California Payroll Conference Shadow Payroll Michele Honomichl Executive

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

Agenda 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? 2

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

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

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

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

Types of Host Tax Programs �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) 7

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

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

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 Jan 1 to Dec 31 �Others count from start date in country �Some Countries Require Calculations at 90 or Less Days 10

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

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

Withholding Submissions �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) 13

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

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

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

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 Company’s Expense 17

What Is A Tax Matrix? Host Tax Calculations Example

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 19 Calculation

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

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

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

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

Example Calculation 3 �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 24

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

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

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

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

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

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

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