax deduction ordinarily would be available to Company X for compensation paid, provided:• Cost of compensation
is borne by Company X; and,
• Employee performs services for the benefit of Company X
• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out
• Most countries would require payroll reporting and possibly, tax withholding on the compensation paid
Performs services
Base case illustration
Revealing the Risks Associated with Global Compensation Programs18
Parent Company
X
Employee of Parent
Co. X
$100K Cash Compensation
Corporate Income Tax Considerations
Payroll Considerations
• Corporate income tax deduction ordinarily would be available to Subsidiary X for cash compensation paid by Parent Company X, provided:• Cost of compensation is
borne by Subsidiary X; and, • Employee performs services
for the benefit of Subsidiary X
• Deduction ordinarily available to Subsidiary X for locally paid allowances and B-I-K
• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for cash compensation, allowances and B-I-K
• Processes must be in placed to capture:• Recharges from Parent
company• Provide corporate tax with
visibility to locally paid allowances/B-I-K (some potentially non-cash/imputed)
• Most countries would require payroll reporting and possibly, tax withholding on the compensation paid by Parent Company X and allowances/B-I-K paid by subsidiary X
• In certain cases, a corporate income tax deduction will trigger payroll reporting/tax withholding which would otherwise not exist.
• Processes must be in place to capture:• Locally paid
allowances/B-I-K (some potentially non-cash/imputed
• Provide payroll with visibility to recharges from Parent company.
Subsidiary X
Secondment/Performs services
Locally paid allowances/B-I-K
Recharge for $100k cash compensation
Payment for recharge of $100K
Secondment illustration
Aligning Global Corporate Income Tax Deduction and Payroll Reporting Policies (continued)
Revealing the Risks Associated with Global Compensation Programs19
Parent Company
X
Employee of Sub X
$100K stock award
Corporate Income Tax Considerations
Payroll Considerations
• Corporate income tax deduction ordinarily would be available to Subsidiary X for stock award delivered by Parent Company X, provided:• Cost of award is
borne by Subsidiary X; and,
• Employee performs services for the benefit of Subsidiary X
• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for stock award
• Processes must be in place to capture recharges from Parent company.
• Most countries would require payroll reporting and possibly, tax withholding on the stock award delivered by Parent Company X
• In certain cases, a corporate income tax deduction will trigger payroll reporting/tax withholding which would otherwise not exist.
• Processes must be in place to:• Capture stock
award details• Provide payroll
with visibility to recharges from Parent company.
Subsidiary XPerforms services
Recharge for $100k stock compensation
Payment for recharge of $100K
Equity compensation illustration
Aligning Global Corporate Income Tax Deduction and Payroll Reporting Policies (continued)
Revealing the Risks Associated with Global Compensation Programs20
Parent Company
X
Employee of Parent
Co. X
$100K stock
award
Corporate Income Tax Considerations
Payroll Considerations
• Corporate income tax deductions ordinarily would be available to Parent Co. X and Subsidiary X for stock award delivered by Parent Company X.
• Deduction limited to award expense attributable to respective employment service periods, provided:• Respective costs of
award are borne by Parent X/ Subsidiary X; and,
• Employee performs services for the benefit of Parent X/Subsidiary X
• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for stock award
• Processes must be in place to: • Apportion recharges• Capture recharges from
Parent company.
• Most countries would require payroll reporting and possibly, tax withholding on the stock award delivered by Parent Company X at both the Parent and Subsidiary X levels.
• In certain cases, a corporate income tax deduction will trigger payroll reporting/tax withholding which would otherwise not exist.
• Processes must be in place to:• Apportion stock
award income • Capture stock award
details• Provide payroll with
visibility to recharges from Parent company.
Subsidiary XPerformed services G-V,
70%, while previously employed with Sub X
Recharge for $70k stock compensation
Payment for recharge of $70K
Performed services over G-V period=30%, while employed by Parent Co. X (current employer)
Multiple jurisdiction equity compensation illustration
Aligning Global Corporate Income Tax Deduction and Payroll Reporting Policies (continued)
Revealing the Risks Associated with Global Compensation Programs21
Parent Company
X
Employee of Parent
Co. X
$100K deferred
cash bonus
Corporate Income Tax Considerations
Payroll Considerations
• Corporate income tax deductions ordinarily would be available to Parent Co. X and Subsidiary X for deferred cash bonus paid by Parent Company X.
• Deduction limited to bonus expense attributable to respective employment service periods, provided:• Respective costs of bonus
are borne by Parent X/ Subsidiary X; and,
• Employee performs services for the benefit of Parent X/Subsidiary X
• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for bonus
• Processes must be in place to: • Apportion recharges• Capture recharges from
Parent company.
• Most countries would require payroll reporting and possibly, tax withholding on the deferred cash bonus paid by Parent Company X at both the Parent and Subsidiary X levels.
• In certain cases, a corporate income tax deduction will trigger payroll reporting/tax withholding which would otherwise not exist.
• Processes must be in place to:• Apportion bonus
income • Capture bonus details• Provide payroll with
visibility to recharges from Parent company.
Subsidiary X
Performed services over performance period= 70%, while previously employed with Sub X
Recharge for $70k deferred cash bonus
Payment for recharge of $70K
Performed services over performanceperiod= 30%, while employed by Parent Co. X (current employer)
Note: Alternatively, Parent Co. and Subsidiary can each pay their respective portions of the deferred cash bonus (i.e., 30/70); however, this could give rise to complexities around cash delivery to employees and possibly getting employees re-instated/re-registered on the prior employing company’s payroll.
Multiple jurisdiction deferred cash bonus illustration
Revealing the Risks Associated with Global Compensation Programs22
Minimizing Employment and Labor Law Risks Emanating from Under Reported Compensation Income
Risks arise primarily as a result of failure to: – Pay employer social or applicable employment taxes– Withhold applicable social taxes from employees– Include compensation income in statutory benefit formulas for
determining pension payments, termination payments, and other entitlements
Types of risks include:– Penalties assessed by taxing authorities for failure to pay/withhold
applicable taxes– Fines imposed by relevant authorities for failure to administer
compensation programs in accordance with applicable laws– Litigation from impacted employees for claims relating to:
• Underpaid pension payments, termination payments, and other entitlements
• Underpaid/under withheld taxes• Damages
Revealing the Risks Associated with Global Compensation Programs23
Types of compensation which predominantly give rise to failure to pay applicable taxes/include in statutory benefit formulas:
– Equity-based compensation– Deferred cash bonuses– Non-cash benefits-in-kind– Profit sharing arrangements
Highest risk for non-inclusion occurs when the compensation income is paid/delivered by parent company or third-party vendor
To minimize risks, implement processes and procedures to:– Identify compensation income subject to tax/statutory benefits – Identify payments not paid/delivered directly by employing company for
inclusion in• Payroll • Statutory benefit calculations
Minimizing Employment and Labor Law Risks Emanating from Under Reported Compensation Income (continued)
Revealing the Risks Associated with Global Compensation Programs24
Recap
Mitigating Payroll Risks
Tax & Regulatory Landscape
Global Payroll Compliance
Tax & Payroll Reporting Policies
Minimizing Employment Lawsuits
Revealing the Risks Associated with Global Compensation Programs25
Compensation Resources & Support
COMPview™ | Compensation Planning Software
Revealing the Risks Associated with Global Compensation Programs26
Compensation Resources & Support
answer questions
share resources
offer solutions
Strategy Session