revealing the risks associated with global compensation programs (with ernst & young)

TalentTakeawayswebinar & podcast series

Revealing the Risks Associated with Global

Compensation Programs

Revealing the Risks Associated with Global Compensation Programs2

Global Compensation Risks

Legal &Financial Risks

Labor LawsEmployment Taxes

Payroll ReportingCorporate Income Tax


Michael BussaPartner – Human Capital Practice, Ernst & Young

Special Guest Presenter

Revealing the Risks Associated with Global Compensation

Programs


Circular 230 and Financial Statement Disclosure

Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions

These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice


Today’s Discussion

1. Challenges to mitigating payroll risks

2. Overview of the current tax and regulatory landscape

3. Mitigating the risks of payroll non-compliance globally

4. Aligning global corporate income tax deduction and payroll reporting policies

5. Minimizing employment and labor law risks emanating from under reported compensation income


Challenges to Mitigating Payroll Risks

Need for coordinated

approach amongst functional groups

Constant IT releases

Evolving data requirements

and dependencies

Tax and regulatory

developments

Tax and regulatory authorities

enforcement efforts

Increasing number of legal

entities/businesses to manage

globallyExpanded

employee types – cross border/

frequent business travelers


Challenges to Mitigating Payroll Risks (continued)

Over the last several years, EY has identified over 600 significant payroll/compensation-related announcements from tax and regulatory bodies around the world aimed at employers and their employees!

Need for coordinated

approach amongst functional groups

Constant IT releases

Evolving data requirements

and dependencies

Tax and regulatory

developments

Tax and regulatory authorities

enforcement efforts

Increasing number of

legal entities/ businesses to

manage globallyExpanded

employee types – cross border/

frequent business travelers


Current Tax and Regulatory Landscape

Announcements are issued in a wide variety of forms and from numerous authoritative bodies

Announcements address changes to tax, immigration, and foreign exchange laws, regulations, interpretations and practices

Certain procedural announcements issued indicate that taxing authorities will review compliance with tax law changes in upcoming audit cycles

Continued and increasing enforcement of applicable laws and regulations to drive…….”the Great Revenue Grab”!

Harmonization amongst regulatory bodies and countries to identify employees potentially subject to taxation in their jurisdictions. For example:- Taxing authorities using immigration, travel and workplace data- Exchange of information between countries regarding income and assets

Revealing the Risks Associated with Global Compensation Programs

Current Tax and Regulatory Landscape (continued)

9

Africa: Tax – 20Immigration- 13

Asia_Pac: Tax – 135Immigration- 26Fx – 7

Europe: Tax – 292

Immigration- 77Fx – 4

Americas: Tax – 29

Immigration- 3Fx – 1

Middle East: Immigration- 5


Current Tax and Regulatory Landscape (continued)

Types of Announcements

Subject areas addressed in relation to compensation/ payroll Impacted Employee Types

Proposed/final law/regulations Individual taxation Local nationals

Rulings Payroll reporting/tax withholding Cross-border/permanent transfers

Court decisions Social security/employment taxes Seconded on international work assignment

Procedural/administrative guidance

Taxation of compensation income Frequent business travelers

Voluntary disclosures/abatements Corporate income tax deductibility “C suite” executives

Visa quotas Cross-border tax implications

FX limits/restrictions Pension payments/contributions

Income tax treaties Immigration quota limits/exemptions

Totalization agreements Cross-border income apportionment

Sanctions Currency transfers


Mitigating the Risks of Payroll Non-Compliance Globally

Challenge – Ongoing Tax and Regulatory Developments

Ongoing validation that changes are implemented

and operating as instructed

Stay abreast of tax and regulatory developments

Assess impact of tax and regulatory changes to organization and employees

Identify stakeholders; secure buy-in and assign

responsibilities

Develop action plan for implementing changes


Mitigating the Risks of Payroll Non-Compliance Globally (continued)

Meeting the Challenge of ongoing Tax and Regulatory Developments

Stay abreast of tax and regulatory developments

• Adopt robust process to timely identify applicable tax and regulatory changes

• Monitor authorities’ communication channels for announcements, releases, guidance, etc.

• Consider assistance from 3rd party providers



Meeting the Challenge of Ongoing Tax and Regulatory Developments

Assess impact of tax and regulatory changes to organization and employees

Determine specific tax or regulatory implications taking into account:

• Proposed/final laws and regulations

• Organizations’ risk posture

• Existing rulings/agreements with authorities

• Payroll/HR/IT system capabilities and limitations

• Market practice

• Cross-border/mobile employees

• Tax and regulatory issues specific to equity, incentive and non-cash compensation

• Financial/economic impact to organization and employees



Develop action plan for implementing changes

• Adopt positions to be taken

• Identify relevant functional areas of the organization required to be involved

• Assess data requirements

• Determine if significant gaps exist requiring corrective and/or remedial action




Identify stakeholders; secure buy-in and assign responsibilities

• Identify stakeholders across functional areas such as; payroll, HR, tax, accounting, executive compensation, mobility, general counsel’s office, and IT.

• Adopt and implement action plan and accountability matrix

• Perform testing and adjust where needed

• Provide training to payroll teams and other functional areas




Ongoing validation that changes are implemented and operating as instructed

Implement processes and controls/variance analysis to proactively validate payrolls are operating as instructed, with support from relevant functional groups. Special attention should be given to:

• Align payrolls coming on line for first time(e.g., where payroll reporting/w/h not previously required and triggered by law/regulatory change

• Special reporting/disclosure requirements

• Timely remittance of withholding and employer taxes

• Cross-border/mobile employees

• Equity, incentive and non-cash compensation



Aligning Global Corporate Income Tax Deduction and Payroll Reporting Policies

Company X

Employee

$100K Cash Compensation

Corporate Income Tax Considerations

Payroll Considerations

• Corporate income tax deduction ordinarily would be available to Company X for compensation paid, provided:• Cost of compensation

is borne by Company X; and,

• Employee performs services for the benefit of Company X

• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out

• Most countries would require payroll reporting and possibly, tax withholding on the compensation paid

Performs services

Base case illustration


Parent Company

X

Employee of Parent

Co. X

$100K Cash Compensation



• Corporate income tax deduction ordinarily would be available to Subsidiary X for cash compensation paid by Parent Company X, provided:• Cost of compensation is

borne by Subsidiary X; and, • Employee performs services

for the benefit of Subsidiary X

• Deduction ordinarily available to Subsidiary X for locally paid allowances and B-I-K

• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for cash compensation, allowances and B-I-K

• Processes must be in placed to capture:• Recharges from Parent

company• Provide corporate tax with

visibility to locally paid allowances/B-I-K (some potentially non-cash/imputed)

• Most countries would require payroll reporting and possibly, tax withholding on the compensation paid by Parent Company X and allowances/B-I-K paid by subsidiary X

• In certain cases, a corporate income tax deduction will trigger payroll reporting/tax withholding which would otherwise not exist.

• Processes must be in place to capture:• Locally paid

allowances/B-I-K (some potentially non-cash/imputed

• Provide payroll with visibility to recharges from Parent company.

Subsidiary X

Secondment/Performs services

Locally paid allowances/B-I-K

Recharge for $100k cash compensation

Payment for recharge of $100K

Secondment illustration

Aligning Global Corporate Income Tax Deduction and Payroll Reporting Policies (continued)


Parent Company

X

Employee of Sub X

$100K stock award



• Corporate income tax deduction ordinarily would be available to Subsidiary X for stock award delivered by Parent Company X, provided:• Cost of award is

borne by Subsidiary X; and,

• Employee performs services for the benefit of Subsidiary X

• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for stock award

• Processes must be in place to capture recharges from Parent company.

• Most countries would require payroll reporting and possibly, tax withholding on the stock award delivered by Parent Company X


• Processes must be in place to:• Capture stock

award details• Provide payroll

with visibility to recharges from Parent company.

Subsidiary XPerforms services

Recharge for $100k stock compensation


Equity compensation illustration



Parent Company

X

Employee of Parent

Co. X

$100K stock

award



• Corporate income tax deductions ordinarily would be available to Parent Co. X and Subsidiary X for stock award delivered by Parent Company X.

• Deduction limited to award expense attributable to respective employment service periods, provided:• Respective costs of

award are borne by Parent X/ Subsidiary X; and,

• Employee performs services for the benefit of Parent X/Subsidiary X

• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for stock award

• Processes must be in place to: • Apportion recharges• Capture recharges from

Parent company.

• Most countries would require payroll reporting and possibly, tax withholding on the stock award delivered by Parent Company X at both the Parent and Subsidiary X levels.


• Processes must be in place to:• Apportion stock

award income • Capture stock award

details• Provide payroll with

visibility to recharges from Parent company.

Subsidiary XPerformed services G-V,

70%, while previously employed with Sub X

Recharge for $70k stock compensation


Performed services over G-V period=30%, while employed by Parent Co. X (current employer)

Multiple jurisdiction equity compensation illustration



Parent Company

X

Employee of Parent

Co. X

$100K deferred

cash bonus



• Corporate income tax deductions ordinarily would be available to Parent Co. X and Subsidiary X for deferred cash bonus paid by Parent Company X.

• Deduction limited to bonus expense attributable to respective employment service periods, provided:• Respective costs of bonus

are borne by Parent X/ Subsidiary X; and,

• Employee performs services for the benefit of Parent X/Subsidiary X

• Corporate income tax deduction could be subject to disallowance if applicable payroll reporting/withholding are not carried out for bonus

• Processes must be in place to: • Apportion recharges• Capture recharges from

Parent company.

• Most countries would require payroll reporting and possibly, tax withholding on the deferred cash bonus paid by Parent Company X at both the Parent and Subsidiary X levels.


• Processes must be in place to:• Apportion bonus

income • Capture bonus details• Provide payroll with

visibility to recharges from Parent company.

Subsidiary X

Performed services over performance period= 70%, while previously employed with Sub X

Recharge for $70k deferred cash bonus


Performed services over performanceperiod= 30%, while employed by Parent Co. X (current employer)

Note: Alternatively, Parent Co. and Subsidiary can each pay their respective portions of the deferred cash bonus (i.e., 30/70); however, this could give rise to complexities around cash delivery to employees and possibly getting employees re-instated/re-registered on the prior employing company’s payroll.

Multiple jurisdiction deferred cash bonus illustration


Minimizing Employment and Labor Law Risks Emanating from Under Reported Compensation Income

Risks arise primarily as a result of failure to: – Pay employer social or applicable employment taxes– Withhold applicable social taxes from employees– Include compensation income in statutory benefit formulas for

determining pension payments, termination payments, and other entitlements

Types of risks include:– Penalties assessed by taxing authorities for failure to pay/withhold

applicable taxes– Fines imposed by relevant authorities for failure to administer

compensation programs in accordance with applicable laws– Litigation from impacted employees for claims relating to:

• Underpaid pension payments, termination payments, and other entitlements

• Underpaid/under withheld taxes• Damages


Types of compensation which predominantly give rise to failure to pay applicable taxes/include in statutory benefit formulas:

– Equity-based compensation– Deferred cash bonuses– Non-cash benefits-in-kind– Profit sharing arrangements

Highest risk for non-inclusion occurs when the compensation income is paid/delivered by parent company or third-party vendor

To minimize risks, implement processes and procedures to:– Identify compensation income subject to tax/statutory benefits – Identify payments not paid/delivered directly by employing company for

inclusion in• Payroll • Statutory benefit calculations

Minimizing Employment and Labor Law Risks Emanating from Under Reported Compensation Income (continued)


Recap

Mitigating Payroll Risks

Tax & Regulatory Landscape

Global Payroll Compliance

Tax & Payroll Reporting Policies

Minimizing Employment Lawsuits


Compensation Resources & Support

COMPview™ | Compensation Planning Software


Compensation Resources & Support

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Revealing the Risks Associated with Global

Compensation Programs

revealing the risks associated with global compensation programs (with ernst & young)

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