Virtual Workers and Real Tax Issues 2007 High Tech Tax Institute November 5 & 6, 2007 Presenters: John McLearie, International Executive Services Principal-

Virtual Workers and Real Tax Issues Virtual Workers and Real Tax Issues

2007 High Tech Tax Institute

November 5 & 6, 2007

Presenters: John McLearie, International Executive Services Principal- KPMGAllan Smith, Partner – Grant Thornton

• International TaxInternational Tax TrendsTrends

ComplianceCompliance

AdministrationAdministration

• Domestic State & Local TaxDomestic State & Local Tax Payroll Tax ImplicationsPayroll Tax Implications

Other State & Local TaxesOther State & Local Taxes• Nexus – State Income/Franchise Tax, Sales Tax, Local TaxesNexus – State Income/Franchise Tax, Sales Tax, Local Taxes

AgendaAgenda

TrendsTrends

International AssignmentsInternational Assignments

What is the biggest challenge facing your international assignment program over the next 12-18 months?What is the biggest challenge facing your international assignment program over the next 12-18 months?

30%

6%

20%

11%

14%

19%

Reducing / controlling rising programadministration costs.

Managing the repatriation process ofemployees.

Tracking global equity compensation issues.

Staying up to date on international tax lawchanges.

Achieving a good return on investment.

Tracking the expatriate workforce worldwide.

Source: 2006 KPMG Global Forum

26%

21%26%

15%

12%

Source: 2005 KPMG Short Term Assignments Survey

Ability to accurately identify your short term assignees.

Tracking your short term assignees.

Tax Authority Reporting.

Lack of policy for the management of short term assignees.

Lack of internal ownership for the short term assignees.

What is your company’s biggest hurdle to the successful management of short term assignments?What is your company’s biggest hurdle to the successful management of short term assignments?

Source: 2005 KPMG Short Term Assignments Survey

54%

5%

27%

14%

Increased

Decreased

Remained the Same

Don't Know

Compared with One Year Ago, How has your organization’s use of STAs changed?Compared with One Year Ago, How has your organization’s use of STAs changed?

Short-Term Assignments (STAs) TrendsShort-Term Assignments (STAs) Trends

*Source: 2005 KPMG Short Term Assignments Survey

Popularity of STAs continues to grow for multi-national Popularity of STAs continues to grow for multi-national organizationsorganizations

• 54 percent indicate the use of STAs have increased compared to one year 54 percent indicate the use of STAs have increased compared to one year ago*ago*

Increase in the number of organizations that have a separate policy Increase in the number of organizations that have a separate policy for STAfor STA

• 50 percent have separate tax policy for STAs*50 percent have separate tax policy for STAs*• 76 percent have separate formal ST policy*76 percent have separate formal ST policy*

Why Organizations use STAs…Why Organizations use STAs…

9%

27%

8%

2%

30%

5%

19%

Extendedbusiness tripstend to evolve

into STAssignments

ST Assignmentsare more cost-

effective than LTAssignments

It is difficult toget employees to

agree to takelonger

assignments

Suchassignmentstend to be to

hardship/dangerlocations

Assignmentlength is dictatedby requirements

of clientcontracts

Don't know Other

Source: 2005 KPMG Short Term Assignments Survey

International AssignmentsInternational Assignments

ComplianceCompliance

STA Compliance IssuesSTA Compliance Issues

ImmigrationImmigration Confirm with immigration attorneys that the proper visas/work Confirm with immigration attorneys that the proper visas/work

permits have been appliedpermits have been applied Failure to comply may result in severe consequences for Failure to comply may result in severe consequences for

organization and to individual (e.g., fines and incarceration)organization and to individual (e.g., fines and incarceration)

Tax *Tax * CorporateCorporate Individual Individual SocialSocial

*Today’s primary focus.*Today’s primary focus.

Corporate – Permanent Establishment (PE)Corporate – Permanent Establishment (PE)

What is a PE?What is a PE?

One person can create a PEOne person can create a PE

PE’s are subject to corporate level taxation in the host countryPE’s are subject to corporate level taxation in the host country

The term PE and its trigger events are treaty/country specificThe term PE and its trigger events are treaty/country specific

Inconsistent documentation can lead to corporate PE exposureInconsistent documentation can lead to corporate PE exposure

STA – Individual Tax ConsiderationsSTA – Individual Tax Considerations

Away from Home ExpensesAway from Home Expenses Length of AssignmentLength of Assignment

Intent: Temporary vs. IndefiniteIntent: Temporary vs. Indefinite

Tax Treaty ImplicationsTax Treaty Implications

Individual – Away from Home ExpensesIndividual – Away from Home Expenses

The issue of intentThe issue of intent Change in intent with respect to assignment Change in intent with respect to assignment periods can result in loss of tax benefitsperiods can result in loss of tax benefits

DocumentationDocumentation Greater challenges in ensuring that letters of Greater challenges in ensuring that letters of assignment and inter-entity agreements assignment and inter-entity agreements coincide to preserve tax benefitscoincide to preserve tax benefits

The notorious The notorious assignment extensionassignment extension

Requires re-evaluation of the tax impact, Requires re-evaluation of the tax impact, documentation. May result in additional tax documentation. May result in additional tax filings and tax reconciliation for assignee. filings and tax reconciliation for assignee.

Tracking assignee Tracking assignee presencepresence

Failure to manage this issue results in Failure to manage this issue results in individual, payroll and potentially corporate non-individual, payroll and potentially corporate non-compliance. compliance.

Individual – Tax Treaty ImplicationsIndividual – Tax Treaty Implications

Host country tax exemptionHost country tax exemption Tax treaties do not exist between all Tax treaties do not exist between all countries. 183 day period is NOT countries. 183 day period is NOT straightforward in that the counting straightforward in that the counting period varies.period varies.

Home country tax residenceHome country tax residence This may result in the continuing need This may result in the continuing need to authorize home country tax filing to authorize home country tax filing preparation and possible inflated tax preparation and possible inflated tax costs.costs.

Economic employer concernsEconomic employer concerns Charge-back to the host country may Charge-back to the host country may result in loss of treaty exemptionresult in loss of treaty exemption

Social Security IssuesSocial Security Issues Certificates of coverage may be Certificates of coverage may be required; some countries have treaty required; some countries have treaty exemption. exemption.

STA – Minimizing the CostSTA – Minimizing the Cost

Tax PlanningTax Planning Structure assignment to maximize tax treaty benefitStructure assignment to maximize tax treaty benefit Proper documentation of intended assignment lengthProper documentation of intended assignment length Maintaining vs. breaking residency in home countryMaintaining vs. breaking residency in home country

International AssignmentsInternational Assignments

AdministrationAdministration

Helping the Business: Administration TipsHelping the Business: Administration Tips

• Develop specific ST international assignment and tax policies, if Develop specific ST international assignment and tax policies, if applicable, business travelers and commuter policiesapplicable, business travelers and commuter policies

• Involve HR in the planning stagesInvolve HR in the planning stages

• Issue a letter of assignment for short-term assignments, as well Issue a letter of assignment for short-term assignments, as well as long-termas long-term

• Develop Procedures that facilitate identification of STADevelop Procedures that facilitate identification of STA Design an authorization process that supports complianceDesign an authorization process that supports compliance Engage travel service providerEngage travel service provider Work with on-boarding group/securityWork with on-boarding group/security Establish process with technology groupEstablish process with technology group Contact accounts payable and/or expense report processing groupContact accounts payable and/or expense report processing group

Helping the Business: CommunicationHelping the Business: Communication

Utilize internal Websites, employee newsletters, etc., to educate on Utilize internal Websites, employee newsletters, etc., to educate on process and risksprocess and risks

On-line resources: On-line resources: Frequently Asked Questions available to key stakeholdersFrequently Asked Questions available to key stakeholders Downloadable project management questionnaireDownloadable project management questionnaire Country-specific model calculations with and without planningCountry-specific model calculations with and without planning Basic domestic tax law and treaty rules for key country pairsBasic domestic tax law and treaty rules for key country pairs Decision-trees and flowcharts on the STA tax compliance process Decision-trees and flowcharts on the STA tax compliance process Ongoing monitoringOngoing monitoring

STA’s Need to be Tracked – Why?STA’s Need to be Tracked – Why?

• Travel information – pre and post assignment – is criticalTravel information – pre and post assignment – is critical

• Travel information required for payroll, planning, and tax Travel information required for payroll, planning, and tax preparationpreparation

• Real-time travel data allows you to be pro-active rather than Real-time travel data allows you to be pro-active rather than reactivereactive

• Travel data helps to identify reporting and withholdingTravel data helps to identify reporting and withholding

Biggest issue – How to Identify and Track?Biggest issue – How to Identify and Track?

• Travel systemTravel system

• Travel expensesTravel expenses

• Security passesSecurity passes

• TimesheetsTimesheets

• Per diem paymentPer diem payment

• MicrochipMicrochip

• Travel diaryTravel diary

Managing Risks around STAsManaging Risks around STAs

Compliance includes:Compliance includes: Corporate TaxCorporate Tax Permanent establishmentPermanent establishment Individual TaxIndividual Tax Social TaxSocial Tax ImmigrationImmigration Payroll / Withholding agentPayroll / Withholding agent DocumentationDocumentation TrackingTracking

Accrue for the expense by estimating costsAccrue for the expense by estimating costs

Is There a Choice with STAs?There is No ChoiceIs There a Choice with STAs?There is No Choice

Short-term international assignments are vital in multinational Short-term international assignments are vital in multinational organizationsorganizations

Problem – Business leaders often choose and send employees Problem – Business leaders often choose and send employees without consulting with HR, Tax, or Payrollwithout consulting with HR, Tax, or Payroll

Solution – Build a Process that:Solution – Build a Process that: Identifies costsIdentifies costs Manages riskManages risk Highlights both costs and risks to the business leader and other Highlights both costs and risks to the business leader and other

stakeholdersstakeholders Facilitates assignments with a policy, tools, and trackingFacilitates assignments with a policy, tools, and tracking

Domestic State & Local Tax Domestic State & Local Tax ImplicationsImplications

State & Local TaxState & Local Tax

• PotentialPotential Compliance Requirements for the Business Resulting Compliance Requirements for the Business Resulting from Virtual or Mobile Employees:from Virtual or Mobile Employees:

Personal State & Local Income Tax WithholdingPersonal State & Local Income Tax Withholding State Unemployment TaxState Unemployment Tax State Income TaxState Income Tax State Franchise/Capital Stock TaxState Franchise/Capital Stock Tax State Gross Receipts TaxState Gross Receipts Tax State and Local Sales/Use Tax CollectionState and Local Sales/Use Tax Collection Local Income, Gross Receipts, and/or Payroll TaxLocal Income, Gross Receipts, and/or Payroll Tax Local Business License Registration and FeesLocal Business License Registration and Fees OtherOther

Income Tax WithholdingWages Paid to NonresidentsIncome Tax WithholdingWages Paid to Nonresidents

• Withholding Requirements Withholding Requirements Generally, income tax is required to be withheld from wages paid and Generally, income tax is required to be withheld from wages paid and

remitted to any state in which an individual performs services. For remitted to any state in which an individual performs services. For example, California resident employees are sent to a systems example, California resident employees are sent to a systems implementation job site in Illinois for 2 months, Illinois income tax implementation job site in Illinois for 2 months, Illinois income tax withholding would be required for wages paid and sourced to Illinoiswithholding would be required for wages paid and sourced to Illinois

Some states do impose a threshold that must be exceeded before Some states do impose a threshold that must be exceeded before withholding is required, but these thresholds are typically very low (e.g., withholding is required, but these thresholds are typically very low (e.g., $1,500 wages)$1,500 wages)

Withholding in state of residence may still be required when employee is Withholding in state of residence may still be required when employee is working in another stateworking in another state

• Failure to Withhold and RemitFailure to Withhold and Remit Employer may be liable for the Tax plus Penalties and InterestEmployer may be liable for the Tax plus Penalties and Interest Corporate Officer LiabilityCorporate Officer Liability

Income Tax WithholdingWages Paid to NonresidentsIncome Tax WithholdingWages Paid to Nonresidents

• Reciprocal AgreementsReciprocal Agreements Some states have reciprocal arrangements whereby tax withholding is only Some states have reciprocal arrangements whereby tax withholding is only

required for the state of residence (e.g., Maryland, Virginia, and D.C.)required for the state of residence (e.g., Maryland, Virginia, and D.C.) Requires a certification/authorization form from the employeeRequires a certification/authorization form from the employee

• New York "Convenience of the Employer" RuleNew York "Convenience of the Employer" Rule Days worked from home are treated as NY work days unless the Days worked from home are treated as NY work days unless the

nonresident employee worked outside of NY by necessity (applies if the nonresident employee worked outside of NY by necessity (applies if the employees "assigned" or "primary" office is in NY)employees "assigned" or "primary" office is in NY)

Revised Convenience rule under TSB-M-06(5)I provides exemption from Revised Convenience rule under TSB-M-06(5)I provides exemption from requirement if home office qualifies as "bona fide employer office"requirement if home office qualifies as "bona fide employer office"

Pennsylvania, Nebraska, and Delaware also have formal "convenience" Pennsylvania, Nebraska, and Delaware also have formal "convenience" rulesrules

Income Tax WithholdingWages Paid to NonresidentsIncome Tax WithholdingWages Paid to Nonresidents

• Issues/Things to ConsiderIssues/Things to Consider Internal Tracking SystemsInternal Tracking Systems Communications Between Functions/DepartmentsCommunications Between Functions/Departments Communications to Employees Regarding State Tax RequirementsCommunications to Employees Regarding State Tax Requirements Non-Salary Income (Commissions, Bonuses, Stock Options) – Non-Salary Income (Commissions, Bonuses, Stock Options) –

example, Pennsylvania requires withholding on commission example, Pennsylvania requires withholding on commission salesmen based on a ratio of sales volume on Pennsylvania to salesmen based on a ratio of sales volume on Pennsylvania to sales volume everywheresales volume everywhere

State Unemployment TaxState Unemployment Tax

• Employers must remit state unemployment tax on wages Employers must remit state unemployment tax on wages paid to an employee (up to a specified wage base limit) for paid to an employee (up to a specified wage base limit) for services rendered if such services are performed solely services rendered if such services are performed solely within the state. within the state.

• For services performed both within and without a state, For services performed both within and without a state, unemployment tax should be remitted to a state under a unemployment tax should be remitted to a state under a “four-prong test”“four-prong test”

State Unemployment Tax Four-Prong Test State Unemployment Tax Four-Prong Test

• Services are localized in the state;Services are localized in the state;

• If the services are not localized in a particular state, unemployment tax If the services are not localized in a particular state, unemployment tax should be remitted to the state where the employer has its base of should be remitted to the state where the employer has its base of operations;operations;

• If the employer’s base of operations is not in one of the states where If the employer’s base of operations is not in one of the states where the employee performs services, unemployment tax should be remitted the employee performs services, unemployment tax should be remitted to the state from which the services are directed and controlled;to the state from which the services are directed and controlled;

• If the services are not directed and controlled from one of the states If the services are not directed and controlled from one of the states where the employee performs services, unemployment tax should be where the employee performs services, unemployment tax should be remitted to the state of the employee’s residence.remitted to the state of the employee’s residence.

NexusNexus

Nexus is the minimal connection between the state (or local jurisdiction) and the taxpayer or transaction, which is sufficient that the state or local jurisdiction may require payment or remittance of a tax.

Nexus is the minimal connection between the state (or local jurisdiction) and the taxpayer or transaction, which is sufficient that the state or local jurisdiction may require payment or remittance of a tax.

NexusNexus

• Generally, physical presence of employees will create nexus for Generally, physical presence of employees will create nexus for income/franchise taxes, sales tax, gross receipts taxes, etc. at the income/franchise taxes, sales tax, gross receipts taxes, etc. at the state and local level state and local level

P.L. 86-272 protection applies for income tax purposes onlyP.L. 86-272 protection applies for income tax purposes only

• At what point does occasional visits by a mobile employee At what point does occasional visits by a mobile employee constitute doing business in a particular state? in a local constitute doing business in a particular state? in a local jurisdiction?jurisdiction?

• How do you track activity of mobile employees into state and How do you track activity of mobile employees into state and local jurisdictions?local jurisdictions?

NexusNexus

• Example – Philadelphia Business Privilege TaxExample – Philadelphia Business Privilege Tax

Taxpayer sells tangible personal property to large customer located in Taxpayer sells tangible personal property to large customer located in PhiladelphiaPhiladelphia

Employees located outside of state perform services at customer location Employees located outside of state perform services at customer location in Philadelphia creating nexusin Philadelphia creating nexus

Taxpayer is liable for income tax and gross receipts taxTaxpayer is liable for income tax and gross receipts tax Although no payroll or property in Philadelphia, large sales base creates Although no payroll or property in Philadelphia, large sales base creates

significant liabilitysignificant liability Philadelphia Interest and Penalty provisions:Philadelphia Interest and Penalty provisions:

• Interest accrues at the rate of 1% per monthInterest accrues at the rate of 1% per month• Penalties equal 30% after year one, then 1.25% for each month Penalties equal 30% after year one, then 1.25% for each month

thereafter (15% per year)thereafter (15% per year)

Presenters Contact DetailsPresenters Contact Details

John McLearieJohn McLearieKPMG LLPKPMG LLP500 E Middlefield Rd500 E Middlefield RdMountain View, CA 94536Mountain View, CA 94536(650) 404-5000(650) [email protected]@kpmg.com

Allan SmithAllan SmithGrant ThorntonGrant ThorntonOne California StreetOne California StreetSan Francisco, CA 94111San Francisco, CA 94111(415) 365-5440(415) [email protected]@gt.com

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN 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.