Shadow Payroll Michele Honomichl Executive Chairman & Chief
Strategy Officer Celergo Global Payroll California Payroll
Conference September 11 and 12, 2014
Slide 2
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? Agenda 2
Slide 3
Expatriate Payrolls Host Shadow Payroll Home Shadow Payroll 3
What Is A Shadow Payroll?
Slide 4
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
Slide 5
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
Slide 6
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
Slide 7
Types of Host Tax Programs 7 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)
Slide 8
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
Slide 9
9 Long Term Expatriate Local Rules On Foreign Workers When Do I
Need A Shadow Payroll? 9
Slide 10
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 Jan1 to Dec31 Others count from start date in country
Some Countries Require Calculations at 90 or Less Days 10
Slide 11
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
Slide 12
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
Slide 13
Withholding Submissions 13 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)
Slide 14
Compensation Package Benefits In Kind Taxes What Is Included In
A Shadow Calculation? 14
Slide 15
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
Slide 16
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
Slide 17
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 Companys Expense 17
Slide 18
Host Tax Calculations Example What Is A Tax Matrix?
Slide 19
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
Calculation 19
Slide 20
Tax Matrix Example Norway: Long Term Expatriates Compensation
Elements Taxability for Income Tax and Social Security Tax Example
Amount to Gross-Up 20
Slide 21
UK to Germany US to Germany US to Germany (With Off Cycle in
US) Tax Calculation Examples
Slide 22
Example Calculation 1 22 Long-term Expatriate Home: United
Kingdom Host: Germany Split Delivery
Slide 23
Example Calculation 2 23 Long-term Expatriate Home: United
States Host: Germany Split Payroll Separate Cash versus Tax
Mechanism
Slide 24
Example Calculation 3 24 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
Slide 25
Changes Memo Updates Consistency Auditing How Do I Manage A
Shadow Payroll?
Slide 26
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
Slide 27
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
Slide 28
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
Slide 29
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
Slide 30
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
Slide 31
Thank you for your attention Questions? Please feel free to
contact Michele Honomichl at [email protected]