California Payroll
Conference
Shadow Payroll
Michele Honomichl
Executive Chairman & Chief Strategy Officer
Celergo Global Payroll
September 11 and 12, 2014
Agenda
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?
2
What Is A Shadow Payroll?
Expatriate Payrolls
Host Shadow Payroll
Home Shadow Payroll
3
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
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
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
Types of Host Tax Programs
 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)
7
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
When Do I Need A Shadow Payroll?
Long Term Expatriate
Local Rules On Foreign Workers
9
9
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
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
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
Withholding Submissions
 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)
13
What Is Included In A Shadow
Calculation?
Compensation Package
Benefits In Kind Taxes
14
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
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
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
Company’s Expense
17
What Is A Tax Matrix?
Host Tax Calculations
Example
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
Tax Matrix Example
 Norway: Long Term Expatriates
 Compensation Elements
 Taxability for Income Tax and Social Security Tax
 Example
 Amount to Gross-Up
20
Tax Calculation Examples
UK to Germany
US to Germany
US to Germany (With Off Cycle in US)
Example Calculation 1
 Long-term Expatriate
 Home: United Kingdom
 Host: Germany
 Split Delivery
22
Example Calculation 2
 Long-term Expatriate
 Home: United States
 Host: Germany
 Split Payroll
 Separate Cash versus Tax Mechanism
23
Example Calculation 3
 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
24
How Do I Manage A Shadow
Payroll?
Changes
Memo Updates
Consistency
Auditing
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
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
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
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
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
Thank you for your attention
Questions? Please feel free to contact Michele Honomichl at mhonomichl@celergo.com