Slide 1

Shadow Payroll Michele Honomichl Executive Chairman & Chief Strategy Officer Celergo Global Payroll California Payroll Conference September 11 and 12, 2014

Slide 2

Introductions What is a Shadow Payroll? When do I need a Shadow Payroll? What is included in a Shadow Payroll calculation? What is a Tax Matrix? Tax Calculation Examples How do I manage a Shadow Payroll? Agenda 2

Slide 3

Expatriate Payrolls Host Shadow Payroll Home Shadow Payroll 3 What Is A Shadow Payroll?

Slide 4

Expatriate Payrolls Consists of Multiple Components Compensation Balance Sheet Tax Equalization Benefits In Kind Split Payments Calculation of Taxes at the Host Calculation of Taxes at the Home (Countries that tax on worldwide income) 4

Slide 5

Host Shadow Payroll Calculation of taxes at Host Location Often referred to as Shadow Payroll Typically Employer pays this Tax on behalf of the Employee Typically Grossed-up or Rolled Over 5

Slide 6

Home Shadow Payroll Typically occurs in Countries with WW Income Requirements United States Switzerland South Africa A Few Others Host Taxes can also be included in Home Payroll on an Off-Cycle Basis 6

Slide 7

Types of Host Tax Programs 7 Employee is on Tax Equalization and the Employer pays the Host Tax (Gross-up needed) Employee is treated like a local, on local payroll and pays host tax (No gross-up needed) Employee is on a home payroll but pays host taxes via a Host Tax Deduction on home payroll (No gross-up needed)

Slide 8

Home Shadow Payroll Includes: Full Compensation Package (Regardless where paid) Benefits In Kind Host Taxes Calculates: Social Insurances US: Medicare, SS, sometimes State & Federal 8

Slide 9

9 Long Term Expatriate Local Rules On Foreign Workers When Do I Need A Shadow Payroll? 9

Slide 10

Long Term Expatriate Most Expatriates on Long Term Assignment will need Host Tax Calculations if Withholding is required in Country Most Countries Require Withholding Some do not (Hong Kong, & France, etc.) Long-Term is often defined from a Tax Perspective as Greater Than 183 Days Some countries Calculate 183 days based on Jan1 to Dec31 Others count from start date in country Some Countries Require Calculations at 90 or Less Days 10

Slide 11

Foreign Workers Some Countries Require Host Tax Calculations Even If Employee Is Not An Expat Based on Work Performed Determined by Local Country Rules Required if Work is Billed to Local Entity 11

Slide 12

Compliance Host Tax Payrolls (Withholding) are often required by Host Locations May be dependent on Visa Type May be required to maintain Drilling or Business Permits Need To calculate to not Incur Penalties May be Audited more regularly 12

Slide 13

Withholding Submissions 13 Expatriate Host Taxes Payments can be tricky: Modified Scheme Expat Taxes submitted separately from Local Taxes under same Company Tax ID (Example: UK) One Company Tax Id: Expat Taxes must be submitted with Local Taxes (Example: Germany) By Individual: Expat Taxes are remitted for each individual (Example: Spain)

Slide 14

Compensation Package Benefits In Kind Taxes What Is Included In A Shadow Calculation? 14

Slide 15

Compensation Package Compensation Package Includes: Salary Expatriate Allowances (COLA, Housing Allowance, Car Allowance, Foreign Service Premiums) Expatriate Deductions (Hypo Taxes, Housing Norm, Transportation Norm, etc.) Home Country Deductions (Pension, Insurance, etc.) All Included Regardless Where Paid! 15

Slide 16

Benefits In Kind Determine Taxability First Relocation Provider Payments Rent, Storage, Property Mgmt., Training, etc. Usually Sent To Company Each Month/Cycle Internal Payments by Accounts Payable Gathered from each Host/Home Location Usually every Cycle or Quarterly Typically Need To Be Grossed-up Often Processed Off-cycle 16

Slide 17

Taxes If on Tax Equalization, Host Taxes are Taxable at the Home Location if the home location taxes Worldwide Income Taxes include Income and maybe Social (Totalization Agreements) US Taxes on Worldwide Income Income Is Reduced by the Hypo Tax and then Increased by the Host Tax The Differential Between the Home and Host Taxes is the Companys Expense 17

Slide 18

Host Tax Calculations Example What Is A Tax Matrix?

Slide 19

Matrix For Host Tax Calculation Lists All Elements Paid to or On Behalf of the Expatriate Compensation: Salary, Cola, Transportation Allowances, etc. Benefits in Kind: Rent, Property Management, Storage, etc. Relocation Allowances: Cultural Training, Moving Expenses Review Taxability for Each Element Best Practices: Tax Return Provider in that Country Approve the Matrix and Review Annually Provide Payroll with Documentation for Host Tax Calculation 19

Slide 20

Tax Matrix Example Norway: Long Term Expatriates Compensation Elements Taxability for Income Tax and Social Security Tax Example Amount to Gross-Up 20

Slide 21

UK to Germany US to Germany US to Germany (With Off Cycle in US) Tax Calculation Examples

Slide 22

Example Calculation 1 22 Long-term Expatriate Home: United Kingdom Host: Germany Split Delivery

Slide 23

Example Calculation 2 23 Long-term Expatriate Home: United States Host: Germany Split Payroll Separate Cash versus Tax Mechanism

Slide 24

Example Calculation 3 24 Long-term Expatriate Home: United States Host: Germany 100% Home Delivery of Funds Use of Off Cycle for Grossing-Up Benefits in Kind and Host Taxes

Slide 25

Changes Memo Updates Consistency Auditing How Do I Manage A Shadow Payroll?

Slide 26

Changes Ensure changes to Comp Sheet are included at Host and Home Payrolls Coordinate Benefit Update Timing with Updating the Host Confirm Changes were Implemented at Host by Reviewing Pay Slips

Slide 27

Benefit In Kind Updates Set-up a Calendar for Benefit In Kind Updates Review Data to Ensure Proper Exchange Rate is Utilized Confirm Host Payroll has Properly Included Benefits In Kind via Pay Slips Ensure Data is Captured in Correct Tax Year 27

Slide 28

Consistency Set-up Payroll Calendar for Host Payrolls Processing More Often Is Better Provide Same Format Each Month to Host Locations Request Same Format for Collection of AP and Relocation Items Training Is Essential To Ensure Proper Tax Compliance 28

Slide 29

Auditing Review Pay Slips or Reports from Each Cycle to Ensure Changes were Processed Watch Trends for Missing Data Check for Taxability and Gross-up Refine Process After Each Tax Year 29

Slide 30

Conclusion Shadow Payrolls Are Necessary Consistency Is Very Important Compliance Is Based On Accurate and Timely Data Loads Host Calculations are More of an Art Than A Science 30

Slide 31

Thank you for your attention Questions? Please feel free to contact Michele Honomichl at mhonomichl@celergo.com