If you've followed my byline in EBN over the years, you'll note that I don't often write stories about tax issues. One of the perks of being the boss is that most of the time, I can assign myself only stories that genuinely interest me. Tax issues? Thanks, but no thanks. However, after sitting down several months ago with Sean Watts, principal of human capital at Ernst & Young, to talk about the key tax considerations for benefits practitioners when it comes to payroll and total compensation, I have to say: While I still don't find benefits tax issues interesting, I see how understanding them is imperative. Keep reading, and I think you will, too. -K.M.B.
EBN: Employers are taking on increasing risks with payroll taxes. What exactly are those risks, and how can employers go about making sure they're avoiding any legal or other compliance missteps?
Watts: The typical risks in this space have to do with knowing what your reporting requirements are for cross-border employees. If you have employees crossing borders, typically they're going to be paid in multiple locations - some items are going to be paid on payroll, some items off payroll, some items that are benefits that there's some kind of imputed value on.
The risks are in understanding what your reporting requirements are for compensation: Identifying the total compensation packages for your employees across all the different sources that exist, understanding what's taxable and not taxable in each of the jurisdictions that your [employees are] working in, since each location will have its own tax rules, and knowing what you have to report and don't have to report.
There are a lot of different circumstances that drive whether you have a reporting responsibility: Does the home charge the cost to the host? Where are payments delivered? In some locations if you make payments in [a different country], those are reportable. In some locations if you make payments offshore, there may not be a withholding obligation. It may depend on the employee's nationality or citizenship, or the duration of the assignment.
All of those things are challenges from a reporting perspective, and we're seeing underreporting in some locations - where organizations don't know what the total compensation package is, the taxable component of the compensation is, and they don't know what the reporting requirements are. But we're also seeing overreporting for the same reasons.
EBN: Obviously, the corporate world is only getting more global. So, without spending an inordinate amount of resources, how can employers get a handle on what their reporting requirements are, depending on what country/countries they have operations in?
Watts: We recommend developing a "fact pattern," [for overseas operations], which involves:
* Understanding what [classification] of employees they have in foreign locations.
* How they're paying those employees.
* What they're paying those employees.
* [Knowing whether or not they] are charging back the expenses to foreign locations.
Then, develop a payroll guide for each location they're operating in that explains the reporting requirements; identifies all elements of compensation individuals in each location could receive; and explains the taxability of those items, the income tax rules for employers and employees, and how to calculate those taxes and remit them to proper authorities.
EBN: Who should be the people around the table to develop this payroll guide so that it operates most effectively? Accounting? Legal? HR/benefits?
Watts: It includes a broad range of stakeholders, typically the expat program manager - the person responsible for the program itself and delivering compensation to the employees - [as well as] the different payroll groups: the home payroll [manager], the host payroll [manager] or the payroll vendor. The corporate tax group should have a seat at the table as well, to make sure [the guide] doesn't deviate from the corporate tax strategy. It could involve finance, general counsel, internal audit and HR.
EBN: How often should these payroll guides be updated?
Watts: We recommend when opening a new location or changing your processes that you update [payroll guides]. We also recommend that as tax law changes, you make updates as well. That could be on an annual or just as-needed basis.
EBN: What are the legal implications for companies that are underreporting or overreporting?
Watts: There could be significant penalties in interest associated with a failure to report; we've seen penalties as high as 300%. So, there's a financial risk. There's also a reputational risk - you don't want your company's name in the paper. And, in many locations, there's a criminal risk. Many locations view failure to report as criminal activity, and certain locations may limit your ability to operate.
Then, in terms of employee satisfaction, if you can't effectively determine or provide total compensation, employees may start to question your ability to manage not just compensation, but the entire [expatriate] process.
EBN: What else should employers know?
Watts: There's a significant increase in attention from authorities - maybe because revenues are down and compensation noncompliance seems to be low-hanging fruit. We're seeing more audits, more information requests from authorities about what [employers'] total compensation packages are, and I suspect we'll see more of that as we move forward.
