As the year is drawing to a close, global mobility and payroll teams are focused on US W-2 reporting, specifically to make sure global compensation and expense reimbursements, such as tax reimbursements, housing, and tax preparation services, have been reported appropriately for their mobile employees on long-term assignments. While this focus is crucial, it often overshadows a critical aspect of payroll reporting compliance. In the rush to ensure the tax efficiency of international assignments, there's a tendency to overlook the nuances of reporting for permanent transfers.
It's essential to recognize that while some countries permit certain moving expenses and relocation allowances to be paid in a tax-free manner, there are significant compliance risks with assuming ALL payments made on behalf of international transferees are only taxable based on their Home country rules. In this article, we will explore the intricacies of year-end payroll reporting for permanent transfers (i.e., an employee who has relocated to a company’s Host country entity, with the Host country entity becoming the employer), shedding light on the nuances and potential pitfalls that mobility, payroll, and HR managers need to navigate for a smooth transition into the new year.
Ensure payroll reporting compliance for permanent transfers
The increased emphasis on payroll reporting compliance for permanent transfers is driven by three key factors:
- Increased use of permanent transfers as a proportion of the overall global mobility population.
- A transition from lump-sum payments made by the company to specific moving expenses and relocation allowances paid in accordance with standard policies.
- Immigration barriers that cause companies to transfer non-US employees to foreign entities because of US visa issues.
To foster payroll reporting compliance, the following actions are recommended:
Develop a taxability matrix.
Create a matrix for each country where you have permanent transfers (to and/or from). The matrix should include all relocation or transfer-related allowances that could apply based on your company’s relocation policy and an indication of their taxability.
Calculate tax gross ups.
Identify whether there are corresponding tax gross-up requirements. This should be done once the moving expenses and relocation allowances have been determined to be taxable.
Calculate tax withholdings on lump-sum payments.
Lump-sum relocation allowances are often provided to permanent transfers to help cover miscellaneous move-related expenses. These are typically paid on a “gross” basis, meaning the transferee is liable for any tax withholding on the payment. It can be difficult to ensure the correct tax amount is withheld. Many companies will address this need either through Home country payroll or through outsourcing to their relocation vendor. However, it is important to understand both approaches have risks and require appropriate review and implementation.
- Home payroll: Some companies have the local payroll department in the Home country pay the lump-sum relocation allowance to the transferee. In this way, the amount of withholding can be determined at the time of payment by the company’s payroll department. However, it is important to check the taxability of the lump-sum payment in the transfer country if that country has so-called forward attribution rules (as there may then be a mismatch between the location of the withholding and the location where the employee will ultimately have a tax liability).
- Outsourced: Other companies have their relocation firms pay the lump-sum relocation allowance. Here, it’s important to ensure they are working with the company’s tax provider to calculate the tax withholdings for lump-sum relocation payments made outside the US.
Identify trailing reporting obligations.
Permanent transfers sometimes receive payments after moving to the Host location that were earned during the period worked in their Home location. Common examples include bonus payments and equity compensation. The company may have a payroll reporting requirement for these payments in both the transferee’s Home and Host countries. Here is a possible solution to help manage this requirement:
- Provide tax preparation services for at least one year in the Home and Host country. Many permanent transfers are removed from their Home country payroll system at the time of the transfer. Therefore, trailing payments are reported in the transfer country payroll. Unless the transferee is authorized for tax services in years subsequent to the transfer, it is unlikely these trailing payments are reviewed to determine if a portion should be reported on their Home country payroll or on a Home country tax return.
- Have a process to track trailing compensation and determine appropriate reporting and withholding in the Home and Host locations. However, even when underwithholding of tax can be corrected on their Home country tax return, there are still limitations.
- In some cases, the transferee is not authorized for tax services for years after the transfer year, or they have declined mobility tax services.
- It may not be possible to address all employment tax requirements through the filing of an individual tax return. For example, there typically is no mechanism to correct underwithholding for FICA tax purposes in the US, resulting in a compliance gap and potential payroll audit exposure.
- Transferees often face cash flow issues if trailing bonuses and equity compensation are reported 100% on the new Host location payroll. They can face issues obtaining overwithheld tax in the Host location that is needed to fund the trailing liability in the former Home location. Timing differences between when Host and Home country tax returns are filed further aggravate such issues. This can lead to penalties and interest for the transferee if they don’t have sufficient funds on hand to pay the Home country trailing liability.
- While relocation management companies provide US tax gross up and reporting instructions to clients for the reporting of taxable relocation benefits, the same often cannot be said for taxable relocation benefits that are reportable outside the US. Work with your tax service provider to ensure relocation benefits are reported in the Host country based on local tax law.
Reducing risk and increasing employee satisfaction
While transferring employees can be a cost-effective way to increase intra-firm mobility, proper planning and a thorough review is required to ensure global payroll compliance. Navigating the intricate landscape of year-end payroll reporting for permanent transfers demands a proactive approach and a vigilant eye on compliance. By addressing these key action items, mobility and HR managers can ensure a smooth and tax-compliant transition into the new year, safeguarding the financial well-being of both the company and its valued transferees.
For organizations struggling with the complexities of year-end payroll reporting for permanent transfers, our mobility tax specialists stand ready to provide the expertise and support you need. Our team specializes in navigating the intricacies of global mobility and payroll reporting, offering tailored solutions to address the challenges outlined above. We understand that compliance is a top priority, and we're here to guide you through every step of the process.
To explore how our services can help streamline your payroll reporting and ensure tax compliance, we invite you to schedule a consultation with our experts. Let's work together to make the year-end transition seamless and efficient.