robb chase adam cohen charlie kearns october 9, 2014 … · october 9, 2014 . sutherland tax...

Tax Considerations of a Global Workforce

Robb Chase Adam Cohen Charlie Kearns October 9, 2014 Sutherland Tax Roundtable Silicon Valley

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©2014 Sutherland Asbill & Brennan LLP

Overview

• Employment Taxes Inbound Outbound State and Local Taxes Compensation Sourcing

• Employer Considerations Permanent Establishment State Tax Nexus Employment Structures

• Special Considerations for Ex-Pats

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Employment Tax - Inbound

• U.S. Federal Income Tax – Employee Obligations Subject to certain limitations, non-U.S. persons working in

the U.S. are subject to U.S. federal income tax and social security tax and reporting obligations.

Requirements differ depending on whether employee is resident in a treaty country.

Rules are onerous and, as a result, levels of compliance are inconsistent.

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• U.S. Federal Income Tax – Employee Obligations General rule that compensation for services performed in

the U.S. is subject to U.S. tax, subject to certain exceptions. Income for services performed in the U.S. generally is a

pro rata portion of total income earned by the employee, with special rules for certain fringe benefits (e.g., housing allowances).

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• U.S. Federal Income Tax – Employee Obligations De minimis exception:

Employee is not present in the U.S. for more than 90 days during the taxable year.

Total compensation for services performed in the U.S. does not exceed $3,000 for the year; and

Employer is a foreign corporation not engaged in a U.S. trade or business.

Day count is rarely relevant given the low dollar threshold. Travel advances that are excluded from income under U.S.

federal tax principles are not counted.

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• U.S. Federal Income Tax – Employee Obligations If the De Minimis Exception does not apply:

the performance of services in the U.S. by a non-U.S. Employee creates a U.S. trade or business for such employee and any compensation related to the services he or she performs are subject to graduated income tax rates in place a general 30% withholding requirement.

Withholding obligation is imposed on employer, and technically applies to U.S. as well as non-U.S. employers although enforcement may be difficult where employer has no connection to the U.S.

The employee should file a Form 1040NR reporting the income.

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• U.S. Federal Income Tax – Employee Obligations Treaty exemptions may apply if the employee is resident in

a treaty country. Although specific treaty requirements differ, under U.S.

model treaty an employee resident in a treaty country is not subject to U.S. tax for services performed in the U.S. if: the employee is not resident in the U.S. for more than

183 days in any twelve month period; the remuneration is paid by an employer that is not a

U.S. resident; and The remuneration is not borne by a U.S. PE.

Various treaties depart from these general rules, including some that have alternative total income limitations.

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• U.S. Federal Income Tax Withholding and Information Reporting – Employer Obligations No federal information reporting or withholding obligations if

the employee meets the de minimis test. Employer must withhold U.S. federal income tax from U.S.

employee under U.S. wage withholding tax rules. U.S. rules technically apply to foreign employer even if

there are practical limitations on ability to enforce where employer has no U.S. tax presence.

Withholding is reported to the employee on a Form W-2. The employee should provide a Form W-4 claiming

exemptions, although generally only the personal exemption would apply.

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• U.S. Federal Income Tax Withholding and Information Reporting – Employer Obligations If the employee is eligible for a treaty exemption, the

exemption is claimed by providing the employer a Form 8233.

The employer generally would report payments made on a Form 1042-S (although a W-2 may be required in some cases).

An employee claiming a treaty exemption still is required to file a Form 1040NR to claim the treaty benefit.

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• FICA Generally, all wages paid for services performed in the U.S.,

including services by a foreign employee for an employer that is not resident in the U.S. are subject to FICA. Rev. Rul. 92-106 specifically provides that wages paid to

a Foreign Employee by a non-U.S. employer for services the employee performs in the U.S. generally are wages for FICA, subject to withholding for the employee’s share of FICA under IRC §§ 3101(a) and (b). In addition, the employer must pay its share of FICA and FUTA with respect to the wages in accordance with IRC §§ 3111(a) and (b) and 3301.

De minimis exception does not apply and social security taxes generally are not covered by U.S. treaties. Totalization Agreements are discussed below.

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Employment Tax - Outbound

• U.S. Federal Income Tax U.S. persons are taxable on their worldwide income, subject

to the section 911 foreign earned income exclusion (currently approximately $97,000).

Potential for double taxation of income earned by U.S. persons outside the U.S. is further limited by application of: Foreign tax credit rules; and Treaty exemptions.

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• US Social Security Tax Social Security tax, totalization agreements, and 3121(l)

Any American employer must pay Social Security tax. Totalization agreements with 24 countries minimize dual

coverage. Generally pay where you work, but detached worker rule

(less than 5 year assignment) allows continued home country coverage.

3121(l) allows foreign sub to be treated as American employer and pay Social Security tax for all U.S. citizens.

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• US Federal Income and Social Security Tax Tax equalization

Tax equalization v. tax protection Use of hypo taxes 409A payment timing

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• Non-U.S. Tax Whether income of U.S. employee working outside the U.S.

is subject to local tax and withholding obligations is based on local law and consideration should be given to determining such obligations whenever there is cross border travel.

• Withholding U.S. entity v. non-U.S. entity Dual withholding minimized by exclusions for amounts

subject to foreign withholding (section 3401(a)(8)(A)), foreign tax credit, section 911.

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©2014 Sutherland Asbill & Brennan LLP 15

Employment Tax – State Taxes

• When to Withhold State Taxes? • Relevant standard varies by State

Days worked in state Dollars earned in state Combination No tax – Alaska, D.C. (non-residents), Florida, Nevada,

South Dakota, Texas, Wyoming • Triggering threshold varies by state

Number of working days Any part of a day (“hour equals a day” rule) Actual work done No specific threshold – but state has personal exemption


Employment Tax – State Taxes

• Examples: New York – 14 working days per year Connecticut – 14 working days per year North Dakota – 20 working days per year (MTC Model) Georgia – 23 days per quarter or in-state wages exceed 5%

of total compensation Arizona – 60 days per year Montana – in-state income exceeds $3860 of federal gross

income

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Employment Taxes - Local Taxes

• Local Withholding or Payroll-based Taxes Identification of localities Imposition may be on employee or employer Different sourcing rules than state Different base

• Problematic Jurisdictions Wilmington, DE New York City Pennsylvania localities


Compensation Sourcing

• Basic International Tax Principles Generally sourced to where the services are performed.

• Basic State Law Principles Vary by type of compensation – what services are

performed? Some states source compensation income based on

“source,” i.e., the portion reasonably attributable to personal services performed in the state and irrespective of residency at time of recognition.

Other states look only to residency at time of recognition. Other states employ unique rules. No guidance

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Compensation Sourcing – State Law

• Application to Types of Compensation Deferred compensation

Where services were provided – during vesting period, during full period of accrual

Severance pay Allocate to last work location, allocate over career

Equity – restricted stock, RSUs, options Grant to vest Grant to exercise Date of grant Date of exercise

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Compensation Sourcing – State Law

• Examples of Equity Allocation Methods Arizona, California, Colorado, Pennsylvania, Virginia:

grant-to-exercise, multiyear allocation based on working days

Connecticut, New York: grant-to-vest, multiyear allocation based on working days

Illinois: allocated based on working days during the year options were earned or granted or, if that date is unclear, ratably over a five-year allocation period

Ohio: taxable based on the appreciation of the underlying option that occurred while the taxpayer was an Ohio resident.

Georgia, Minnesota: taxable only if a resident at time option is exercised

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• Permanent establishment is a treaty concept Under income tax treaties, the “business profits” of a corporation

that resident in one treaty jurisdiction generally are not subject to tax in the other treaty jurisdiction unless they are attributable to a permanent establishment maintained in that jurisdiction.

• Before you get to the permanent establishment question, you must first determine if there is a tax residence in the local jurisdiction. Under U.S. principles, for example, a corporation that is

engaged in a U.S. trade or business is subject to tax on its income that is effectively connected with that trade or business.

Employer Considerations: Permanent Establishment


• Once it has been determined that there is a tax residence under local law, the question under the treaty is whether the corporation has a “permanent establishment” in the taxing jurisdiction. Under most tax treaties, the business income of foreign

corporation is taxable only if that corporation has a “permanent establishment” in the taxing jurisdiction.

• Rules apply on a company by company basis Can be significant, particularly when day counting is required.



• Under the OECD Model (Article 5), there are two types of permanent establishments: Fixed Place PE – Article 5(1) Agency PE – Article 5(5)

• In addition to Fixed Place and Agency, some treaties provide for: Construction PE – Relates to construction or supervision of a

project in a taxing jurisdiction; and Service PE – Relating to performance of services for a specified

period of time in a jurisdiction.



• Under the OECD Model Treaty, there are three basic requirements to the finding of a fixed place permanent establishment (Article 5(1)): Premises owned, rented or otherwise at disposal of the foreign

corporation or its employees; Permanency; and Conduct of meaningful business activity by employees, local

agents or other personnel.



• Physical Presence Requirement According to the OECD Commentary:

Mere presence of the corporation or its employees at a location in the jurisdiction is not sufficient.

Similarly, regular visits by sales personnel to customer premises in the jurisdiction alone are not sufficient to constitute a PE.

But, The continuous use of office space of another company for

an extended period is considered to give rise to a permanent establishment.

Seconded employees may give the lending employer a fixed place of business, particularly if they remain on the payroll of the lending employer.



• What constitutes permanency? OECD Commentary suggests that activities that are carried

on for less than six months cannot constitute a PE, but there is not consistency in practice.

Short periods of time at recurring intervals can give rise to a permanent establishment.

The duration of business activity is significant. In the case of some treaties that provide for services PE,

even one day of services may give rise to a PE in the jurisdiction.



• Conduct of meaningful business activity Under the OECD Model, preparatory or auxiliary activities

alone do not constitute a permanent establishment. Article 5(4).

Specific exclusions: Storage, display or delivery Purchasing goods Collecting information

Not that treaties with a construction PE clause effectively override these rules as to construction activities.

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• As noted above, activities of a “dependent agent” in the taxing jurisdiction may give the principal a PE in that jurisdiction. (OECD Model Art. 5(5)). An employee generally is considered to be a dependent

agent of the employer.

• If an employee has and habitually exercises the authority to conclude contracts in the name of its employer, employee activities may give the employer an agency PE in the relevant jurisdiction. Where employee travel is contemplated, it is important to

limit the scope and nature of activities that can be performed when traveling.



Employer Considerations: State Nexus and Jurisdiction to Tax

• Employee Residency versus source taxation

• Employer Constitutional Statutory

Example: New Jersey – “employer maintaining an office or transacting business within this state and making payment of any wages subject to New Jersey personal income tax or making payment of any remuneration for employment subject to contribution under the New Jersey ‘unemployment compensation law’...” 54A:7-1(a)

Overlay with corporation income tax, e.g., P.L. 86-272.

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©2014 Sutherland Asbill & Brennan LLP 30 30

Employer Considerations: State Nexus and Jurisdiction to Tax

• Separate and distinct from employee’s obligation to file personal income tax returns Penalty versus tax Problems with proving employee separately reported and

paid tax • Where to withhold?

Where is service performed? New York’s “convenience of employer” test exception Reciprocity agreement? Consideration of credit in resident

state on withholding • State Registration


Employer Considerations: Employment Structures

• Significance of employing entity Employment law Benefits Tax withholding and payroll Tax deduction Permanent establishment Nexus Local law requirements (e.g., China)

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• Common Structures Secondments

Remain home country employee Usually remain in home country benefit plans Host country often pays fee for services

Localization Transfer employment Host country benefits Usually longer term assignments Acquired rights and other local law concepts

Global employment companies Single employment company in favorable jurisdiction

Dual employment

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• Documentation Assignment letters Intercompany agreements

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Employer Considerations: Telecommuting Issues

• Telecommuting employee likely creates nexus for out-of-state employer Telebright Consider whether ownership of property is relevant

• Impact on other state and local taxes? Business activity taxes (income, gross receipts, net worth) Sales and use taxes Personal property taxes

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Special Ex-Pat Issues

• Foreign Bank Account Reporting (“FBAR”) Rules U.S. persons that own or have signature authority over non-

U.S. accounts generally are required to report those accounts to the Treasury annually on a FinCEN Report 114. Report is filed electronically.

U.S. corporations are required to report their foreign accounts and U.S. persons employed by foreign subsidiaries may be required to report corporate accounts over which they have signature authority.

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• FATCA FATCA rules are separate from the FBAR rules, but also

require U.S. persons with non-U.S. accounts to report those accounts to the IRS on a Form 8938. Unlike FBAR rules, generally does not require reporting

of corporate accounts. “Account” is defined broadly and can include insurance

contracts and interests in employee plans.

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• Section 402(b) Funded, non-qualified pension plan is taxed when vested. If a U.S. taxpayer participates in a non-U.S., funded pension

plan, the taxpayer could have taxable income on the vested accruals in the plan.

Also a potential issue for non-U.S. national who becomes a U.S. resident or green card holder.

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• Section 409A Unfunded deferred compensation must comply with strict

distribution timing rules or be subject to a 20% additional tax imposed on the employee.

Potentially applies to any compensation that is paid in a year later than the year the legally binding right arises.

Examples: severance, long-term incentives, phantom equity, unfunded retirement plans

Exceptions for certain non-U.S. arrangements that are broad-based or meet other requirements, but often applies to non-U.S. compensation arrangements and changes are often necessary.

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• Section 457A

No-tax or low-tax

jurisdiction Deferred

compensation

US citizen or green

card holder

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• Section 457A Enacted in 2008 primarily in response to hedge fund

manager deferred compensation. Applies to unfunded deferred compensation of a U.S. citizen

or green card holder. Only applies if the plan sponsor is a “nonqualified entity.”

Sponsor is the entity that gets the tax deduction under U.S. tax principles.

A nonqualified entity is an entity that is not subject to a comprehensive foreign income tax. Comprehensive tax treaty or Comprehensive income tax (no special benefits).

Requires immediate inclusion in taxable income once vested – no deferral permitted.

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Special Ex-Pat Issues – State Law

• Foreign Tax Credit to U.S. Residents for Income Taxes Paid to Treaty Partner Exception to bilateral tax treaties – nondiscrimination clause

of tax treaties, which generally applies “to taxes of every kind and description imposed by a Contracting State or a political subdivision or local authority thereof.”

Accordingly, states typically dismiss taxpayers’ claims that they have a right under bilateral tax treaties to a tax credit against state income taxes for income taxes paid to foreign countries. See, e.g., Virginia Public Document Ruling No. 13-232, 12/18/2013.

Impact on withholding

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Special Ex-Pat Issues – State Law

• Unemployment Insurance Sourcing – apply four tests in succession:

1) Place where work is localized (“localization test”); 2) Location of employee’s base of operations (“base of

operations test”); 3) Location from which operations are directed or controlled

(“control test”); 4) Location of employee’s residence (“residence test”).

• Issues related to foreign assignments and employers’ UI contributions

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Questions?

Robb Chase

202.383.0194 [email protected]

Adam Cohen

202.383.0167 [email protected]

Charlie Kearns 202.383.0864

[email protected]

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mailto:[email protected]



robb chase adam cohen charlie kearns october 9, 2014 … · october 9, 2014 . sutherland tax...

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