Immedis President of US Operations Dave LeBoff presents at Virtual Congress 2018.

1. 1
#PAYCON#PAYCON
#onlinecongress
#PAYCON
#onlinecongress

2. 22#onlinecongress 2#onlinecongress
Dave Leboff
President, US Operations
SPEAKER
Tax Equalization
for Payroll
Professionals

3. 33#onlinecongress 3#onlinecongress
Dave Leboff
President, US Operations
SPEAKER

4. AGENDA
#PAYCON
4
AGENDA
4#onlinecongress
AGENDA
4#onlinecongress
1. Definitions
2. Expatriate Programs & Policies
3. Income Tax & Expat Policies
4. Tax Equalization Administration
5. Other Tax Considerations Affecting
US Payroll Administration
6. Basics of Accounting for Tax
Equalization
7. Best Practices
8. Q & A

5. 5
#onlinecongress 5
#onlinecongress
Definitions

6. 2018 V I R T U A L C O N G R E S S 666
Expatriate
Verb: to settle oneself abroad
Noun: a person who lives
outside their native country

7. 2018 V I R T U A L C O N G R E S S 777
Company-Sponsored Expatriate
• An employee who
• Transfers across national borders
• To work on assignment for their
employer
• Under terms and conditions of a
company-developed policy
• For a period of time exceeding a
business trip

8. 2018 V I R T U A L C O N G R E S S 888
Expatriate Payroll Administration
The application of global mobility policy &
relevant law as part of ongoing domestic payroll
processing

9. 9
#onlinecongress 9
#onlinecongress
Expatriate Programs
& Policies

10. 10102018 V I R T U A L C O N G R E S S 102018 V I R T U A L C O N G R E S S
Types of Company Sponsored Assignments
184 Days – 1 Year 1 – 1+ Years Indefinite< 183 Days
Policy Type
Payroll Setup
Assignment Length
Home and Host
(Concurrent )
Host
Long Term
Int’l Assignment
Local
Short Term
Int’l Assignment
Extended
Business Trip
Home and Host
(Concurrent )
Home
(unless no tax treaty)

11. 2018 V I R T U A L C O N G R E S S 111111
• Relevant Tax Rules
• Likely taxable in home and
host countries
• Regular US withholdings
(Fed/State/Local/FICA/Medica
re)
• Section 162 (a) (2) may apply
(Temporary away from home
living expenses)
Short Term Assignment (184 days – 1 Year)
• Assignment Profile
• Project resource
• Duplicated expenses
• Family remains home
• Return home after assignment
• Policy Considerations
• Compensation remains tied to
home country
• Allowances offered to provide
equivalent financial net and quality
of life

12. 13132018 V I R T U A L C O N G R E S S 132018 V I R T U A L C O N G R E S S
Expatriate Policy Basics – Policy Principals
• When moving the expat from
Country A to Country B, an
expatriate’s “quality of life” and “net
pay” should feel like home country
• When employee moves to new
assignment or back home
compensation and tax should not
be a complicating factor in deciding
whether to take the assignment
– Similar goods and services
burden
– Similar housing burden
– Similar tax burden
– Similar net-in-pocket

13. 2018 V I R T U A L C O N G R E S S 141414
Balance Sheet – Foundation of Expat Policy Development
Tax Grossup at (40%)
on Additional
Allowances
$20,000
$12,000
$4,800
$1,920
$768
$307
$123
$49
$20
$8
$3
$1
Housing
$15,000
Net
Reserve
$20,000
Tax
(30%)
$30,000
Cost of
Living
$35,000
Housing
$20,000
Cost of
Living
$10,000
Additional Assignment
Allowances
Stay at
Home
Profile
Additional Assignment
Cost = $50,000

14. 2018 V I R T U A L C O N G R E S S 151515
Balance Sheet – Foundation of Expat Policy Development
Net Reserve
$20,000
Housing
$35,000
Cost of Living
$45,000
Tax $50,000
Housing
£ 26,915
Cost of Living
£ 34,605
Tax £ 30,760
Exchange Rate =
GBP .769 per 1 USD

15. 2018 V I R T U A L C O N G R E S S 161616
Expatriate Programs & Policies
Exchange
Rate: GBP to
USD = .769
PAYCODE
Paid At Home
(USD)
Paid in Host
(GBP)
Salary USD 100,000
Allowances
(Hypo Cost Of Living) (USD 35,000)
(Hypo Housing) (USD 15,000)
(Hypo Tax) (USD 30,000)
Actual Cost of Living Allowance (Host)
GBP 34,605
Actual Housing Allowance (Host)
GBP 26,915

16. 2018 V I R T U A L C O N G R E S S 171717
Expatriate Programs & Policies

17. 2018 V I R T U A L C O N G R E S S 181818
Expatriate Programs & Policies
Exchange Rate:
GBP to USD =
.769
PAYCODE
Paid At Home
(USD)
Paid in Host
(GBP)
Total Reported
(GBP)
Salary USD100,000 GBP 76,900
Allowances
(Hypo Cost Of Living) (USD 35,000) (GBP 26,915)
(Hypo Housing) (USD 15,000) (GBP 11,535)
(Hypo Tax) (USD 30,000) (GBP 23,070)
Actual Cost of Living Allowance
(Host)
GBP 34,605 GBP 34,605
Actual Housing Allowance (Host) GBP 26,915 GBP 26,915
Actual Tax (Grossup) USD 10,000 GBP 30,760 GBP 38,450
Salary Plus Allowances (Reportable Compensation)
Deductions
Salary/Allowances Paid - British Payroll (GBP 61,520) (GBP 61,520)
Actual Home/Host Taxes (USD10,000) (GBP 30,760) (GBP 38,450)
NET PAY DELIVERED IN USD (USD 20,000) (GBP 15,380)
NET PAY IN GBP -0-

18. 19
#PAYCON
19
#onlinecongress#onlinecongress
#PAYCON
19
#onlinecongress#onlinecongress
Income Tax and Expatriate
Policies

19. 2018 V I R T U A L C O N G R E S S 202020
Tax Drivers of Expatriate Policies
• Dual country tax
• Different fiscal years
• Complexity of foreign tax laws and
languages
• Certain locations may be perceived to be
more or less economically attractive than
others
• Risk allocation between employer and
employee

20. 2018 V I R T U A L C O N G R E S S 212121
Common Expatriate Tax Policy Models
1. Laissez Faire
2. Tax Protection
3. Other
4. Tax Equalization

21. 2018 V I R T U A L C O N G R E S S 222222
Laissez Faire
• Employee on their own, win or lose
• Employee motivated to reduce tax
burden
• Chances of non-compliance
increase
• Employee will likely call and
negotiate with employer if tax costs
are higher than anticipated

22. 23232018 V I R T U A L C O N G R E S S 232018 V I R T U A L C O N G R E S S
Tax Protection
• Employer agrees to pick up tax
costs if they exceed home country
tax costs; employee keeps
difference if lower cost
• Because of allowances and tax
costs may exceed home country
in majority of cases, causes
negotiation of tax in every case
• May hinder employee relocation
flexibility
Tax Protection with
Grossups
• Grossups provided at outset in
anticipation of additional tax
costs

23. 2018 V I R T U A L C O N G R E S S 242424
Income Tax and Expatriate Policies

24. 25
#PAYCON
25
#onlinecongress#onlinecongress
#PAYCON
25
#onlinecongress#onlinecongress
Tax Equalization
Administration for US
Payroll Professionals

25. 26262018 V I R T U A L C O N G R E S S 262018 V I R T U A L C O N G R E S S
◦ Employer charges employee a hypothetical
tax roughly equivalent to his/her stay at home
tax (or some other policy-derived amount)
• Defines and locks in employee’s tax
burden
◦ Employer pays 100% of employee’s actual
Federal, State, Local, FICA, Medicare,
Foreign Income Tax, Foreign Social Tax
obligation
◦ Risk/reward for tax planning shifts to employer
◦ No tax incentive to stay or leave a country
Tax Equalization

26. 27272018 V I R T U A L C O N G R E S S 272018 V I R T U A L C O N G R E S S
Tax Equalization Cycle
• Assignee is responsible for a
policy-derived amount
(“estimated theoretical tax”)
approximating the employee’s
stay-at-home tax liability
• This estimated obligation is
retained each pay period in the
form of a negative allowance
called “hypothetical tax” (like
tax withholding)
• Employer pays all of the expat’s
“actual home and host country
income and social taxes”
• After the tax year is over and all
tax-related information is known,
an “actual theoretical tax” is
calculated and compared to the
hypothetical tax retained for a
final true-up – This “true up” is
known as Tax Equalization
• Like comparing withholding
to actual tax on a tax return

27. 2018 V I R T U A L C O N G R E S S 282828
Tax Equalization Cycle
Employee Estimated
Theoretical Tax is $30,000
annually. Therefore, on a
semi-monthly payroll $1,250
Hypothetical Tax is retained
from salary each period
Employer pays GBP
30,760 of Actual UK
PAYE and grosses up
$10,000 of Actual US Tax
on behalf of employee
After year end Tax
Consultant computes
stay-at-home (Actual
Theoretical) tax in the
amount of $29,850
Employer reimburses
over-retained
Hypothetical Tax of
$150 to employee

28. 2018 V I R T U A L C O N G R E S S 292929
Example - TEQ Settlement
Tax-related payments made by or on behalf of the Expat
◦Hypothetical tax retained from gross compensation $ 30,000
◦US Income taxes withheld from pay $ 509
◦FICA withheld from pay $ 7,316
◦Medicare withheld from pay $ 2,175
◦Grossed up UK Tax paid (shadow payroll) $ 40,000
TOTAL $ 80,000
$10,000 US
Grossup

29. 2018 V I R T U A L C O N G R E S S 303030
Examples - TEQ Settlement
TOTAL Payments of Actual Tax and Hypothetical Tax $ 80,000
Amounts Funded by Employer:
US Tax Grossup (Federal/State/City/FICA/Medicare) ($10,000)
UK Grossed up PAYE (shadow payroll) ($40,000)
Amount funded by Employee (hypothetical tax) $30,000
Actual Theoretical Tax (calculated after the tax return is completed) ($29,850)
Balance owed to employee before tax refunds $ 150
Refund of US Income Tax $ (509)
Net Balance owed to employer $ (359)

30. 31312018 V I R T U A L C O N G R E S S 312018 V I R T U A L C O N G R E S S
• TEQ balances paid to employees by
the employer
− Taxable and should be grossed up
and included in W2
• TEQ balances paid to the employer
by employees
− Apply IRC Section 1341 – Claim of
Right rules
− Not a negative earning in W2
• Claim of Right
– Miscellaneous deduction on
Schedule A for amount of TEQ paid
back to employer, or
– Tax credit representing the
overpaid tax in the year the excess
tax payment was included in
income, and take that amount as a
tax credit in current year
• If employee does not repay TEQ
balance
– No reporting of amount on 1099 or
W-2 as loan forgiveness (as amount
has already been taxed)
Handling of Payments To/From Employees

31. 2018 V I R T U A L C O N G R E S S 323232
• Grossups
◦ If Foreign Tax Credits and/or Foreign Earned Income Exclusion (Section 911) will eliminate US
Income tax, gross up only FICA, Medicare, State, Local Taxes
◦ Quick formula for grossup (if your payroll system does not do it for you):
((amount to be grossed up/(1 - tax rate))-amount to be grossed up
• For example – grossing up a $20,000 tuition payment
– Fed Rate = 0% (Foreign tax credit)
– State Rate = 5%
– FICA = 6.2%
– Medicare = 1.45%
• (20,000/(1 - .1265)) – 20,000
• 22,896.39 – 20,000
• 2,896.39
◦ Go to www.paycheckcity.com for an online grossup tool
Handling of Payments Due To/From Employees
12.65%
PROOF
22,896.39 22,896.39 22,896.39
X .05 X .062 x.0145
1,144.82 1,419.58 331.99
2,896.39

32. 2018 V I R T U A L C O N G R E S S 333333
Income Tax and Expatriate Policies

33. 34
#PAYCON
34
#onlinecongress#onlinecongress
#PAYCON
34
#onlinecongress#onlinecongress
Other Tax Considerations
Affecting US Payroll
Administration for
Expatriates

34. 2018 V I R T U A L C O N G R E S S 353535
Section 911 - Exclusion of Income Earned Abroad
◦ US citizens or greencard holders employed outside the US
• Section 911 Exclusion – Up to $104,100 plus certain
housing costs
– Wages of US citizen or resident in excess of
exclusions are subject to FIT
» Bona Fide Residence Test (“BFR”) or Physical Presence Test (“PP”) for US
Citizens
» Physical Presence Test for Green Card Holders
» Form 673 plus W-4 should be filed for BFR test expatriates
• State tax withholding – state by state rules
– Many hard to break
– Some have quantitative rules

35. 2018 V I R T U A L C O N G R E S S 363636
High wage earners may be subject
to 35% withholding on non-periodic
pays regardless of foreign tax
credits or Section 911
Supplemental income withholding rules apply to
non-periodic expatriate allowances

36. 37372018 V I R T U A L C O N G R E S S
Foreign Tax Credits (“FTC”)
• As mentioned, FTC’s can reduce US
income tax on expatriates
• US FIT should be adjusted to reflect the
reduction or elimination of US income tax
accordingly
• W-4 should reflect effect of FTC on
withholding
Income Tax Treaties
• The US has income tax treaties with
almost 80 countries
• General rule for international travel:
Employee exempt from host country
income tax if:
◦ In that country under 183 days in a
year, and
◦ Charges for transferee are borne
outside of the host country

37. 38382018 V I R T U A L C O N G R E S S 382018 V I R T U A L C O N G R E S S
Section 162: Travel expenses are deductible for
assignments that are temporary away from home
• If an assignment away from home
in a single location is expected to
last (and it does last) for 1 year or
less, it is temporary unless facts
and circumstances indicate
otherwise.
• If an assignment is expected to
last for more than 1 year, it is
indefinite.

38. 39392018 V I R T U A L C O N G R E S S 392018 V I R T U A L C O N G R E S S
Section 162: Travel expenses are deductible for
assignments that are temporary away from home.
• However, if employment away from
home to is expected last for 1 year
or less, but at some later date you
expect it to last longer than 1 year, it
is temporary (in the absence of facts
and circumstances indicating
otherwise) until the expectation
changes.
• Starting with the date your
expectation changes, travel
expenses will no longer be
deductible.
• What determines a temporary
versus an indefinite assignment
is the intent of the taxpayer.

39. 2018 V I R T U A L C O N G R E S S 404040
Totalization Agreements
• Cases where expatriates are
reported on two countries’
payrolls
• Social security agreements
between those two countries
that set rules for determining
into which system social
security taxes are paid into
• If no totalization agreement
exists, then contributions may
have to be made into two
systems
• US participates in 26 Totalization
Agreements:
• https://www.irs.gov/individuals/international-
taxpayers/totalization-agreements
• Certificates of Coverage are the
payroll administrator’s proof that an
expatriate is contributing to another
social insurance system under the
terms of a totalization agreement
• Apply for US certificate of coverage if
the expat pays into the US system
and forward for the files of the other
country’s payroll administrator
https://opts.ssa.gov/

40. 2018 V I R T U A L C O N G R E S S 414141
Duplicate social security taxes are
creditable (US FTC)

41. 42
#PAYCON
42
#onlinecongress#onlinecongress
#PAYCON
42
#onlinecongress#onlinecongress
Basics of Accounting for
Tax Equalization

42. 2018 V I R T U A L C O N G R E S S 434343
1. Project Tax
Costs for Next
Year
2. Build Reserve
for Tax/Charge
the Location
3. Reduce
Reserve for
Actual Taxes
Paid
4. Determine the
Adequacy of the
Reserve
5. Top
Up/Reduce the
Reserve

43. 2018 V I R T U A L C O N G R E S S 444444
Best Practices
• Don’t over-grossup
◦ The expatriate should take into account Foreign Earned Income
Exclusion and Foreign Tax Credits for calculating W-4
• Get opinion from tax counsel on claim of right questions
• Know how you organization’s tax equalization policy treats non-salary
compensation and personal income for accurate grossup
• Take advantage of tax treaties for employees on assignment for under
183 days
• Take advantage of totalization agreements

44. 45
#PAYCON
45
#onlinecongress#onlinecongress
#PAYCON
45
#onlinecongress#onlinecongress
Questions
Dave Leboff
President, US Operations
Immedis, Inc.
dave.leboff@Immedis.com
+1 (212) 239-2625 x212
www.Immedis.com

45. Please Complete Your Evaluation
Thank you!
#onlinecongress
Thank you!
#onlinecongress