Overview of webinar series

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(No Transcript)
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Agenda for Class - Introduction

• Overview of webinar series
• Syllabus
• Need access to Code and Regs in class
• Ask questions
• Need feedback on format

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Goals of the Webinar Series

• Understand the special rules and concepts
  associated with mobile employees
• Taxation of foreign corporations doing business
  in the US
• Issue recognition
• Multi-jurisdictional
• Real world environment

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Introductions

• Tax experience
• Experience with expats, aliens, and international
  issues
• What you want out of the class

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Agenda for Today - Overview

• International tax concepts
• US Who gets taxed and how they are taxed
• Whats included in international compensation
  package and how is it taxed
• Tax equalization concepts
• Corporate tax and legal issues

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International Tax Concepts

• Taxed on personal relationship between taxpayer
  and country
• US citizens
• Resident aliens
• Domestic corporations
• Taxed on economic relationship between taxpayer
  and country
• Nonresident aliens
• Foreign corporations
• Double taxation when taxpayer has personal
  relationship with one country and economic
  relationship with another country

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Territorial vs. Credit Systems

• Traditionally home country solves double taxation
  problem of citizens and residents
• Territorial system
• Taxed on income derived from sources within home
  country
• Not taxed on income from foreign sources
• Credit system
• Taxes foreign income
• Allows a credit for foreign taxes paid

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Foreign Tax Credit
Home Country Host Country Total
Earned 100 100
Taxed 100 100
Tax Rate 30 20 50
Territorial System 20 20
Credit System 30 20 50
FTC -20 -20
Net Tax 10 20 30
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Tax Treaties

• Unilateral solution territorial and credit
  systems
• Bilateral solution tax treaties
• Reciprocal tax exemptions
• Lower tax rates
• Shift primary tax jurisdiction from host country
  to home country
• Increase in home countrys revenue at host
  countrys expense

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Overview of US System

• US uses credit system
• Claim FTC on foreign-source income
• Deferral provisions
• Foreign-source income earned by US person through
  foreign corporation not taxed until repatriated
  through dividend distribution
• Foreign earned income exclusion

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US Taxation of International Transactions

• US person
• Foreign source income US collects the excess of
  the pre-credit US tax over the related foreign
  tax credit
• Foreign person
• Income effectively connected with a US trade or
  business US taxes the net amount of income at
  graduated rates
• US source nonbusiness income US taxes the gross
  amount of income at 30

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Terminology Tax vs. Company Definitions

• Expatriate
• IRC Sec. 911 provides for citizens or residents
  of the US living abroad
• Inpatriate/Alien/Foreign national
• IRC Sec. 7701(b) defines resident and nonresident
  aliens
• Third Country National (TCN)

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US Tax Status

• Citizen
• Taxed on worldwide income
• Regardless of where it is earned and where it is
  paid
• Resident
• Defined in IRC Sec 7701(b)
• Taxed like citizen
• Non-resident
• Defined in IRC Sec 7701(b)
• Taxed on US source income

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Length of Assignment

• Company definition vs. tax definition
• Common categories
• Business trip
• Extended business trip
• gt 1 year
• gt 3-5 years
• Potential double taxation for
• Income tax
• Social tax
• Estate tax

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Reasons for International Assignments

• Technical needs
• Company pays extra costs
• Developmental needs
• Company may pay extra costs
• Employee requests
• Company may treat as local hire

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Components of Compensation

• Balance Sheet
• Provide employee with similar purchasing power in
  home and host locations
• Common in US-headquartered MNCs (multi-national
  company)
• Review Annual Compensation Summary
• Incorporates tax equalization
• Updated frequently
• Net Pay
• Employee has same after tax pay in home and host
  location
• Common in European-headquartered MNCs
• Usually wont change during an assignment

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Net Pay Example
Home Host
Salary 100 140
Tax rate 30 50
Tax 30 70
Net after tax income 70 70
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Principles of Taxing Compensation

• Definition of wages
• What is taxable?
• Withholding federal income tax
• When do you withhold?
• Sourcing within or without US
• How do you avoid double taxation?

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Taxability of Compensation

• Tax definition of wages
• IRC Sec. 61 Gross Income Defined.
• General Definition Except as otherwise provided
  in this subtitle, gross income means all income
  from whatever source derived, including (but not
  limited to) the following items
• (1) Compensation for services, including fees,
  commissions, fringe benefits, and similar items.

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Taxability of Compensation

• Qualified plans
• IRC Sec 401. Qualified pension, profit-sharing,
  and stock bonus plans.
• IRC Sec 402. Taxability of beneficiary of
  employees trust.
• (a) Taxability of beneficiary of exempt trust.
  Except as otherwise provided in this section, any
  amount actually distributed to any distributee by
  any employees trust described in section 401(a)
  which is exempt from tax under section 501(a)
  shall be taxable to the distributee, in the
  taxable year of the distributee in which
  distributed.
• Do all plans qualify under Sec 401?

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Impact of 409A

• New regulations issued 4/10/07
• Unless certain requirements are met, amounts
  deferred under nonqualified deferred compensation
  plan are included in gross income and subject to
  20 penalty tax
• Exception
• Foreign nationals (not permanent residents)
• Broad-based foreign retirement plans
• Permanent residents and US citizens
• Broad-based foreign retirement plan related to
  non-US services

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Compensation

• Definition of wages
• Taxable regardless of where paid or where earned
• Withholding federal income tax
• When do you withhold?
• Sourcing within or without US
• How do you avoid double taxation?

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Taxability of Compensation

• Withholding required on wages
• Subchapter A Withholding from Wages
• IRC Sec. 3401. Definitions.
• (a) Wages. For purposes of this chapter, the
  term wages means all remuneration (other than
  fees paid to a public official) for services
  performed by an employee for his employer,
  including the cash value of all remuneration
  (including benefits) paid in any medium other
  than cash except

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Taxability of Compensation

• Wages for withholding except
• 3401(a)(5) services for a foreign government or
  international organization
• 3401(a)(6) services performed by a nonresident
  alien individual
• 3401(a)(8)(A) for services for an employer (other
  than the US)
• Performed by a citizen of the US if that
  remuneration will be excluded from gross income
  under Sec 911 or
• Performed in a foreign country by such a citizen
  if the employer is required by law in the
  foreign country to withhold income tax upon
  such remuneration

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Compensation

• Definition of wages
• What is taxable?
• Withholding federal income tax
• Withholding required unless
• Nonresident alien
• Qualify for Sec 911 exclusion
• Subject to non-US withholding
• Irrelevant whether paid out of US or no US
  paymaster
• Sourcing within or without US
• How do you avoid double taxation?

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What is included on Form W-2?

• US expats
• Paid in the US
• Paid out of the US
• What if not hired by US company?
• Resident/nonresident aliens
• Paid in US
• Paid out of the US
• What if no US paymaster?

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Taxation in Home/Host Country

• Usually taxable in host country if present more
  than 6 months
• Tax in home country ceases if absent more than 1
  year
• Except US citizens
• Offsets available in the US against non-US source
  income
• Section 911 exclusion (91,500 in 2010)
• Foreign tax credits

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IRC Sec 861. Income from Sources within US

• Gross income from sources with US. The
  following items of gross income shall be treated
  as income from sources within the US
• (3) Personal services. Compensation for
  personal services performed in US except shall
  not be deemed to be income from sources within US
  if-
• (A) the services are performed by NRA
  temporarily present in US lt 90 days during year,
• (B) compensation does not exceed 3,000 in
  aggregate, and
• (C) employer not engaged in trade or business in
  the US

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IRC Sec 862. Income from Sources without US

• Gross income from sources without US. The
  following items of gross income shall be treated
  as income from sources without the US
• (3) compensation for labor or personal service
  performed without the US

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Sourcing Compensation

• Sourced on workdays
• 1.861 - 4(b)(2)
• Salary
• 401(k)
• Goods and services differential

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Sourcing Compensation

• Attributed to specific location
• 1.861 - 4(b)(2)(ii)(D)
• Housing - Foreign taxes
• Education allowances - Hazard duty or hardship
• Transportation - Reimbursed moving exp
• Multi-year compensation
• 1.861 - 4(b)(2)(ii)(F)
• Bonus
• Stock awards

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Other Compensation Issues

• Local law vs. tax treaties
• General rule treaties override local statute
• Covered in future class
• Exchange rates
• Paid in currency other than US
• Covered in various classes

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Tax Equalization Basics

• Common business practice
• Allocate tax cost under balance sheet method
• Mechanics
• Taxability of hypothetical tax and tax
  equalization

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Allocating Tax Cost
100,000 Salary
30,000 Tax if remain _at_ home (Represents hypothetical) Tax if remain _at_ home (Represents hypothetical)
40,000 Tax _at_ host
10,000 Excess tax cost (40,000 30,000) Excess tax cost (40,000 30,000)

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Mechanics of Tax Equalization
W/O Assignment With Assignment
W-4 withholding Estimate stay-at-home hypothetical tax
Withhold tax each pay period Withhold hypothetical each pay period
Host country tax
YE tax return compare actual to withholding YE tax equalization compare actual to hypo withholding

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Taxability of Tax Components

• Is there constructive receipt of hypothetical
  tax?
• Are tax payments considered an advance or wages?
• Similarity to employee advances
• Documentation important
• Consistency required between employer and
  employee

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Impact of 409A

• Tax equalization exempted
• Payment must be made within two tax years that
  begin after the later of
• The deadline for filing a US return (including
  extensions)
• The deadline for filing a foreign return (or the
  due date of the foreign tax payments)

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Impact of 409A Example

• John on assignment in 2006
• 2006 return extended to 10/15/2007
• 2006 foreign tax paid January 2008
• When does tax equalization have to be paid to
  fall under 409A exemption?

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Taxability of Tax Components

• How is the tax equalization sourced?
• US payments
• Non-US payments
• 1.861-4(b)(2)(ii)(D)

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Corporate Issues for Intl Assignments

• Who gets the deduction?
• Secondment of employee
• Who is the employer?
• Who has the right to hire and fire?
• Which companies benefits programs apply?
• Permanent Establishment of employer in host
  location
• Legal issues
• Access to US court system

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Key Points

• Who gets taxed and how they are taxed
• Definition of wages
• What is subject to withholding
• US citizen vs. resident vs. nonresident
• Sourced within and without US
• Whats included in international compensation
  package and how is it taxed/sourced

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Key Points

• Tax equalization concepts
• Hypothetical tax vs. tax equalization
• Constructive receipt
• Tax advances
• 409A
• Corporate tax and legal issues
• Who is the employer
• Secondment
• Permanent establishment

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Contact Information

• Carol Rutlen
• crutlen_at_rutlen.com
• 650-321-3999