International Aspects of Section 409A — a Deadline Draws Near

Section 409A of the U.S. Internal Revenue Code, enacted as part of the American Jobs Creation Act of 2004, introduced significant changes to the taxation of deferred compensation. In April 2007, final regulations were issued which provide significant relief from the adverse consequences, in many situations, that may arise in the context of international assignments. However, notes IES professional Ben Francis in Washington, D.C., it is important to ensure that the precise terms of the regulations are complied with to obtain the relevant relief. Because the regulations are effective for tax years beginning on or after January 1, 2008, employers of international assignees should review their tax equalization policies as soon as possible to be sure that they contain payment deadlines that conform with the regulations to prevent the negative consequences of section 409A from applying to routine tax equalization and gross-up payments.
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There’s More Than Meets the Eye in the 183-Day Rules

Many U.S. tax treaties provide that income earned by an employee on short-term assignment to or from the United States will be exempt from host country income taxation provided the employee is present in the respective host country for 183 days or less. However, as Atlanta-based IES professional Ed Kennedy maintains, there is more to this rule than meets the eye, which can prove, in many instances, to be a trap for unwary international assignment program managers. Keys to managing compliance in this area are achieving an understanding of the potential tax outcome of each short-term international assignment and then evaluating and monitoring the assignment for compliance with the facts necessary to arrive at the desired outcome.
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The Writing on the Wall

Peter Burnham, an IES professional based in Zurich, draws attention to the growing number of tax authority audits and their increasing sophistication in investigations and case prosecutions that focus on international issues, in Asia, Europe, and the Americas. Indeed, he notes, the authorities in some countries may even be looking for “high-profile” foreign companies whose local non-compliance, once highlighted, might serve as an example to their peers. In order to mitigate potential penalties and damage to an organization’s brand and reputation, companies should consider consulting with their professional services advisers about undertaking an examination of their systems and processes to determine where and if there are any areas of non-compliance.
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New York Is Looking More Closely at Employees on International Assignments

Though most taxpayers are alert to the possibility of audit by the Internal Revenue Service, audits of state income tax returns seem to be of less concern. In New York, however, there has been a notable rise in the volume of audits of international executives, which take a critical look at the nature of the assignment, the length of stay in New York, and other factors, in order to determine residency and other issues that may reveal inadequate attention to the rules and potential non-compliance. Although New York-based IES professionals Tony Mortillaro and Bob Mischler do not foresee a decrease in New York audit activity, they suggest there are steps that multinational companies and their international executives can take to potentially reduce exposure and appropriately prepare for an examination. Read their article to learn more!
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Consider the Virtues of Home-Based versus Host-Based Assignment Approaches

IES professionals Lauri Morrison and Achim Mossmann comment on the rising trend in cross-border commercial activity, and in particular mergers and acquisitions involving European companies purchasing or merging with U.S. companies and vice versa, and the repercussions for international assignment programs in both companies that are party to the transaction. At the very heart of the matter, from an international assignment perspective, are the principles and philosophies that underpin the international assignment program. The move from a host-based to a home-based approach—or from a home-based to a host-based—can be a huge undertaking. But in the interest of streamlining two (or more) programs and consistent treatment of assignees across the board, one philosophy—or approach—generally should prevail and apply.
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To Deduct or Not To Deduct the Negative Cost of Living Adjustment? That Is the Question

The cost of living allowance is an often maligned (particularly when adjusted downwards), misunderstood, and occasionally misapplied aspect of assignee compensation. Many assignees perceive it as an entitlement as a result of taking the international assignment and see it as an uplift and/or incentive. As Dallas-based IES professional Laurie Jones notes, when dealing with negative COLA, things can become tricky for the international assignment program manager. Although some assignees might think it beneficial to retain the windfall should the organization decide not to apply a negative COLA, there are several points the organization should consider. Read this article to learn more!
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Easier Said Than Done: Getting Assignee Payroll Documentation Right

On July 13, 2007, final regulations were published that provide guidance for employers and employees regarding the submission by employers of Forms W-4 to the U.S. Internal Revenue Service, as well as the procedures for the IRS to question the number of withholding allowances claimed on those forms. Actually, these regulations are procedural rather than technical. They do not change the law, for the most part; however, what they have done is produce an increase in the frequency of IRS-issued lock-in letters sent to employers and employees challenging employees’ withholding allowances. IES professional Andrew Gewirtz notes the new guidance issued under T.D. 9337 in July refocused attention on completion, submission, and maintenance of properly documented payroll files in respect of Forms 673 and W-4 and recommends setting up appropriate systems and implementing proper payroll documentation procedures to support your company’s tax compliance goals.
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Watch Out for Restricted Stock Award Plans in Canada!

Employers considering Restricted Stock Award (RSA) arrangements for employees should keep in mind that the Canadian tax consequences of these plans may make other options more attractive for Canadian employees. While many jurisdictions defer the taxation of employees who receive RSAs until the shares vest, Canada taxes the employees when the awards are granted. Therefore, advises Toronto-based IES professional Jim Yager, an employer may consider choosing another type of plan, for example a Restricted Stock Unit plan, for its Canadian employees to keep their tax treatment comparable with their co-workers in other countries and avoid the adverse consequences of taxation at grant.
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Worldwide Digest

We are providing readers with a link to the IES practice's Flash International Executive Alert newsletters, which are archived right through the most recent issue on the IES Web site. Readers can scan the titles and select the news stories that are most relevant to their international assignment situations.
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