Navigating through the Dynamic World of Payroll and Employment Taxes

By Tom Zesk, Partner, Deloitte Tax LLP — July 24, 2012

I often ask my clients “what keeps you up at night?” Their response? It’s usually what they don’t know, particularly with respect to the world of payroll and employment taxes and the labyrinth of different rules for each state and local jurisdiction.

Take nonresident withholding for short-term business travelers, also called multijurisdictional withholding and mobile-workforce taxation. One must know the requirements for each state, and be able to gather the employee information necessary to maintain compliance. These rules exist in every state (actually 41 states, since nine do not have state income tax) but vary by both threshold — which can be based on a dollar figure or the time spent working in a particular state — and of course rates, which vary. Even if information can be updated regularly, not all payroll systems have the functionality to accommodate an employee that needs withholding in more than two states.

The most recent version of the proposed Mobile Workforce State Income Tax Simplification Act of 2012 was passed in the U.S. House of Representatives a year after it was introduced. This bill would introduce a uniform 30-day threshold for all states, if enacted. Employers would no longer be required to withhold on employees’ wages, nor would they need to report in any state other than the employee’s state of residence and a state in which the employee is present and performing employment duties for more than 30 days during a calendar year.

As of right now, this proposed bill has not been introduced in the Senate, and is not scheduled to be introduced any time soon. Some feel that Congress will never pass a law that has such control over the way states raise revenue, especially when the states are facing budget challenges. However, we’ve seen Congress step in and pass legislation that changed the way the states can tax retirement income, but such instances are rare.

For now, one’s only option is to continue to address each state’s rules separately.

Click here to register or view an archive of our webcast on this topic (taking place Wednesday, July 25).

  

I’ll Know It When I See It.

By Tom Zesk, Partner, Deloitte Tax LLP — May 17, 2012

I used to be able to say that with certainty when discussing the tax treatment of compensation and benefits plans, but now I am not so sure anymore.  Arrangements have become more complex in order to meet the needs of both domestic and global workforces.  In addition, rules being promulgated by government agencies in the United States and abroad are affecting the design as well as the taxation and reporting of these plans.  “Section 409A,” “Section 457A,” “SEC proxy disclosure rules,” the “Dodd-Frank Act,” “UK Disguised Remuneration,” “Fair and Accurate Credit Transactions Act (FATCA),” and “Report of Foreign Bank and Financial Accounts (FBAR),” — these are just some of the laws and requirements that are muddying the waters.

The Dodd-Frank Act calls for the deferral of incentive compensation for executive officers of certain financial institutions.  How will these deferrals be affected by the rules of Section 409A and/or Section 457A?  Of course, the answer is “it depends,” as the definition of “deferred compensation” is different for each and different exceptions apply.

Only time will tell how much of an impact the UK Disguised Remunerations will have on the design of equity, deferred compensation, and loan programs.  However, I am certain that significant collaboration between human resources, legal, and tax will be needed to achieve the desired outcome, especially for global companies dealing with the requirements of multiple jurisdictions.

More recently, the FATCA and FBAR rules in the United States have increased the requirements to report foreign assets and accounts as part of a taxpayer’s annual tax return filings.  The Internal Revenue Service has made clear that these are not duplicative filings.  Each has its own set of definitions, exceptions, and filing thresholds.  Furthermore, these asset/account reporting requirements differ from income reporting requirements.  In certain situations, an asset may need to be reported even though no income is generated, and in other situations income may need to be reported even though the asset does not need to be reported.

Will you know it when you see it?  Register or view the archive of our next webcast being held live on May 23 entitled “Deferred Compensation in a Regulated World” to learn more about the latest rules and trends related to deferred compensation and the changing regulatory environment in other countries as regulations continue to evolve globally.

Denial isn't just a river ...

By Kristen Kowalski, Director, Deloitte Tax LLP — February 22, 2011

How many times have you said the following to yourself …

“I’ll just have one drink…”

“I’ll just get this one pair of shoes…”

“I mean, it’s a MINI cheeseburger, it can’t be that many calories…”

And then come to realize that you don’t remember much of last night, you have ten shoeboxes in your hallway, and you’re carrying a half-dozen “mini cheeseburgers” around your midsection? 

So you will understand where I’m going when I ask if you have also said the following to yourself…

“It’s just one person going on a few business trips.  That’s not a big deal.  Right?”

Maybe.  Maybe not.  The short term business traveler is a rapidly evolving role that creates different benefits and additional challenges to employers now than it had in the past.  Many professions now allow employees to work virtually anywhere in the world, which is not only convenient but also helpful to building an employee’s skill set and personal connections.  However, when one trip for a project turns into several trips, individuals may quickly become liable for taxes in another state or foreign jurisdiction.  Complicating the issue further is that certain business travelers are an unknown quantity to company HR: difficult to track and not normally covered under any sort of policy.

It’s no secret that with the state of our global economy, domestic and international tax authorities are looking for new sources of revenue.  Business travelers are an easy target, but for a long time, governments faced the same tracking issues that employers did.  However, with better technology, tax authorities are becoming more sophisticated in pursuing these potential sources of revenue.  Changes to employer reporting requirements and information sharing between the taxing and immigration authorities in countries are just two examples of how tax authorities are successfully uncovering the necessary information. .  At the very least, unchecked business travel may  result in an inconvenience to the employee who didn’t know a tax return had to be filed until he/she received a notice.  Worse cases may result in exorbitant penalties, unfavorable company press coverage or specific travel bans.

But before you find yourself trying to answer how that one business traveler suddenly turned into an unknown number of individuals crisscrossing around the globe so fast it’s making your head spin, take a deep breath, and register for our next webcast on February 22 entitled “Business travelers: The road ahead,” or view the archive on the Global Employer Net|Work, and we can promise it will do less damage to your wallet and your waistline than those mini cheeseburgers – registration is free. 

Planning for the Holidays — Make Your Tax Reporting List and Check it Twice

By Sean Trotman, Principal, Deloitte Tax LLP – December 6, 2011

As the new year approaches, I hear more and more frequently from client company employees with urgent requests for clarification of employee compensation reporting requirements for stock-based awards. In the U.S., as we enter the period that most people consider “the holidays,” the hours spent in the office by payroll, tax, benefits, and other human resource personnel usually grows precipitously as the days grow shorter, as they work to collect, reconcile, and adjust compensation data on a massive scale in order to meet deadlines for reporting of income within the calendar year. Then, soon after in January, the race is on to quickly produce and send W-2 forms to employees by January 31.

Beyond U.S. borders, the “year-end” compensation reporting season can extend well beyond the end of the calendar year, even where a country uses the calendar year as the tax year for individuals. Many countries are more generous than the U.S. in allowing time after the year’s end for the completion of annual compensation statements that are similar to Form W-2. For example, Ireland’s Form P60 is due by February 15, Canada’s T-4s are due by the end of February, and Belgium’s 281.10/20s are due by the end of March.

Another factor that keeps the global year-end tax reporting calendar rolling is the fact that the UK and other members of the British Commonwealth have non-calendar tax years. The UK itself leads the field in quirkiness with a counter-intuitive year-end of April 5, whereas other such countries, such as South Africa (February 28), India (March 31), and Australia (June 30), have chosen a month-end to close out their tax year. While the UK offers approximately eight post-year-end weeks, until May 31, for a company to produce the P60 End of Year Certificate, Australia only allows a miserly two weeks after year-end for a company to provide its employees with an employee share scheme statement (which reports only stock-based compensation details) and a PAYG withholding payment summary (for cash compensation). In addition to income reporting to employees, companies should make sure to file the annual UK plan summary reporting forms, such as Form 42 for a UK nonqualified plan and Form 35 for a UK tax-preferred Company Share Option Plan for the tax year ending April 5 with Her Majesty’s Revenue and Customs before July 7.

An additional dimension that needs to be tracked by U.S. parent companies is the specific taxable or reportable events for stock-based compensation and local valuation rules in non-U.S. locations, where they have employees participating in the stock compensation programs. The data needs of local payroll groups for year-end reporting are by no means uniform. In Belgium, the local employer will need to report a deemed value in the year of grant for stock options that have been offered by the company and accepted by the employee within sixty days. Australian rules for stock-based compensation are now so convoluted that possible taxation events include the full spectrum of typical possibilities: grant and vesting of awards, acquisition of shares, and sale of shares, depending on facts that need to be carefully reviewed. In Italy, stock compensation is measured by “normal value,” which, for a publicly traded stock, is an average of the closing stock prices in the one month leading up to and including the stock acquisition date. Despite its successful efforts to integrate itself in the global economy, for shares that are not listed on an Indian stock exchange, India apparently does not place faith in the value-setting role of global stock exchanges and instead requires that stock compensation be valued by a certain category of domestic Merchant Banker.
 
Even when a company carefully plans out its processes and regular data needs for year-end reporting for its typical employee population well in advance, it will need to review and account for employees who change work locations (with or without a shift in payroll location). A wide variety of data may be needed for each mobile employee who has performed services in multiple taxing jurisdictions (countries, states, provinces, cities). Citizenship, permanent residence, visa type, employee transfer or change of residence dates, and daily work location are among the data points that may need to be gathered and analyzed to determine whether and how much compensation should be reported and potentially subjected to tax withholding in two or more tax jurisdictions before the end of the tax year.

Oftentimes, far removed from the loci of employee compensation concerns in human resources and payroll groups, the corporate tax department may have decided during the year that it wants to generate corporate tax deductions by implementing cost recharge arrangements between the U.S. parent and the non-U.S. subsidiaries. In many countries, especially in Latin America, Eastern Europe, and Asia, cost recharges can create new local employer payroll obligations for reporting and tax withholding, and even new tax liabilities. For example, when a recharge arrangement is in place with a Brazilian employer company, employee and employer social taxes and employer tax reporting and withholding obligations apply where they may not otherwise exist. Similarly, in South Korea, a recharge of costs results in new employer reporting and withholding obligations, but generally does not result in new tax liabilities. Because recharge arrangements can have these potentially unintended consequences, payroll groups need to stay informed of changes in company policies for recharge arrangements.

In summary, the global year-end stock compensation reporting process requires attention throughout the year. The companies that are most successful in this important area not only check off the required deadline-driven “to-dos” but also make the effort to further develop the process schedule, data requirements and responsibilities documentation for the next annual cycle. With some advance planning and attention throughout the year, it is possible for company personnel involved in annual stock compensation reporting to achieve a happier condition for the holidays.

Not all Pension Plans are Treated the Same

By Tom Zesk, Partner, Deloitte Tax LLP — November 8, 2011

As we prepare for the year-end Form W-2 reporting season, I was updated by my team on how employers are treating foreign pension plans for U.S. inbound employees participating in their home country plans.  I was amazed by how many different approaches employers have taken to determine and capture the amount of taxable income for inclusion on employees’ Forms W-2.  Historical practices of treating foreign pension plans the same as U.S.-qualified plans (i.e., not taxable until distribution) are being replaced by in-depth analysis of domestic and foreign tax laws and applicable treaty relief. 

Generally, the assignee’s accrued benefits for the year will be taxable immediately under the U.S. tax code unless the U.S. has a treaty with the home country, which provides that the benefits will not be taxable and the individual has communicated to the employer that he or she has elected to apply the treaty provisions. There are many factors to take into consideration when performing a treaty analysis, such as immigration status; length of assignment; commencement of participation in the plan; applicable U.S.-qualified plan limits; vesting; and funding.  Many of the technical issues were covered in detail during our May 18, 2011, Global Employer Net|Work seminar on equity compensation and international pensions.

However, applying the technical conclusions to a company’s internal reporting processes to accurately prepare a Form W-2 appears to be another matter altogether.  Employers may be erroneously including amounts in income when treaty relief could exclude them.  Additionally, as many foreign plans operate on a fiscal year, the timing of income recognition for the benefits accrued in that entire fiscal year, if any, may be delayed until the tax year of the employee, which includes the end of the fiscal year of the plan (i.e., the taxable amount of accrued benefits for a 12-month plan year ending March 31, 2011 would be included in the 2011 Form W-2 and amounts related to April 1, 2011 through March 31, 2012, would be reportable on the 2012 Form W-2).

Timing is also a challenge.  In order to advise our clients on the appropriate amount to include in income, and the related reporting obligations, we need to obtain the information related to the foreign plans on a timely basis so it can be reflected in year-end reporting.  In many cases, we also have to understand their payroll processes and will need to provide solutions for specific situations.  

Do you know how your plans are treated?  If not, now would be the time to perform an analysis. 

Fall into Fundamentals

By Kristen Kowalski, Director, Deloitte Tax LLP — October 25, 2011

October is here, and in my neck of the woods, the fall colors are on full display. This time of year is one of my favorites – temperature changes, crisp fresh air, apple picking, and of course – Halloween!  We take Halloween pretty seriously in my household, and it is always a challenge to find the perfect decorations – things that will not scare the neighbors, but allow each of my family members to get creative on the same budget.  I was just telling one of my children, “You can get five pumpkins or one giant ghost, but you can’t get both.” This year, it got me thinking about a similar struggle in the mobility arena and the recent developments around “core/flex” policies.

A few weeks ago, we wrapped up our ninth season of the Global Mobility Fundamentals Program, which was being offered via our Global Employer Net|Work. The program was kicked off by our own Gardiner Hempel, with a discussion on “Smarter Moves” and aligning talent with overall global mobility strategy.  Each session was designed to build upon the previous one, thereby giving participants a full picture of the global mobility “life cycle” and the opportunity to discuss pre-departure administration, assignment planning, policy management during assignment, repatriation, and everything else along the way.

We received a number of questions throughout the sessions that encouraged some thought-provoking dialogue among the group.  The topic which created the most buzz by far seemed to be the Assignment Policy and Development session.  It seems many of you are giving your policies a lot of thought, whether that be about creating, overhauling, or fine-tuning a policy. Some of the questions we received included:

• What are the common drivers for policy change?
• How often would you recommend benchmarking your current policies?
• What are your suggestions for implementing a core/flex approach and driving good business decisions and equity?  What about governance of core/flex policies?
• Based upon your experiences, do more companies provide the expat full policy document as a point of reference or rather a summary document?

“Core/Flex” was the new buzzword this year, and it was both surprising and inspiring to see not only the number of policies offered by many of you, but also the level of flexibility that is being offered within some policies. Similar to my decoration dilemma, assignees and business units are faced with the same types of decisions – do you want four home leaves or an increased rental allowance for a bigger apartment?

The Fundamentals Program brought up a number of ideas for participants to take home and ponder, which will undoubtedly be a part of our Global Employer Net|Work Virtual Offerings for the rest of this year. What other topics are of fundamental importance to you? 

Time to hit the books again

By Kristen Kowalski, Director, Deloitte Tax LLP — August 23, 2011

Summer is winding down and the kids are headed back to school.  My husband is a teacher, so he is also headed back to school.  It’s time to trade in our flip-flops for loafers and our cargo shorts for khaki pants.  What does this mean in our household?  SHOPPING!  School supplies, backpacks, books, new shoes, new clothes, all the things that will carry us through the school year . . . or at least until December!

This time of year also brings some anxiety – Who will be my teacher?  What kids will be in my class?  Will I remember everything I learned last year?  A new school year can be exciting and filled with new opportunities, but can also be overwhelming and challenging from a learning perspective.  In many ways, it is very similar to taking on a new role professionally or changing jobs.  In the ever-changing global marketplace, it is imperative that professionals continue to develop their skills to meet the needs of the business.

In Sarah’s blog posted on August 15, she discussed the exciting opportunities and courses that will be offered at this year’s North American Global Employer Services Conference to be held in Phoenix, Arizona.  The live conference is further supported by the Global Employer Net|Work and the Global Mobility Fundamentals Program.  These resources provide ongoing learning opportunities for professionals faced with meeting the complex challenges of global mobility.

The Net|Work is a virtual, online community offering networking opportunities, online educational forums, and real-time access to various tools, resources, and surveys.  The Fundamentals Program is an educational series offered via the Net|Work and is designed for professionals new to global mobility management and for those looking for a refresher course.  The four-part series includes the following topics:

• Plenary and introduction to global mobility
• Tax basics
• Assignment policy and development
• Developing and administering global mobility processes

If you are interested in joining us in Phoenix, joining the Net|Work, or participating in the Fundamentals Program, please click here to register.  Good luck with your back-to-school plans, and we look forward to seeing you in Phoenix or on the Net|Work…or in the aisle of your nearest retailer with a cart full of folders and spiral notebooks!

Seeing the opportunity

By Sarah Cuthill, Principal, Deloitte Tax LLP – August 15, 2011

Like many of you, I’ve been paying close attention these past two weeks to the global markets.  As each market update feels more and more like the ups and downs of a rollercoaster ride, I think we’re all starting to realize that this economic recovery is going to be very different than any other in our history.  The road to true recovery clearly is not going to be a linear climb. 

The uncertainty and ongoing change being felt in the marketplace can lead to uneasiness for many businesses, but I also think that these changes can bring opportunities for many of us. To pursue these opportunities, companies must consider the impact of change before it actually hits them. That kind of foresight helps best position companies to adapt internally and get ahead of the changes — and the competition. It helps them see new business opportunities and market needs.
 
Learning and development becomes very important in times like this to help employees adjust to a new landscape.  Key insights and perspectives from industry leaders can be critical to developing a workforce that can adapt quickly and move the business forward.  So, I’m very excited that the timing of Deloitte’s 2011 North American Global Employer Services Conference is aligning to the emerging need for more information.

Each year around this time about 200 tax and HR professionals from around the country gather for two days for what has been described as a unique and valuable conference experience. The interactive format of this conference is designed to enhance learning, networking and information exchange with other professionals on the latest strategic business issues facing global mobility, compensation, benefits and talent programs today.

This year’s conference will take place on September 12-13 at the beautiful Arizona Biltmore in Phoenix.  Helping us kick off and adjourn our conference are two keynote speakers who are both well-known leaders in their respective industries. Diane Swonk from Mesirow Financial is a highly respected economist on global issues and is frequently called upon by policymakers and business leaders to provide her perspectives. Her insight will certainly help all of us to better understand the impact of recent changes we’re seeing in the global markets. Tom Peters has been called one of the most influential business thinkers of our time, and is the other keynote speaker at this conference.  He will help make the connection between these changes and how we need to manage our talent to adapt to the change.  

If you’re interested in joining us in Phoenix, or in joining the Global Employer Net|Work online community where you can view a live video stream of Tom’s and Diane’s presentations along with other select sessions from the conference, you can register by clicking here.

Around the world in 80 lines (or so)

By Sean Trotman, Principal, Deloitte Tax LLP – July 26, 2011

I have felt like a competitor in the “Amazing Race” show on CBS recently with the number of foreign offices I have been working with. Although I have not been cast on the show, I have been working with various countries over the last couple of months in order to understand the numerous and far reaching changes to tax and reporting requirements for equity. I thought I would share my whirlwind learning adventure by giving you some extracts from my “journal.”

Australia

It is not as warm as I thought it would be down here and I am kicking myself for not packing that extra sweater. My colleagues are super busy at the moment as they are in the thick of Australia’s Employee Share Scheme (ESS) reporting season. Providers of employee share plan awards are required to furnish an ESS employee statement to the employee by July 14 and an ESS annual report to the Australian Taxation Office (ATO) by August 14.  This reporting is even more important now as the ATO has announced that compliance with the requirement will be part of its audit focus this year (for the year ended June 30, 2011). The ATO intends to match ESS income on the individual tax return to that disclosed in the employer ESS annual report. So, after an “easy” year on the introduction of ESS reporting, it is now vital that the annual reporting forms are submitted on time but, above all, correct.

Canada

It would appear that my trip coincided with that of a certain couple from Cambridgeshire, UK. The country was all abuzz with both the royals and the new Regulation 102 waiver application. The Canadian income tax act requires employers to withhold income tax for all Canadian-sourced income. However, employers may be relieved of their tax withholding obligation, but only when a formal waiver is obtained. The new waiver must be filed by nonresident employees and submitted 30 days prior to the start of employment or initial payment for services – so employers need act quickly before the start of a short-term assignment for nonresident employees in order to have the necessary paperwork in place.

China

While attending the first China-U.S. governors’ forum met in Salt Lake City, Utah, this month, I caught up with my Asia-Pac counterparts to understand the great news that the existing tax beneficial treatment for share-based compensation has been extended so that more companies are able to meet the qualifying criteria. Previously, preferential tax treatment only applied to employees of a listed company where the issuing parent held at least a 30 percent stake in the People’s Republic of China entity and indirect shareholding was limited to second-tier subsidiaries. However, Circular 27 abolishes this tier condition, meaning more U.S. parent companies will be able to apply for tax preferential treatment for employees receiving share-based compensation in China. This important change may have even been mentioned in the trade discussions in Utah.

Russian Federation

The end of June is an exciting time in the Russian Federation with the White Nights Festival held in St. Petersburg in celebration of the summer solstice. It is a week-long festival where the city revelers enjoy local culture and arts all night. Some partygoers may suffer a tax headache arising from amendments made to the Russian Federation tax code. A literal reading of the code suggests that stock options should be taxed at grant value using a complex formula. Currently, due to the lack of valuation guidance, it is difficult practically for employers to withhold taxes at grant for options. To add to the confusion, the amendments have not abolished the principle that taxation arises when income is received (i.e., on exercise). Therefore, employers are faced with a difficult position on whether to change the existing practice of withholding at exercise of stock options to that of grant. Watch this space to see if any guidance is released on this matter.

Several other countries have introduced significant changes in the taxation of equity; however, France, Ireland, Spain and the UK have all been covered by previous blog installments. Now that I have my feet firmly back on U.S. soil, I plan to refresh my memory on these important changes – you should do the same.

Running into a Spanish PIT?

By Sean Trotman, Principal, Deloitte Tax LLP — June 30, 2011

As some of you may know, running is one of my passions. I truly enjoy getting on the treadmill and clearing my mind of whatever the day has thrown at me. Sometimes, at the beginning of a race, runners will go out with the mindset that, this time, they will break a personal record, but before long they are exhausted, or worse, end up injured. Someone once shared with me a principle about running: it is good to test the waters, run at different paces, and go for different distances. A runner needs to establish what feels right. They can push themselves, but ultimately if that does not feel right or comfortable, it can lead to serious injury.

Looking back at the past decade, one might say that the various branches of the Spanish Government wrestling when it came to the laws and regulations regarding the taxation of equity compensation in Spain. Since 2003, the Spanish Personal Income Tax Act (PIT or the “Act”) has provided a 40% reduction in the amount of individual stock option gain subject to Spanish Income Tax (30% reduction available prior to 2003). In order to be eligible for this reduction in taxable income, the income must be considered “irregular income.” Spanish law stated that two conditions were needed to be satisfied in order to be considered irregular income: the first is that the options must have a grant to exercise period of more than two years. The second condition being that the income is “neither recurrent nor periodical.” The regulations originally issued under the Act interpreted the “neither recurrent nor periodical” requirement to mean that the options could not be granted on an annual basis. Since most companies typically make awards annually, in some cases more frequently, most equity awards have historically failed to meet the second test.

On April 30, 2009, the Spanish Supreme Court ruled that employees receiving stock options as a part of their compensation are entitled to apply the 40% reduction even when options have been granted on an annual basis. The court found that the definitions of  “recurrently” and “periodically” were not clearly defined in the Act, and for the regulations to interpret these terms to mean “not annually,” (i.e. that awards granted on an annual basis would be deemed to result in income that was realized periodically or recurrently) was not supported by the statue. Accordingly, the Spanish Supreme Court found that it is the frequency of stock option exercises, rather than stock option grants, that should govern whether stock option income is realized recurrently or periodically.  In other words, exercises of stock options in consecutive years would not qualify for the reduction in taxable income (regardless of when the options were granted), but multiple exercises can be made in a single year without disqualifying the employee from receiving the tax reduction benefit. 

January 1, 2011 saw the latest revision to the law take effect.  The new law in Spain explicitly confirms that income realized from stock options and, potentially, other types of share-based remuneration will not be eligible for the reduction in taxable income where such awards were granted on an annual basis. The Spanish Minister of Finance seems to have taken the role of an overexcited runner. Originally, Spain set up a law that would make it beneficial for Spanish companies to offer stock options as part of their employees’ compensation. However, it would seem that, when the government considered the number of option exercises in the consecutive years that obtained preferential treatment, it realized the tax revenue loss would be greater than projected.