EY Human Capital Conference 2012: the global employment tax landscape

2012 Human Capital Conference
23–26 October

The global employment taxes
l d i th hidd
landscape in the hidden gems

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

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
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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.

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.com


Agenda

► Global employment tax trends
► Global employment tax risk
► Country perspectives
► US issues


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.


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.


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.


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 — conglomerate


How companies are responding
Trends 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 governance
Governance 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.


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?


Questions for the person with area
responsibility 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?


Local deep experience is essential to
support 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 company


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
benefits


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 company


More than 50% of businesses think that lack of
resource 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 Public


Only approximately 50% of employers can track compensation
and 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 Public


Approximately 25% of employers do not have a
strong 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 Don't know Refused

All $3b+ Americas BRIC EMEIA Asia Private Public


Tax information exchange agreements


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 p


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 planning


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.


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.


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 interest


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 underwithheld


UK

► Recovery normally by Her Majesty's 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 auditors


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
Germany


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
kf
Issues 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 based


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).



► 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.



► 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.


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 withholding


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)


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.


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.


Questions


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