managing the complexities of global and multistate travel taxation carolinas payroll conference...

Managing the Complexities of Global and Multistate Travel Taxation

Carolinas Payroll Conference

November 7, 2014

KPMG LLP

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 33372WDC

2

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER

PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR

(ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Notwithstanding anything to the contrary set forth herein, you (and your employees, representatives, or other agents) may disclose to any and all persons, without limitation of

any kind, the tax treatment and tax structure of any transaction, and all materials of any kind (including opinions or other tax analyses) that are provided to you by KPMG LLP

related to such tax treatment and tax structure, effective immediately upon commencement of discussions with KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.


3

Agenda

Provide an overview of the issues associated with mobile employees including:

– Current State of Business Travel

– Risk Factors & Exposure

– Multi-jurisdictional Withholding Issues

Domestic

Global

– Special Issues Surrounding Equity & Other Incentive Compensation

– Employment Tax Reporting & Withholding Survey

– What Can Be Done?

– Hope for the Future?


4

Current State of Business Travel

Business travel remains strong

For calendar 2013 a global corporation identified 140,000 individual business trips.

Many organizations have developed “swat teams” of frequent business travelers who are on the road more often than at home

Costs associated with “business travel” often less than traditional international assignment

Business travel is, for the most part, unregulated

Most organizations do not track foreign or domestic business travel for any purpose other than expense reimbursement

Most organizations do not utilize a time capture system which contains a “location” field

In a recent poll of KPMG’s IES clients, 100% of the responding organizations rated the controls in place around their business travelers as “lacking” or “severely lacking”


5

What is Your “Traveler” Profile?

Organizations “at risk”

Companies that have a population of employees who travel frequently

Organizations which have operations in CA, CT or NY, with employees from other states traveling there

Companies with global operations in non-treaty countries

Public companies with equity/incentive compensation plans in place

Organizations with extremely high paid employees in “deal making” roles, e.g. PE firms, M&A teams, etc.


6

Business Travel Defined

Generally less than 12 months “away from home”

Assignments < 183 days

May qualify for tax treaty exemption

Assignments > 183 days, but < 12 months

The taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year (§162(a))

“Realistic expectation” of assignment length (R.R. 93-86)

Indefinite assignments

Change in assignment length

Traveling expenses (meals, lodging, transportation, etc.) deductible / excludable when “temporarily” away from home on business

Per diems treated as “substantiated” for U.S. income tax purposes under “accountable plan” rules

Government table sets limits

Assignments > 12 months

Reimbursements for meals, lodging, transportation, etc. are taxable income


7

Identifying Potential Exposures

Frequent business travel can create multiple types of exposure

Corporate Level

Corporate Tax

– Nexus (domestic)

– Permanent Establishment (global)

Payroll / Compliance

– Failure to report income and/or withhold income tax

– Failure to withhold/pay social insurance

Reputational – issue specific, media exposure

Individual level

Compliance - Failure to file / pay individual income tax

Immigration - Failure to obtain proper work permits/visas

Criminal - Employee detainment


8

Why is This Important?

The identification and assessment of tax on business travelers (domestically and internationally) continues to be a focus

Government regulation will continue to increase

Federal

IRS to conduct employment tax audits of 6,000 businesses

IRS audits to focus on:

Fringe Benefits

Officer Compensation

Worker Classification (“contractor” vs. “employee”)

State - Payroll Audit Emphasis

Global

Emphasis on ST business travelers

Equity / Deferred Compensation

There has been significant movement by organizations to implement procedures to assess their exposure


9

Increasingly mobile workforces

Increased scrutiny by tax authorities

Corporate, payroll tax compliance

Localities joining in

Broader use of equity awards

Complexity around awards

Difficulty in controlling the process

Focus by media

Corporate monetary and brand risk

Multi-jurisdictional withholding – A perfect storm

RegulatoryActivity/Tax Compliance

Mobile Employees

Long Term Awards


10

Multi-Jurisdictional Income Tax Withholding - What you Need to Know

?

Some jurisdictions have de minimis thresholds that must be identified and

monitored.

Ignorance is no defense.Company officers could be

liable for under withheld amounts.

Increased audit enforcement by states.

Payroll systems could be ineffective.

What Employers Need to Know


11

Multi-Jurisdictional Withholding – What Are the Problems?

Employers cannot track employee movement on a daily basis

Employers cannot collect and maintain required documentation for proper wage allocation

Payroll systems cannot allocate wages correctly to match time spent in multiple jurisdictions

Inconsistent policies and procedures for monitoring a mobile workforce


12

Varying Approaches to Managing Business Travelers

Partial Compliance

Establish a system for all or select employees who perform services in specific jurisdictions to track source income.

Non-compliance

Not complying with nonresident withholding rules regardless of where compensation was sourced as earned.

Full Compliance

Developing/utilizing a system to ensure proper withholding and source recognition of earnings in nonresident jurisdictions.

Any approach that does not involve withholding and remitting taxes on all wages earned, could have an associated tax exposure, including penalty and interest assessment.

http://www.swissre.com/INTERNET/pwswpspr.nsf/alldocbyidkeylu/MSHS-4T9NBP





13

Multistate withholding risks and control obstacles

Barriers to compliance

– Time and expense system limitations

– Third-party vendors unable to comply

– Corporate culture

– Employee impact

– Employers cannot track employee movement on a daily basis

– Inconsistent policies and procedures for monitoring a mobile workforce

Potential risk associated with noncompliance

Aggressive enforcement for almost a decade

– Audit risk

– Public relations

– Tax principal/penalty/interest assessments


14

Nonresident state income tax withholding

In general, employers are required to withhold SIT on nonresidents of a state if services are or were performed by the employee in that state

Section 114 (former Public Law 104-95) exception – “retirement/pension income”

– Applicable to qualified pension income only

– Generally not applicable for equity compensation, bonus, deferred comp, etc.

Exceptions/limitations:

– De minimis rules of certain states (not always applicable to equity compensation)

– Reciprocal agreements between states

– Telecommuting (convenience of the employer doctrine)

– Exemption certificate allocation and pre-allocation of time spent


15

As of September 1, 2014

States with de minimis rules or exceptions

States without de minimis rules or exceptions

States with no withholding provision

Nonresident withholding de minimis jurisdictions

AK

HI

DC

SD

MT

WA

OR

CA

NV

ID

UTCO

WY

AZ NM

NE

KS

OK

TX

MN

IA

MO

AR

LA

WI

IL

MI

IN OH

MS

KY

TN

AL GA

FL

SC

NC

VA

PA

WV

NY

ME

NH

MDDE

NJ

MA

RICT

VT

ND

Source: KPMG LLP International Executive Services.


16

The Concept of the “Stealth Assignee”

Frequent business travel to a specific host location can create an unexpected tax or “document” exposure

Highly compensated employees can create this exposure with a minimal amount of travel

Median family income State of NY – $55,980 (source: US Census Bureau)

Executive with $1 million in annual compensation reaches this level in 14 work days

In many circumstances exposure is created almost immediately

State of North Carolina – tax withholding/filing obligation created with first dollar of NC-source income

Korea – $3,000 limit for treaty exemption


17

Consider This…

New York State Nonresident Withholding Example

NYS nonresident SIT rules (general)

– Regular wages allocated to NY according to ratio of NY workdays to total workdays (14-day de minimus)

– Equity compensation – no annual de minimus; multi-year allocation

State Income Tax Exposure / Risks (employer)

– Tax: 100% of the unpaid tax that should have been withheld on the employee’s NY

compensation

– Penalties & Interest: Late Payment: .5% / month of tax not paid up to 25% of total original tax Failure to File: 5% of unpaid tax + 50% of the calculated interest Interest – rate varies by quarter


18

Consider This…


Facts: A salaried employee with an annual salary of $100k works 25% of his time in NY. Also has $100k of non-qualified stock option gain. Employer sources $0 to NYS

Potential State Income Tax Exposure for the Year:

– NY Tax on wages $857 (single – 0 allowances)

– NY tax on stock NQSO $2,758 (supplemental rate)

– Estimated Late Pay Penalty $1,030

– Estimated Negligence Penalty $325

– Estimated Interest $290 Total Potential Exposure $5,260


19

Consider This…


– $5,260 State Tax Assessment per Individual / Year

5 Individuals $26,300 @ 3 years = $78,900



100 Individuals $526,000 @ 3 years = $1,578,000

– Includes NY Tax, penalty & interest


20

State withholding audit activity (samples)

New York

– Aggressive enforcement for almost a decade

– Large assessments especially on allocation of equity compensation

California

– Aggressive since the mid-90s

– New initiative for auditor hiring/training

– San Francisco Payroll Expense Tax (being phased out)

Minnesota – Cancellation of WI reciprocity, taxation of nonresident equity compensation

Connecticut

– Enacted New York’s de minimis regulations as their own

– Uptick in Connecticut audits

Increase in audit activity in states that border a state with no personal income taxes

– Massachusetts, Georgia, etc.


21

An International Twist…

Example – Financial Services Client

Total compensation expense of $31,528 M

Employing approx 284,000 people

Average salary of highly compensated employees - $222,000

Global operations: UK, Brazil, Korea, NY, CA

Assumptions

Approx 5% of employees travel frequently domestically (45 days +)

Approx 2.5% of employees travel to UK (30 days +)

Approx .5% employees travel to Brazil (24 days +)


22

It can add up

Potential domestic non-resident withholding exposure

$222,000 x 14,200 (5% of employees) x 20% (45/240 days worked in NR state) x 8% (avg. tax rate of NY/CA) = $50M

Potential UK tax exposure

$222,000 x 7,100 (2.5% of employees) x 12.5% (30/240 days worked in UK) x 40% (tax rate in UK) = $79M

Potential Brazilian tax exposure

$222,000 x 1,420 (.5% of employees) x 10% (24/240 days worked in Brazil) x 27.5% = $9M

TOTAL = $138M for one year


23

Income Tax Treaties Can Help

Effect of income tax treaties

Residency article (Tie Breaker)

Dependent personal services article

Double taxation article

Does not cover Social Security taxes

Does not directly cover state taxes


24

Income Tax Treaties - Residence

Article 4 of Most Treaties

(1) The term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature.

(2) Where by reason of the provision of paragraph 1, an individual is a resident of both Contracting States, then his residence shall be determined as follows:

(a) He shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);

(b) If the State in which he has his center of vital interest cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

(c) If he has an habitual abode in both State or in neither of them, he shall be deemed to be a resident of the State of which he is a national

(d) In any other case, decided by competent authorities of the Contracting States

Saving Clause

A Contracting State may tax its residents (as determined under Article 4(Residence)) and by reason of citizenship may tax its citizens, as if the Convention had not come into effect.


25

Income Tax Treaties - Dependent Personal Services Article

United States/Mexico treaty example:

(1) Salaries, wages and other similar remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

(2) Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) The recipient is present in that other State for a period not exceeding in the aggregate 183 days in a 12-month period; and

(b) The remuneration is paid by, or on behalf of, an employer who is not a resident of that other state; and

(c) The remuneration is not borne as such by a permanent establishment or a fixed base which the employer has in that other state.


26

26

Income Tax Treaties – Common Mishaps / Misperceptions

Chargebacks / Cross-charges

Use of Technical Services / Management Services Agreements

Transfer pricing concerns

Potential corporate PE issues

Extensions or ad hoc travel following assignment

May not cover all individual taxes (e.g. U.S. states may not recognize treaties)

Limited treaty network or DPS clause

May not eliminate withholding requirement

Canada requires withholding waiver in advance of business travel, regardless of treaty exemption

Does not cover social taxes

Totalization agreement network much more limited


27

27

Current DPS Treaty Countries

Australia Finland Italy Netherlands Slovenia U.K.

Austria France Jamaica New Zealand South Africa Venezuela

Belgium Germany Japan Norway Spain

Canada Greece Kazakstan Pakistan Sweden

China Hungary Korea Philippines Switzerland

Cyprus Iceland Latvia Poland Thailand

Czech Rep. India Lithuania Portugal Trinidad & Tobago

Denmark Indonesia Luxembourg Romania Tunisia

Egypt Ireland Mexico Russia Turkey

Estonia Israel Morocco Slovak Republic

Ukraine


28

KPMG survey information by country

EuropeBelgiumCyprus Germany Greece Kazakhstan IrelandNorway PortugalSpain Sweden Switzerland United Kingdom

Africa Botswana Morocco South Africa

Americas CanadaCosta RicaHondurasMexicoUnited States

AsiaChinaHong KongIndiaJapanKoreaMalaysiaSingapore

Australia

Current or increasein audit activity

Source: KPMG Member Firms


29

Assessing Global Risk

Review of 25 global locations to understand Tax, P & I exposure

Specifically regarding employer compliance for equity compensation: reporting/withholding

Takeaways:

Frequently, country taxing authorities will levy penalties and interest against the employer for failure to operate payroll withholding and/or reporting, even if the income is reported on the annual tax return

Penalty and interest amounts vary widely across countries:

– China: Up to 500% of underpaid tax

– Hong Kong: Up to 300% of tax due to under reporting + fine

– Poland: Fines of up to PLN 18,000,000 (approx. $5.3M)

– Singapore: Up to 200% of tax due to under reporting

– Thailand: Up to 100% of underpaid tax + fine

– Venezuela: Up to 500% of underpaid tax

Tax authorities may agree to mitigate penalty/interest charges if employer voluntarily discloses compliance failure

The Equity Compensation Equation


31

Equity awards and related compensation

Basis for equity based compensation typically spans multiple years

Employers required to allocate gain based upon time an employee performs services in a particular jurisdiction.

Highly compensated individuals, such as C suite executives, travel to numerous states while executing their responsibilities.

States are aware of such employee movements and are becoming more aggressive in their enforcement efforts with respect to employer withholding.

Public corporations, private equity firms, financial institutions and non-U.S. based companies with U.S. presence are key audit targets

Bonus allocation challenges, i.e., withholding current year taxes based on prior year services related to bonus payment


32

Equity compensation does not always follow general de minimis rules

Can require record keeping to reflect awards from grant date through exercise

Treatment varies greatly from country to country, state to state

Example – While NYS has a 14 day de minimis for SIT withholding, equity compensation is taxable immediately upon income recognition based on all days spent in state

The Equity Compensation Equation

Employment Tax Withholding and Reporting Survey

Survey objectives, methodology, and key findings


34

Survey Objectives

The survey was performed to gauge employer position and perception regarding nonresident/multistate withholding

Designed to have the results shared in “white paper” format in order to provide a broad based view into organizational treatment

Survey Methodology

Electronic survey sent to KPMG clients in March, 2013

103 organizations responded and provided input

Respondents included large and middle market employers in many industries

All responses anonymous

Employment tax withholding and reporting survey


35

Mining

Insurance

Food, Drink & Consumer Goods

Conglomerates, En-gineering & Industrial

Products, Metals

Chemicals

Aerospace & Defense

Retail

Oil & Gas

Building & Construction

Healthcare

Information Technology & Software

Banking & Finance

0% 10% 20% 30% 40% 50%

2%

2%

2%

2%

3%

3%

4%

4%

5%

8%

11%

13%

Other

Power & Utilities

Electronics

Transportation

Real Estate

Pharmaceuticals

Media

Investment Man-agement

Internet & Social Media

Energy and Natural Resources

Communications

Automotive Manufac-turers & Suppliers

0% 10% 20% 30% 40% 50%

31%

0%

0%

1%

1%

1%

1%

1%

1%

1%

1%

1%Other

Business Process Outsourcing

Charitable Foundation

Cleaning Service

CPA firm

Education

Engineering

Management Consulting

Manufacturing

Non profit Zionist organization

Professional Services

Scientific and educational

Industry

Does not add up to 100% due to rounding


36

Less than 5,000 5,000 to less than 10,000

10,000 to less than 25,000

25,000 to less than 50,000

50,000 or more 0%

20%

40%

60%

80%

100%

40%

11% 13%17% 19%

Respondents – Number of employees


37

All of the above

Cash balance

Equity awards

Salary

0% 20% 40% 60%

41%

3%

24%

52%

15%

53%

32%

Yes, it is a major issueYes, it is a growing issueNo

Majority say U.S. nonresident state withholding/reporting is a growing issue with salary as the top concern with respect to compliance and/or risk

Q. Is U.S. nonresident state withholding/reporting a major or growing issue for your organization with respect to compliance and/or risk?

Q. What type of compensation is this concern centered around?


38

Yes, we have pro-ceduresin place

Yes, we have technology

in place

Yes, we have both procedures

and technology in place

No0%

20%

40%

60%

80%

100%

27%

2%

22%

49%

51%: Procedures and/or technology in place

Half say they do not have procedures and/or technology in place to monitor employee work travel and remit/report taxes accordingly

Q. Do you currently have procedures and/or technology in place to monitor employee work travel and remit/report taxes accordingly?


39

Among those who have procedures in place to monitor employee work travel and remit/report taxes

89%

7% 4%

Corporate complianceReputational risk (brand damage)Monetary risks

Most say corporate compliance is the main driver for having procedures in place

Q. What is the main driver for having procedures in place?


40

Among those who do not have procedures and/or technology in place to monitor employee work travel and remit/report taxes

Less than 6 months

6 to less than 12 months

12 to less than 24 months

24 months or more

Do not anticipate implementing a

program

0%

20%

40%

60%

80%

100%

10% 8%12%

18%

51%

Half anticipate implementing procedures and/or technology to monitor employee work travel and remit/report taxes

Q. Do you anticipate implementing such a program in the next:…

48%: Anticipate implementing

Does not add up to 100% due to rounding


41

Excellent Good Poor We are looking for other alternatives

0%

20%

40%

60%

80%

100%

10%

43%

34%

13%

Nearly half are dissatisfied with the ability of their current processes/systems to effectively source salary and equity awards

Q. How would you rate your current processes/systems to effectively source salary and equity awards to multiple states?

47%: Poor/Looking for other alternatives


42

No, we would not provide additional support to these employees

Yes, gross-up additional tax costs and pro-vide tax return preparation support for other

than primary work states

Yes, provide tax return preparation support for other than primary work states

Yes, gross-up additional tax costs

0% 20% 40% 60% 80% 100%

75%

8%

2%

15%

Only one quarter say their organization currently provides additional tax support to employees working in multiple states

Q. Does your organization currently or expect to provide tax support to employees working in multiple states?

25%: Yes

Multi-jurisdictional Withholding

What can be done?


44

Multi-jurisdictional withholding – What can be done

Evaluation/assessment

– Identify jurisdictions and employees likely to have material activity

– Identify records/sources that provide indicators of activity

– Determine pay types, e.g., base comp, equity, bonus, etc.

Compliance policy design

– Determine processes

– Methodology of data capture (travel records, employee data entry, etc.)

– Real-time compliance

– Communication and training to/for employees

– Internal audit procedures

Practical issues/concerns

– Phased roll-outs

– IT/Technology/Security issues

– Deployment Timeframes Voluntary Disclosure Programs


45

Narrowing the field - How to filter?

All Employees

Business Travelers

BusinessTravelers with

PotentialExposure


46

The road to compliance

Collection Assessment ActionCommunicati

onGovernance Compliance


47

Collection

Employee/delegate input, IP address, smart phone, location services

Single versus multiple platforms

User acknowledgement/reminders

Timing of submission and locking data

Data storage warehouse

Security (IT Risks)




48

Assessment

U.S. Considerations

State de minimis rules

Reciprocity Agreements

State specific exemptions

Global Considerations

Double tax agreements, social security, immigration

Risk profile




49

Action

Allocation between multiple jurisdictions

Payroll calculations

Delivery of pay

Store allocations and track for long term incentives

Integration/Connectivity with multiple systems and stakeholders

Employee compliance (tax returns, visa, work permits etc.)




50

Communication

Employee communications (including reminders)

Policy awareness (funding of taxes, multi jurisdiction filing requirements, payroll calculations versus final liabilities)

Ongoing and new hire training

Identify and publish contacts




51

Governance

Policy owners

Travel policies

Internal audits (e.g., expense reports)

Non compliance sanctions/penalties

Quarterly reviews

External audit support



Hope for the Future?


53


Mobile Workforce State Income Tax Simplification Act of 2013

Primary Goal – Harmonize the state tax treatment of multi-state business travelers

Primary Provisions:

Individual will not be subject to tax in a nonresident state if present for no more than 30-days

Employer not subject to wage reporting / tax withholding

Employer may rely on employee’s estimate of time spent in nonresident state unless

Employer has actual knowledge of employee fraud, or

Employer maintains a time / attendance system that tracks where employee performs services

Applicable to “wages & other remuneration”

A “day” consists of a part of a day if only one nonresident state involved

If multiple states, then the state in which most time is spent

Does not include time spent in a state while in transit

Does not apply to professional athletes / entertainers


54


Mobile Workforce State Income Tax Simplification Act of 2013

Introduced into the Senate on 11/05/13

16 Bi-partisan cosponsors

Latest Action – Read twice and referred to the Committee on Finance

Prognosis: 22% chance of being enacted

Contact details

Vincent E. Rieck, CPATax Managing DirectorGlobal Mobility ServicesPhone 704-335-5392Charlotte, NC

managing the complexities of global and multistate travel taxation carolinas payroll conference...

Documents

kpmg llp slide

domestic business travel

tax treatment

tax structure

tax analyses

tax advice

tax adviser

individual business