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2012 Human Capital Conference23–26 October The global employment taxes l d i th hidd landscape in the hidden gems

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Circular 230 disclaimer► Any US tax advice contained herein was not intended or y 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.Page 2 The global employment taxes landscape in the hidden gems

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Disclaimer► Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US.► This presentation is ©2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or LLP reproduction distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.► The views expressed by panelists in this session are not necessarily those of Ernst & Young LLP LLP.Page 3 The global employment taxes landscape in the hidden gems

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Presenters► Graham Farquhar q ► Delphine Swierc p ► Ernst & Young LLP (UK) ► General Electric Company ► gfarquhar1@uk.ey.com ► delphineswierc@ge.com► Greg Carver ► Ernst & Young LLP ► gregory.carver@ey.comPage 4 The global employment taxes landscape in the hidden gems

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Agenda► Global employment tax trends► Global employment tax risk► Country perspectives► US issuesPage 5 The global employment taxes landscape in the hidden gems

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Theme/key points► There is an increasing trend of managing employment and payroll t d ll taxes on an area ( (e.g., EMEIA or A i P ) Asia-Pac) basis or even globally.► Finance transformations are often driving this change change.► Greater government focus on compliance and information sharing are focusing businesses on a broader approach to employment tax risk management.► Change brings benefits but also challenges for the business and the person responsible.Page 6 The global employment taxes landscape in the hidden gems

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Global employment tax trends

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Change drivers► Finance transformations are centralizing records and g reporting processes.► Tax is often not consulted in the process, so corporate p p and indirect tax reporting processes can become cumbersome.► Employment and payroll taxes commonly remain an afterthought.► Business and government perspectives regarding t risk B i d t ti di tax i k and compliance are changing.Page 8 The global employment taxes landscape in the hidden gems

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Change drivers► Revenue authorities are engaging into more tax audits. g g g► We are starting to see use of tax information exchange agreements. g► Tax compliance and scrutiny is increasingly front-page news around the world.► Evidence shows that corporate tax audits move into employment tax audits and vice versa.Page 9 The global employment taxes landscape in the hidden gems

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What we are seeing in the market ► The combination of new business operating models, Almost 80% of companies have transformed finance functions and an increasingly complex recently completed or will soon regulatory landscape has brought global t compliance and complete a finance transformation. l t l d h b ht l b l tax li d reporting (GCR) to a tipping point. ► Tax functions in general have not adapted to changing requirements. ► 17% of surveyed Fortune Global 500 companies experienced tax-related business disruptions. ► 64% of companies experienced unplanned tax audits, 45% experienced unexpected tax assessments, and 42% experienced penalties. ► The majority of companies excluded some or all of their tax function, including employment taxes from finance transformation. transformation Companies’ status with regard to finance ► The majority of companies reported a lack of transformation standardization leading to inefficient processes and a focus on compliance rather than business support. “Compliance may be a routine function — if done right, it can add tremendous value, and if done ► Leading companies are transforming their tax function to wrong, it can destroy a company. But not many address these changing requirements across all taxes. have reached the stage of optimal global compliance efficiency — they are still maturing.” Fortune Global 500 — conglomeratePage 10 The global employment taxes landscape in the hidden gems

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How companies are respondingTrends in employment and p y p y payroll tax compliance p Models/characteristics 1 ► Limited or no global and/or regional g g egional/global l 3 visibility Control, access and visibility over ► Limited or no standardization in data Simplification, collection local process standardization and cost ► Variety of service providers globally/regionally 2 reduction Re 2 ► Global and/or regional governanceGovernance and ► Visibility and control over work flow and processes management ► Single or few service providers ► Some standardization of data formats and processes Local 3 ► Alignment with finance shared service Local centers and centers of excellence 1 country ► Integrated approach to the record-to- approach report process ► Leveraging technology and systems investment Local Regional/global ► Clear global Key Performance Indicators (KPIs) and Service Level Agreements Standardized (SLAs) with primary service provider processes and execution Employment taxes and payroll may not move at the same rate along the curve.Page 11 The global employment taxes landscape in the hidden gems

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A personal angle► What is the business case for creating a wider remit?► How is success defined?► Has the business considered the impact on the individual of a wider remit?► Skill-set match — what is needed to deliver on the vision?► Time lag bet ee appo t e t and efficiency — transition planning? e ag between appointment a d e c e cy t a sto pa g► What is the benefit of a wider mandate for risk management?► What support is needed or desired?► How is the transition to a new role or an extension of the existing remitted?► What is the local input?Page 12 The global employment taxes landscape in the hidden gems

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Questions for the person with arearesponsibility for employment taxes What does compliance look How often should we get like where we operate? audited? Can we act quickly in all Area e p oy e t ta ea employment tax Where do we start in a new countries? responsibility country? What’s the impact if we get p g How do I keep up to date? something wrong?Page 13 The global employment taxes landscape in the hidden gems

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Local deep experience is essential tosupport the area structure More than 60% of respondents indicated local resources are important to The trend in finance has been to reduce or redeploy in- processes. country finance and tax resources to global or regional centers. ► Survey indicates that almost 80% of the companies have recently completed or will soon complete a finance transformation. ► Companies recognize that it may not be efficient to build full p g y employment tax capabilities in every country. ► Many organizations are supporting rapid business expansion into new and emerging markets through regional support rather than building local employment tax functions in each country. More than 60% of respondents indicated local resources are important to processes. ► Employment and payroll tax processes result in inherently local in- country filings and submissions. t fili d b i i ► Changing regulations and more aggressive and informed tax enforcement heighten the need for sustainable access to local Companies that consider local in-country resources to be important expertise. ► 82% of respondents indicated that the lack of skilled resources limits their ability to adopt a more regional or global model. “There’s no supervision beyond the country in question — that would be too costly, as it’s Leading companies are transforming their function to usually a small operation. So if they’re doing it wrong, we have no idea [until it’s too late].” address these changing requirements. Forbes Global 2000 — technology hardware and equipment companyPage 14 The global employment taxes landscape in the hidden gems

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Optimizing outside providers More than 80% of respondents that use Many companies have outsourced one of more of their outside providers consider it an effective employment tax and payroll processes or intend to do so in the means of accessing local expertise expertise. next two years. Companies report that benefits of using outside providers include cost-effective and flexible access to specialist skills, broader access to leading practices, greater scalability and heightened focus on value. Many companies have multiple service providers resulting in non-standardized non standardized processes and a high cost of managing these service providers, e.g., various payroll providers. Leading companies find that the best sourcing solution to meet employment tax and p y p y payroll needs is a mix of local, regional , g and global resources, both internal and external. Leading companies are increasingly procuring some or all of their employment and payroll tax services on a regional or Companies assessing outsourcing as an global basis. effective means of achieving business benefitsPage 15 The global employment taxes landscape in the hidden gems

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Achieving accountability and governance Geographic responsibility for various The management of today’s tax processes is often processes is widely distributed. more a product of piecemeal evolution than of conscious design. ► Fewer than 44% of surveyed companies have established discrete or otherwise dedicated GCR responsibilities. ► Typically, responsibility is divided between finance, tax and yp y, p y , business operating units. For employment taxes, this is wider including HR, procurement and company secretarial. ► Responsibility often varies significantly across geographies, with inconsistencies at local, regional and global levels. With distributed accountability and governance, controls are often hampered and improvement opportunities are difficult to realize. Strong governance is essential, with clear accountability and control being prerequisites for an Geographic responsibility for ensuring that effective model. compliance and reporting deadlines are met Leading L di companies identify and use process owners to i id tif d t “Because [our processes] are too decentralized there is decentralized, an overlap of competencies falling under the align governance and operation of processes. responsibility of too many different departments. Sometimes it’s under operational staff, sometimes its legal, sometimes tax and even sometimes the local finance controller.” Forbes Global 2000 — diversified financial companyPage 16 The global employment taxes landscape in the hidden gems

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Global employment tax risk

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More than 50% of businesses think that lack ofresource and communication increases tax risk Please indicate to what extent you agree that each of the following factors may contribute to increased tax and tax controversy risk in your company. 80% US <$3b segment: 70% All tax directors: 58% 68% CFOs: 43% US <$3b 60% segment: 63% 60% 60% 58% 58% 58% 57% 57% 56% 56% 55% 54% 50% 53% 48% 45% 45% 40% 42% 42% 41% 39% 38% 30% 20% 10% 54% 52% 52% 59% 54% 61% 60% 56% 68% 49% 58% 39% 44% 48% 45% 36% 63% 40% 44% 51% 0% Insufficient resources to Insufficient internal Changes within business A lack of processes or Failures in the cover tax function activities communication operations or strategy that technology implementation of tax are inconsistent with planning and other implemented tax planning structures All % strongly agree and agree $3b+ Americas BRIC EMEIA Asia Private PublicPage 18 The global employment taxes landscape in the hidden gems

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Only approximately 50% of employers can track compensationand work activities for their globally mobile staff In terms of your globally mobile employees, do you have processes in place to manage the following issues? 70% 60% 59% 56% 50% 51% 49% 40% % 43% 42% % 41% 39% 30% 20% 10% 52% 39% 43% 45% 39% 37% 39% 40% 5 3 4 4 3 3 3 4 0% To ensure compensation and benefits paid to them in their home To track the work-related activities of employees who travel abroad country are declared to tax authorities in the foreign country where for business outside of formal international assignment programs they are located All % Yes $3b+ Americas BRIC EMEIA Asia Private PublicPage 19 The global employment taxes landscape in the hidden gems

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Approximately 25% of employers do not have astrong process to manage PE or immigration risks gp g g Are you confident that the processes you have in place to track business travelers provides you with a high level of risk protection against issues such as permanent establish risk or immigration risk? 90% 80% 74% 70% 73% 71% 60% 63% 50% 40% 34% 30% 26% 20% 23% 21% 10% 4% 65% 79% 76% 68% 31% 21% 21% 28% 4% 3% 0% 4% 3% 4% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0% Yes No Dont know Refused All $3b+ Americas BRIC EMEIA Asia Private PublicPage 20 The global employment taxes landscape in the hidden gems

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Tax information exchange agreementsPage 21 The global employment taxes landscape in the hidden gems

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What employers should do now► Undertaking g g global reviews of high-risk areas g► More compliance necessary in relation to mobile workforce► Greater drive for compliance► No surprises p► Better financial reporting and budgeting► Need to be seen in the public as being compliant p g pPage 22 The global employment taxes landscape in the hidden gems

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Some generic problems► Benefits in-kind being accurately reported g y p► Shadow payrolls► Compliance with equity withholding and reporting► Home and host pensions► Deferred compensation► Travel by employees► Poor execution tax planningPage 23 The global employment taxes landscape in the hidden gems

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Country perspectives

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Expanding your business: early hurdles Austria Greece Social security Registration requirements registration not in place based on the profession when trading meant of the worker not the trade employee was refused of the employer treatment for child Switzerland Registration required for social UAE security on compensation and No tax withholding but accident and pensions insurance social security applies if via an insurance company; the worker is a UAE or cantonal registration based on Gulf Cooperation national where employee lives Many countries require corporate tax registration to occur prior to registering the payroll etc rather than following submission of the accounts etc., accounts.Page 25 The global employment taxes landscape in the hidden gems

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South Africa► There is increased revenue activity. y► Tax audits normally recover up to five tax years.► There is an increase to a maximum of 10 years where there was intention.► Stock Appreciation Rights ( pp g (SARS) uses a risk assessment ) of the reconciliation of payroll costs.► Penalties are approximately 10%, but interest is 8.5%.► Voluntary disclosure substantially reduces penalties.Page 26 The global employment taxes landscape in the hidden gems

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India► Statutory limitation of five to seven y y years dependant on p size► Proposed increase of 7 to 17 y p years for income related to assets held outside of India► India increasingly using Tax Information Exchange Agreement (TIEA)► Audits undertaken randomly or where scrutiny assessments have b t h been undertaken d t k► Interaction with immigration services► Waiver or lesser penalties for voluntary disclosure► Penalties up to 300% plus interestPage 27 The global employment taxes landscape in the hidden gems

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China► China Tax Bureau (CTB): normally recovers last three years but no limit for tax evasion► CTB tax audits can include: ► Site/office visits ► Search of bank account details► Audits may occur either through: ► Audit plan ► Special projects ► Statistical analysis ► Transfers by other departments ► Informants► Penalties: ► Late payment surcharge 0.05% per day of overdue tax ► Penalties of 50% to 500% of tax underwithheldPage 28 The global employment taxes landscape in the hidden gems

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UK► Recovery normally by Her Majestys Revenue & Customs (HMRC)► Four tax years for errors► Six tax years for carelessness► 20 tax years for fraud► National Insurance limited to six tax years► Penalties► New in-year penalties► Penalties up to 100% of tax and National Insurance Contributions (NIC) underpaid► Audits► Increasing in nature► Many employers not received an audit in more than six years► HMRC currently training new auditorsPage 29 The global employment taxes landscape in the hidden gems

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Key issues 1. Equity 2. Compensation 3. Business travelers South Africa Germany China China South Africa India UK China UK India India Germany UK 4. Benefits in-kind 5. Status 6. Social security India South Africa India UK UK UK GermanyPage 30 The global employment taxes landscape in the hidden gems

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US issues

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The US state and local landscape for short-term business travelers► Proposed federal legislation (H.R. 1864)► States actively seeking to generate revenue► Aggressive electronic state audits► States changing deferred compensation taxation► States’ consideration of wages/salary and equity compensation► Local tax jurisdictions also now auditing nonresident workforce kfIssues companies currently face:► Income tax not withheld in nonresident work state for short-term business traveling workforce► Statute of limitations (employer or employee)► Limited system capabilities to track and calculate short-term business travelers► Complicated withholding tax calculation for deferred and equity-based compensation equity basedPage 32 The global employment taxes landscape in the hidden gems

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Tax treaty exemption► Applicable tax treaty may exempt compensation of pp y y p p temporary workers from US federal income tax, including mandatory federal income tax withholding (FITW) under Internal Revenue Code (IRC) Section 1441, under certain circumstances: ► NonResident Alien (NRA) generally must be resident of country with tax treaty containing applicable exemption: ► US tax exemption may be subject to significant limitations, including dollar limits: ► Exemption is up to threshold dollar limitation. ► “Cliff” exemption is only for payments not exceeding dollar limitation. ► Dollar limits may use gross receipts (i.e., including reimbursed expenses).Page 33 The global employment taxes landscape in the hidden gems

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Tax treaty exemption► To claim treaty exemption from withholding, NRA is y p g, required to submit IRS Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, to employer: ► Employer is required to submit Form 8233 to IRS for approval approval. ► Form 8233 must be obtained annually.► Without Form 8233, wages are generally subject to 30% 8233 FITW on US-source payments.Page 34 The global employment taxes landscape in the hidden gems

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Tax treaty exemption► Requirements to apply for IRS Form 8233: q pp y ► NRA needs to show they have applied for ITIN with the IRS. ► To apply for an ITIN, NRA must provide letter from Social Security Administration (SSA) stating they are ineligible for a Social Security number (SSN): ► The SSN application p pp process described above is not streamlined to provide “denial letter.” ► NRA/employer may already know NRA is not eligible for SSN.Page 35 The global employment taxes landscape in the hidden gems

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US outbound expats and wage reporting► US citizens: Form 673 annually y► US citizens: documentation of mandatory foreign withholding to exempt wages from US withholding g p g g► US resident aliens: not eligible for IRC Sec. 3401(a)(8)(A)(i) or (ii): ► Form W-4 allowances in anticipation of Foreign Tax Credit (FTC) or claiming IRC Sec. 911 exclusion ► Supplemental wages greater than $1 000 000 subject to $1,000,000 mandatory 35% withholding even if wages also subject to mandatory foreign withholdingPage 36 The global employment taxes landscape in the hidden gems

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US inbound and wage reporting► Compliance difficult if NRA not eligible for US SSN► Wage reporting required even if foreign national not eligible for an SSN if no ITIN/Form 8233 or foreign national from a non-treaty country► Federal Insurance Contributions Act (FICA) required unless foreign national from country with Social Security Totalization Agreements: ► No de minimis threshold — US services on day one triggers reporting► Federal Unemployment Tax Act ( (FUTA), state unemployment tax and ) state income tax withholding often required even if federal income tax treaty applies► NRAs required to file 1040NR if compensation income equal to or exceeding one personal exemption and/or to claim treaty exemption ($3,800 ($3 800 in 2012)Page 37 The global employment taxes landscape in the hidden gems

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US merger and acquisition considerations► Employment tax compliance: ► Generally as a result of any reorganization, the IRS and states require various registration forms and other notifications. ► Many of these forms must be filed within 30 to 90 days of the reorganization to “protect” future claims f the value-added payroll cost reductions and refunds. “ ”f l i for h l dd d ll d i d f d ► W-2 reporting options are under predecessor/successor provisions.► Value-added payroll cost reductions: ► Step 1: Successor provision qualification — There are various federal and state rules relating to successor status associated with mergers/acquisitions. Companies should review the applicable provisions to assess whether duplicate payroll costs (state unemployment insurance (SUI) FUTA and FICA) are entitled to be refunded (SUI), or abated. ► Step 2: SUI cost reductions — Based on each states’ unemployment insurance laws, companies s ou d pe o a co p e e s e a a ys s o t e a te at e a s, co pa es should perform comprehensive analysis of the alternative payroll reporting options pursuant to the reorganization.Page 38 The global employment taxes landscape in the hidden gems

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Conclusion► Employment tax is becoming increasingly g p y g g y global.► Major employers are changing to reflect this.► Local expertise should always be considered. p y► Issues in one country can often be seen in others.Page 39 The global employment taxes landscape in the hidden gems

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QuestionsPage 40 The global employment taxes landscape in the hidden gems