Executive Compensation. Best Practices Through. Cas

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Executive CompensationBest Practices
ThroughCase StudiesMaureen GormanMayer Brown
LLPJorge MorazzaniSusan ConklinPricewaterhouse
Coopers LLPMay 3, 2008
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Agenda

• Brief overview
• US taxation of international employees
• Retirement and 409A issues
• Permanent establishment and corporate tax issues
• Case Studies

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US Taxation of InternationalEmployees - Inpats

• US inpatriates NRA
• Only taxed on US source income and ECI
• Limited deductions
• MFS filing status
• US inpatriates Residents
• Global taxation
• Dual status in transfer year
• Possible residency elections

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US Taxation of InternationalEmployees - Expats

• US expatriates
• 911 exclusion
• Spike in compensation cost
• Foreign tax credits
• Away from home expenses
• Social taxes
• State residency

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Other International Employee Assignment Issues

• Secondment agreements
• Equalization/protection
• Retirement plan participation
• Equity compensation plans

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Retirement Plan and 409A issues

• SUMMARY OF 409A
• Election Deadlines. Elections to defer
  compensation and to select time and form of
  payment must be made by certain deadlines
  (generally before the last day of the calendar
  year preceding the calendar year in which
  services are performed).
• Distributions. Benefits payable only on
  specified date or permissible distribution
  events.
• 6 Month Rule. In the case of public companies,
  distributions to key employees on account of
  separation from service must be delayed 6 months.

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Retirement Plan and 409A issues

• ARRANGEMENTS AFFECTED BY 409A
• Traditional deferred compensation plans
• Employment agreements
• Severance plans
• Certain equity-based compensation arrangements
• Certain bonus arrangements
• Fringe benefit arrangements
• Expense reimbursements
• Indemnification arrangements
• Change in control agreements
• Tax gross-up arrangements

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Retirement Plan and 409A issues

• INDIVIDUALS POTENTIALLY SUBJECT TO 409A
• US citizens
• Dual citizens with US citizenship
• Resident aliens who are lawful permanent
  residents
• Resident aliens who are not lawful permanent
  residents
• Nonresident aliens with some US-source income

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Retirement Plan and 409A issues

• FOREIGN PLANS EXCLUDED FROM 409A
• Treaty exemption
• Broad-based foreign retirement plans
• Amounts taxable under Sections 402(b) and Section
  83
• Social security benefits and contributions that
  are subject to an agreement under Section 233 of
  the Social Security Act
• Foreign separation pay plans
• Amounts not included in income under US Code
• Tax equalization payments (subject to certain
  limitations and restrictions)
• Limited deferrals of nonresident aliens

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Permanent establishment corporate tax issues

• Treaty vs. domestic law concepts and time limits
  often not the same for individual vs. corporate
  taxation
• What functions does the employee perform? For
  whom?
• Who exercises dominion and control over the
  employee?
• Is there income attributable to the PE?
• Are there transfer pricing issues associated with
  the employees work?
• Is there other individuals US work that must be
  reviewed in conjunction with the assignees work
  to determine whether a PE exists?
• Business travel vs. formal assignment/secondment

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Permanent establishment corporate tax issues

• Corporate tax compliance
• Protective tax returns
• Treaty-based return disclosures
• Withholding taxes and W-8BEN, 1042, 1042S
• Payroll compliance and withholding
• State local tax issues

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Case Study 1
Foreign citizen/employee of foreign parent
corporation is transferred to the US to work full
time in the US for the US subsidiary for several
years, reporting to US subsidiarys CEO. He
continues to participate in his home country
pension plan and home country SERP (both are
based on world wide income and service and thus
take US compensation and service into account.)
SERP is an unfunded plan. He participates the
US subsidiarys 401(k) plan. During his time in
US he receives options on ADRs of the foreign
parent which are traded on the NY stock exchange.

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Case Study 1(continued)

• Employee Issues
• Resident or nonresident
• DPS in first year and US Model Treaty
• Foreign retirement plan income inclusion?
• Totalization coverage
• 409A Issues
• Pension Plan
• Savings Plan
• Options on ADRs
• Accruals under SERP
• Foreign Separation Pay Plans

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Case Study 1(continued)

• Company issues
• Dominion and control
• Contract signing responsibilities and dependent
  agent issues
• Transfer pricing and compliance issues

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Case Study 2

• Foreign citizen/employee of foreign parent
  performs services in US for US subsidiary for
  short period (e.g. 90 days) in 2008. Remains
  eligible only for foreign parent plans.

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Case Study 2 (continued)

• Employee Issues
• Did you find them?
• Type of visa may drive tax treatment
• Away from home expenses
• DPS treaty article
• 409A Issues
• Pension Plan
• Savings Plan
• Options on ADRs
• Accruals under SERP
• Foreign Separation Pay Plans

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Case Study 2 (continued)

• Company issues
• Effects of non-participation by one or more
  temporary employees on US qualified plans
• Dominion and control
• One individuals activities not necessarily
  viewed in isolation
• Nature of activities
• Contract signing responsibilities
• Transfer pricing, corporate income tax,
  withholding tax compliance issues, timeliness of
  compliance
• Non-tax issues
• Medical and other insurance coverage in case of
  emergency
• Non-tax employment law issues

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Case Study 3
Assume a US Citizen transferred to foreign
country for several years. Becomes participant in
foreign affiliate (e.g., parent) plans.
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Case Study 3 (continued)

• Employee Issues
• 911 vs. foreign tax credit?
• TEQ cost
• F/X and/or inflation (e.g., sale of home)
• Payroll delivery
• Immigration/labor law surprises
• 409A issues
• Contributions to host country Pension Plan.
• Contributions to host country Savings Plan.
• Options on ADRs.
• Accruals under SERP.
• Foreign Earned Income.
• Foreign Separation Pay Plan.

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Case Study 3 (continued)

• Company issues
• Local country rules apply to determine PE status
• FBAR reporting if signatory authority over
  corporate accounts
• US parent Form 5471 compliance requirements may
  trigger personal 5471 filing responsibility if
  officer/director of CFC
• Local compliance critical

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Case Study 4
Assume a US Citizen is assigned to work for the
foreign parent company for a short period of time
and remains on the US companys payroll. He
remains a participant on the US companys
benefits plans.
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Case Study 4 (continued)

• Employee Issues
• Where are they?
• Lack of compliance
• DPS treaty article and "borne by" interpretation
• Away from home expenses
• 409A issues
• Contributions to home country Pension Plan.
• Contributions to home country Savings Plan.
• Options on ADRs.
• Accruals under SERP.
• Foreign Earned Income.
• Foreign Separation Pay Plan.

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Case Study 4 (continued)

• Company issues
• Local country rules apply to determine PE status
• FBAR reporting if signatory authority over
  corporate accounts
• Local compliance critical
• Non-tax issues
• Medical and other insurance coverage in case of
  emergency
• Immigration/labor law surprises

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Other items

• IRC Section 6694 requirements
• Social Security number not shared outside the US.
• Disregarded entities and employment taxes
• Recent payroll audit and inquiry activity
• Foreign bank account reporting
• Payroll nightmare
• You may bear the cost of the stimulus package
• Medical and benefits coverage

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Circular 230 Disclosure This document was not
intended or written to be used, and it cannot be
used, for the purpose of avoiding U.S. federal,
state or local tax penalties. The items
discussed above are intended to be illustrative
only and are not intended to provide a
comprehensive listing of all potential issues
that may arise in connection with international
employee assignments. Appropriate advice should
be sought from tax and legal counsel in
connection with employee international
assignments.