Establishing processes for recording cash and noncash compensation from payment entities and ensuring that taxes are properly withheld are essential for expatriate payrolls, a payroll consultant said May 18.
Electronic systems that record compensation for expatriates and processes for gathering expatriate compensation data should account for payroll components from expatriates’ host countries, home-country payroll components, accounts payable transactions and expense reports that indicate allowances granted to employees as part of the cost of employment aboard, said Patrick Landers, people advisory services partner at Ernst & Young LLP.
Specifying the job positions within an organization that have the responsibility of providing data elements relevant to expatriate compensation, instead of specifying names of employees with this responsibility, is tactically advantageous when creating an employer’s procedural documents for expatriate compensation accumulation tracking, Landers said.
If employee names instead of job titles are identified in the procedural documents, requests for compensation data could be inappropriately directed to individuals who no longer are working in jobs with responsibility for tracking expatriate compensation data, he said.
“Of all the things we deal with in expatriate payroll work, compensation accumulation is the most important component to getting payroll filings complete and accurate and is also most important for completing income tax returns for expatriates,” Landers said at the annual American Payroll Association Congress in Orlando, Fla.
Compensation accumulation also is “one of the easiest things to build a process around to administer,” Landers said. “If your company does not do an effective job of this, or does not have a formal process in place, compensation accumulation will be a nightmare.”
Auditing systems and procedures used for expatriate compensation accumulation is auspicious for identifying and eliminating shortcomings in data collection that may generate problems that require filing adjustment forms or paying additional amounts to resolve, Landers said. Employers should establish a reasonable frequency at which these internal audits occur, he said.
Payroll personnel should thoroughly examine the taxability of the types of payments tracked for their expatriate compensation accumulations, and identify types of payments that are taxed differently by an expatriate’s host country than by the expatriate’s home country, to maximize compliance with each country’s tax filing and payment requirements, Landers said.
Employers that outsource expatriate compensation accumulation components to third-party vendors should stringently evaluate the vendors’ ability to properly account for tax laws and procedures in home and host countries when processing relevant payment data, Landers said. Using a vendor that does not properly track differences between home and host country tax treatment of types of payments received by expatriates may cause an employer to need to resolve mistakes the vendor made, he said.
When developing strategic plans for expatriate compensation accumulation, it is important to recognize that treaties between home and host countries may influence taxability of expatriates’ compensation, Landers said.
Employers should review the terms of double taxation agreements between home and host countries, which commonly use a threshold of 183 days of work in a host country as the maximum number of working days within a 12-month period in which an expatriate working there can do so without being assessed income tax by the host, although other factors could require taxability even if that threshold is not reached, Landers said. For situations when the threshold of working more than 183 days in a host country is applicable, payroll personnel should have procedures for tracking when the threshold is reached, he said.
Recognizing how to apply the terms of bilateral totalization agreements that may eliminate the need for expatriates to be assessed social taxes by both countries as well is essential for expatriate compensation accumulation and tax compliance, Landers said.
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