I N T E R N A T I O N A L E X E C U T I V E S E R V I C E S T A X

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I N T E R N A T I O N A L E X E C U T I V E S E R V I C E S

Taxation Without Representation:

U.S. State Tax Considerations and the U.S. State Tax Considerations and the Globally Mobile Assignee

Globally Mobile Assignee

T A X

Globally Mobile Assignee

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ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY

TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING

TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

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You (and your employees, representatives, or agents) may disclose You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated structure, or both, of any transaction described in the associated structure, or both, of any transaction described in the associated structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those opinions, memoranda, or other tax analyses contained in those materials.

materials.

The information contained herein

The information contained herein is of a general nature and based is of a general nature and based on authorities that are subject to change. Applicability of the

on authorities that are subject to change. Applicability of the information to specific situations should be determined through information to specific situations should be determined through p p g g consultation with your tax adviser.

consultation with your tax adviser.

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Presenter Presenter

Jeannette Wistner Jeannette Wistner

KPMG LLP KPMG LLP KPMG LLP KPMG LLP 20 Pacifica 20 Pacifica Irvine, CA 92618 Irvine, CA 92618

(949) 885

(949) 885--5650 5650

jwistner@kpmg.com

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Agenda Agenda

The current state of business travel The current state of business travel

The concept of the “stealth” assignment The concept of the “stealth” assignment Identifying potential exposures

Identifying potential exposures Multi

Multi--State withholding State withholding National outlook

National outlook S S Non

Non--resident State Withholding resident State Withholding Potential plans

Potential plans Q & A

Q & A

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Current State of Business Travel Current State of Business Travel

Business travel remains strong Business travel remains strong

Recently a global corporation identified 140,000 individual business Recently a global corporation identified 140,000 individual business trips.

trips.

Many organizations have developed “swat teams” of frequent Many organizations have developed “swat teams” of frequent y y g g p p q q business travelers who are on the road more often than at home business travelers who are on the road more often than at home Business travel is, for the most part, unregulated

Business travel is, for the most part, unregulated

Most organizations do not track foreign or domestic business travel Most organizations do not track foreign or domestic business travel Most organizations do not track foreign or domestic business travel Most organizations do not track foreign or domestic business travel for any purpose other than expense reimbursement

for any purpose other than expense reimbursement

Most organizations do not utilize a time capture system which Most organizations do not utilize a time capture system which contains a “location” field

contains a “location” field contains a location field contains a location field

In a recent poll of KPMG’s IES clients, 100% of the responding In a recent poll of KPMG’s IES clients, 100% of the responding organizations rated the controls in place around their business organizations rated the controls in place around their business travelers as “lacking” or “severely lacking”

travelers as “lacking” or “severely lacking”

travelers as lacking or severely lacking

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The Concept of the “Stealth Assignee”

Frequent business travel to a specific host location can Frequent business travel to a specific host location can

t t d t “d t”

create an unexpected tax or “document” exposure create an unexpected tax or “document” exposure

Highly compensated employees can create this exposure Highly compensated employees can create this exposure with a minimal amount of travel

with a minimal amount of travel

Median family income State of NY 2005

Median family income State of NY 2005 $59 686 $59 686 Median family income State of NY 2005

Median family income State of NY 2005 – – $59,686 $59,686

(source: US Census Bureau) (source: US Census Bureau)

Executive with $1 million in annual compensation Executive with $1 million in annual compensation reaches this level in 14 work days

reaches this level in 14 work days reaches this level in 14 work days reaches this level in 14 work days

In many circumstances exposure is created almost In many circumstances exposure is created almost immediately

immediately

Korea

Korea – – $3 000 limit for treaty exemption $3 000 limit for treaty exemption Korea

Korea $3,000 limit for treaty exemption $3,000 limit for treaty exemption State of California

State of California – – tax withholding/filing obligation tax withholding/filing obligation created with first dollar of CA

created with first dollar of CA--source income source income

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Identifying Potential Exposures Identifying Potential Exposures

Frequent business travel can create two types of Frequent business travel can create two types of q q yp yp exposure

exposure Financial Financial

Individual level Individual level

Failure to pay individual income tax Failure to pay individual income tax

Failure to file individual income tax returns Failure to file individual income tax returns Failure to obtain proper work permits/visas Failure to obtain proper work permits/visas Corporate level

Corporate level

Failure to report income and/or withhold income tax Failure to report income and/or withhold income tax Failure to withhold/pay social insurance

Failure to withhold/pay social insurance

Potential permanent establishment concerns Potential permanent establishment concerns

Reputational

Reputational – – client specific client specific Reputational

Reputational client specific client specific

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M i th C l iti f

Managing the Complexities of Managing the Complexities of

Multi

Multi--State Withholding State Withholding

Managing the Complexities of Managing the Complexities of

Multi

Multi--State Withholding State Withholding Multi

Multi State Withholding State Withholding Multi

Multi State Withholding State Withholding

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State Income Tax Withholding – The Basics State Income Tax Withholding – The Basics

Requirements and obligation of employer Requirements and obligation of employer q q g g p y p y Sourcing rule (generally)

Sourcing rule (generally)

Income should be sourced to state where employee Income should be sourced to state where employee performs services

performs services Non

Non resident employees traveling to different states resident employees traveling to different states Non

Non--resident employees traveling to different states resident employees traveling to different states should have SIT withheld in those states

should have SIT withheld in those states

Treatment of deferred comp/equity compensation Treatment of deferred comp/equity compensation p q p q y y p p generally follows withholding treatment

generally follows withholding treatment

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State Income Tax Withholding State Income Tax Withholding

Some states have de minimis threshholds (NY, GA, etc.) that must be identified and monitored.

Ignorance is no defense.

Company officers could be liable for underwithheld amounts.

What ?

Employers

?

Employers Need to Know

Audits are very aggressive in most

states.

Most payroll systems are very ineffective in

handling.

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Personal Income Tax Withholding

MT WA

ME VT

As of 01/01/08

SD MT

ND

OR

ID

WY

MN

WI

MI

NY

ME

NH MA

CT

VT

CA

NV

UT

CO

NE

KS

IA

MO

IL IN OH

VA PA

WV DE

NJ RI

DC

AZ NM

KS

OK

MO

AR

KY

TN

SC NC VA

MD

TX LA

MS AL GA

Personal income tax imposed (41 states)

AK

Personal income tax not imposed (9 states)

FL

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Multi-State Withholding – What Is The Issue?

Employers cannot track employee movement on a daily Employers cannot track employee movement on a daily p y p y p y p y y y basis

basis

Employers cannot collect and maintain required Employers cannot collect and maintain required Employers cannot collect and maintain required Employers cannot collect and maintain required documentation for proper wage allocation

documentation for proper wage allocation

Payroll systems cannot allocate wages correctly to Payroll systems cannot allocate wages correctly to match time spent in multiple states

match time spent in multiple states

Inconsistent policies and procedures for monitoring a Inconsistent policies and procedures for monitoring a mobile workforce

mobile workforce

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National Outlook National Outlook

Mobile Workforce State Income Tax Fairness and Mobile Workforce State Income Tax Fairness and Simplification Act

Simplification Act

Limitation on state and local withholding Limitation on state and local withholding Taxed in resident state and non

Taxed in resident state and non--resident state (if present more than 20 resident state (if present more than 20-- 30 days)

30 days) 30 days) 30 days)

Federation of Tax Administrators Uniform Exchange of Federation of Tax Administrators Uniform Exchange of Federation of Tax Administrators Uniform Exchange of Federation of Tax Administrators Uniform Exchange of Information Agreement

Information Agreement

CT, DE, MD, MA, NJ, NY, RI & VT CT, DE, MD, MA, NJ, NY, RI & VT

Gathering information from tax returns Gathering information from tax returns Gathering information from tax returns Gathering information from tax returns

Information contributed to Centralized Return Clearinghouse (“CRC”) Information contributed to Centralized Return Clearinghouse (“CRC”) Can lead to potential audits

Can lead to potential audits

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Multi-State Withholding Risks/Obstacles Multi-State Withholding Risks/Obstacles

Potential Risk Associated with Non

Potential Risk Associated with Non--Compliance Compliance p p

Audit risk Audit risk

Public relations Public relations

Penalty/interest assessments Penalty/interest assessments Penalty/interest assessments Penalty/interest assessments

Barriers to Compliance Barriers to Compliance

Time & expense system limitations Time & expense system limitations Third party vendors unable to comply Third party vendors unable to comply Corporate culture

Corporate culture

Employee impact

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Non-Resident SIT Withholding Non-Resident SIT Withholding

In general, employers are required to withhold SIT on In general, employers are required to withhold SIT on

nonresidents of a state if services are or were performed by the nonresidents of a state if services are or were performed by the employee in that state.

employee in that state.

Section 114 exception (enacted in 1996 by Public Law 104

Section 114 exception (enacted in 1996 by Public Law 104--95) 95) Exceptions/limitations:

Exceptions/limitations:

De

De--minimis rules of certain states minimis rules of certain states

Telecommuting (Convenience of the Employer doctrine) Telecommuting (Convenience of the Employer doctrine)

R i l t b t t t

Reciprocal agreements between states Reciprocal agreements between states Exemption certificate allocation

Exemption certificate allocation

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De-minimis Jurisdictions

MT WA

ME VT

As of 01/01/08

SD MT

ND

OR

ID

WY

MN

WI

MI

NY

ME

NH MA

CT

VT

CA

NV

UT

CO

NE

KS

IA

MO

IL IN OH

VA PA

WV DE

NJ RI

DC

AZ NM

KS

OK

MO

AR

KY

TN

SC NC VA

MD

TX LA

MS AL GA

FL

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Non-Resident SIT Withholding – State Exemption Certificates

Exemption Certificates Exemption Certificates

Many states allow for allocation of source income Many states allow for allocation of source income y y based on past history, future expectations

based on past history, future expectations

Employer responsibility to know the whereabouts of Employer responsibility to know the whereabouts of Employer responsibility to know the whereabouts of Employer responsibility to know the whereabouts of employees

employees

State exemption certificates may allow for allocation State exemption certificates may allow for allocation for regular and equity compensation

for regular and equity compensation

Failure to obtain and retain state exemption Failure to obtain and retain state exemption certificates often an audit issue

certificates often an audit issue

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Non-Resident SIT Withholding – Convenience of Employer Doctrine

of Employer Doctrine of Employer Doctrine

Individuals work from a site other than their main office for their Individuals work from a site other than their main office for their own convenience, rather than employer requirement

own convenience, rather than employer requirement

Various states have sourced income back to primary work state Various states have sourced income back to primary work state p p y y New York

New York

Huckaby (unfavorable and precedential) Huckaby (unfavorable and precedential) Huckaby (unfavorable and precedential) Huckaby (unfavorable and precedential) Devers (favorable and not precedential) Devers (favorable and not precedential) TSB

TSB--M M--06(5)I 06(5)I -- May 15, 2006 May 15, 2006 Delaware, Nebraska & Pennsylvania

Delaware, Nebraska & Pennsylvania – – statutory provision statutory provision

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Non-Resident SIT Withholding – Reciprocity Non-Resident SIT Withholding – Reciprocity

Work state/resident state agreements Work state/resident state agreements Work state/resident state agreements Work state/resident state agreements Specific filing requirements

Specific filing requirements Specific filing requirements Specific filing requirements Exemption certificates

Exemption certificates

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Varying Approaches to Multi-State Withholding

Withholding Withholding

Partial Compliance

Establish a system for all or select employees

h f i

Non-compliance

Not complying with nonresident

ithh ldi l

Full Compliance

Building an in-house system to ensure

ithh ldi d who perform services

in specific states to track source income.

withholding rules regardless of where compensation was sourced as earned.

proper withholding and source recognition of earnings in

nonresident states.

• Any approach that does not involve withholding and remitting taxes on all

d i id t t t ld h i t d t

wages earned in nonresident state, could have an associated tax exposure,

including penalty and interest assessment.

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Multi-State Withholding – What can be done?

Evaluation/Assessment Evaluation/Assessment

Identify states and employees likely to have material multi

Identify states and employees likely to have material multi--state activity state activity Identify records/sources that provide indicators of activity

Identify records/sources that provide indicators of activity

Compliance Policy Design Compliance Policy Design

Determine processes to be used for multi

Determine processes to be used for multi--state compliance state compliance Communicate policies to employees

Communicate policies to employees Communicate policies to employees Communicate policies to employees Determine internal audit procedures Determine internal audit procedures