Transcript Nuts and Bolts of Foreign "In-Country"

Nuts and Bolts of Foreign
"In-Country" Operations
….an HR focus
Marjorie Forster – University of Maryland Baltimore
Bill Ferreira – Hogan Lovells
Bob Lammey – High Street Partners
November 6, 2012
Who are these guys?
Bob Lammey – Sr. Director of Higher Education
 Leads higher education practice at HSP
 Prior to joining HSP, Bob was Director of Global Business
Compliance at Harvard University
 CPA, began his career at Ernst & Young
Bill Ferreira – Attorney at Hogan Lovells, Washington, DC
 Hogan Lovells is a law firm that advises colleges,
universities, and nonprofits organizations
 Specializes in federal grants and contracts
 Has worked on dozens of international projects
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What do we want to get out of
today??
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HR International Risks…….
……are hiding in many places
• Legal risk
• Reputational risk
• Financial risk
• Human capital risk
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Why do we need to think
differently ?
• Outside the “safe haven” of home campus….
– No legal structure already established for HR framework
– Minimal hiring and employee oversight controls
– Unfamiliar labor and tax laws
– Changing HR landscapes
– Health and Safety considerations different
– Comp and benefits may be very different from
US/Canadian standards
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Trends with International Research
in Higher Education
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Overall Spending on Global Health Research
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Ranking of countries benefitting from grant awards
2004 to 2009
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1. India
2. Nigeria
3. Tanzania
4. Ethiopia
5. Kenya
6. Uganda
7. South Africa
8. Mozambique
9. Zambia
10.China
Detect a trend????
Why should we be worried?
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The War Stories
• Independent contractors come forward claiming to be employees
– Settlements in excess of $500,000
– 3 cases in last few months - all “once friendly” contractors
• Foreign partner non-compliance
– Not registered as employer
– No taxes paid or year end filings made
– Illegally hired employees as contractors
• Employee detained in India
– Stopped at border flying home
– Prevented from leaving country until visa/tax situation was
resolved by U.S. university
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First…. can we agree on
terms??
1111
 Expatriate – a person temporarily or permanently residing in
a country other than that of the person's legal residence
(comes from the Latin “ex” (out of) and “patria” (country))
 Local employee - someone who lives and works in their
home country
 Independent contractor - A legal term for a person who is
hired to do work for another person but who is not an
employee or agent of that person
 Third country national (TCN) – (example easiest explanation) –
The Belgian citizen your university (in US or Canada) has hired
to work on your project in Kenya
How do we know which
HR practices may be of greatest risk?
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Myth #1: “We don’t have HR compliance
issues…We’re just doing research.”
• Most common HR compliance issues :
– “Partner” or subcontractor acts as employer/agent, but doesn’t have
proper registration in-country
– Contractors are really employees of university
– Home country employees working in foreign country for more than “a
few weeks”
– Home country employees entering country with incorrect visa
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Myths #2-5
2. Non-profit status in U.S. means we don’t have to worry
about employer obligations
3. Educational or research activities don’t require
registration as an employer
4. Our foreign “contractors” would never turn on us
5. US/Canadian employees don’t need to worry because
they’re paying taxes in home country already
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Overview of HR issues
High
Risk Level
 Hiring independent contractors
(Admin burden – low)
 Immigration – Home employees and TCNs (Admin burden – med)
 Taxation – Home employees and TCNs (Admin burden – very high)
 Locally hired employees (Admin burden – high)
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Let’s go deep on some of
these issues….
Immigration
Faculty and staff abroad
Independent contractors
Hiring local employees
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Immigration
 Applies to expats and TCNs
 Visas often require a local host to sponsor
 Without correct visa, employee is non-compliant from day ONE
 “Tourist” visas commonly not legally compliant form of
documentation for employees working in a foreign country
 Employees often in position of having to lie to passport control
upon arrival at airport or border
 University would be considered to blame since employee is
working for university
 Left to their own auspices and due to lack of understanding of
immigration laws, employees will frequently not take steps to get
correct visa
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Faculty and staff working abroad
Compliance issues….
Visas and work permits
 Individual taxation
• 183 day “rule of thumb”
• Advances and personal bank accounts
• Should be paying taxes somewhere
FBAR reporting (mentioned in finance section)
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Do you have bank
accounts abroad??
For University employees with signing authority….
 Form TDF 90-22.1 (FBAR)
 University and employees required to report
 For employees, on both 1040 and as
separate report
 May not be applicable for public universities
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Faculty and staff working abroad
Logistical and safety issues…
“Cash in a suitcase”
Advances and personal bank accounts
Safety in developing nations
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Cash management – HR –related
issues
Issues:
•
•
•
•
“Cash in a suitcase”
Personal bank accounts
Advances/safety concerns
Tax implications for employees
Solutions:
 Client trust accounts
 Prepaid and reloadable cards
 Third party or partner account
 Bank transfer
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Overseas employment –
income tax principles
General Principles
• As a general principle, an institution that has employees
working overseas is required to withhold taxes for the host
country.
• The U.S. is one of the few countries that tax its citizens on
worldwide income; therefore, for U.S. citizens, the U.S.
employer is obligated to withhold U.S. income taxes unless
the country in which the services are performed has a tax
code that requires local tax withholding for that country’s
taxes.
• Normally, a U.S. citizen can credit any income taxes paid to
the foreign country against his or her U.S. income tax
liability. U.S. citizens also may be eligible for the “foreign
earned income exclusion”.
Tax treaties
• What’s great about them?
– Easy to find – just google “US tax treaties” or “Canadian tax treaties”
– Definition for Permanent Establishment (which may be triggered by
employees)
– Defines and often extends number of days US/Canadian citizen can
work in country without tax issue (immigration still an issue!)
– Info about tax exemptions which may apply for teaching or research
• And……not so great…..
– Not written for higher ed/NFP audience (lots of info not relevant)
– Certainly doesn’t address all issues with registration or HR
– 66 treaties for US……..90 for Canada
• US has only 3 treaties of 54 African countries (Canada has 14!)
• But treaties exist with countries like….Kyrgyzstan (can I buy a vowel???) and
Malta (100k fewer people than smallest US state!)
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Tax equalization for home employees
paying taxes abroad
• What is it?
– The offsetting of tax difference between a home country and a
foreign country so that working abroad is tax neutral for the worker
• Who does it apply to?
– Employees working abroad who are on the home country payroll but
subject to foreign country income tax
• Why you probably need it
– You will either pay more in the end or expose the university and the
employee to significant risk
• How is it calculated?
– Using employee’s personal tax situation to determine what net pay
would have been in the home country in lieu of the assignment
• How would it be administered?
– Not easily! Through home country payroll, as well as through local
payroll provider
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A moment to consider other tax-related
obligations of the university
• U.S. tax filings associated with foreign “boots on the ground”
activity can be a minefield.
– FBAR
– Information filings associated with foreign funds transfer (Form 5471)
– Form 990
• Schedule F of Form 990 requires the organization to provide information on
activities conducted outside the U.S. at any time during the tax year.
• To the extent the institution establishes special purpose vehicles, such as separate
legal entities, in the U.S. or elsewhere to facilitate foreign activity, Schedule R of
Form 990 may require a report of such entities as “related organizations,” and a
report of transactions between such entities and the institution.
• Playing “catch up” is dangerous territory.
• Consult tax counsel.
Engaging Independent Contractors –
Why so high risk?
• Employee vs contractor - #1 compliance issue today
• Do not assume that foreign employee vs contractor
classification is foreign country is not as stringent as the U.S.
• An agreement that person is a contractor is not enough!
• Fines would far exceed cost of hiring as employee
• Countries taking aggressive measures to encourage
“whistleblowers”
• Both contractor and local tax authority can pursue claims/fines
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Red flag characteristics
• The worker is paid a fixed amount per month
• The worker has decision-making authority and/or can sign contracts on
behalf of university
• Worker does not have discretion on how and when to complete tasks
• A high percentage of the worker’s income comes from the university
• The worker is not part of a separate organization of 3 or more people,
and does not have a distinct separate identity (such as business cards)
• The worker works a set number of hours as specified by a contract
• The worker is entitled to overtime pay, bonuses or benefits (such as paid leave)
• The worker is provided with equipment or tools of trade (such as a
computer)
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Steps to reduce risk (but won’t eliminate)
 Agreement in writing
 Policy for evaluating employee vs contractor in foreign
country
 Educate administrators and PI’s (see next slide)
 Require contractor to obtain certificate from local tax
authority
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Tips on hiring a contractor
Don’t do this
Do this!
 Pay for time worked
Pay for milestone or task
 Give them tools
Worker provides own tools
 Worker self-employed
Works for company (3 or more)
 Paid leave (vacation)
No “employee” benefits
 Supervise and direct daily
Flexibility to set own hours
 Nothing in writing
Contract stating terms
 Require contractor
to perform all work
Work can be performed by others
at worker’s discretion
 Executing contracts or making
decisions
No decision making on behalf of
university!
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What are requirements of an
employer?
The university qualifies as an employer if……
 Those being paid qualify as employee, not contractor
 You have control over those being engaged by partner
 You’re considered an employer in a country that your
home country employees are working in
What is often required:
 Tax withholdings
 Tax payments to local authority
 Statutory benefits (pension, medical, etc.)
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Local employee considerations
• Employment contracts (often required by law, and in local language)
• Understand termination regulations before hiring
• Compensation and Benefits
• Local laws and customs relate differently to local nationals, US expats,
third-country nationals, and contractors
• There should be an understanding of what benefits are mandatory incountry, then what incrementally would be “market norm”
• Comparison with the US benefit plan can certainly be a factor in
evaluating local benefits, but it shouldn’t be the only one
Summary of options to support
employees abroad
(assuming individual does not qualify as independent contractor)
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Standard exemption period for working in country? (employees on US payroll only)
• Citizenship may impact period, and a filing may also apply
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Do teaching or research exemptions apply? (employees on US payroll only)
• Citizenship may determine, and a filing may also apply
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“Manage” days working in foreign country (employees on US payroll only)
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Special exemption granted by foreign gov’t? (rare – typically research in developing nations)
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Third party “partner” (a university or subcontractor)
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Professional employment organization (PEO)
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Non-resident employer registration (NRE), engaging payroll provider
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Entity registration, engaging payroll provider
• NOT A RECOMMENDED OPTION!
– Telling the employee it is their responsibility to report and pay their
own taxes
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Federally Sponsored
Projects
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Federal Research Considerations
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Foreign bank accounts
– Funding to a university official’s personal foreign account for grant expenses is not ideal
– How do we address pre-registration programming?
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Foreign taxes (including Value Added Tax) on equipment, supplies, vehicles, etc.
purchased in host country
– NIH GPS: “Value-added taxes and other related charges are unallowable on foreign
grants or the foreign component of a domestic grant”
– Circular A-21: Local taxes are allowable if no tax exemption is available
– The exemption process can be long and cumbersome
– Customs duties present similar issues
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Currency fluctuation
– Is any part of currency losses an allowable cost?
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Disposition of assets upon expiration/termination of project
– Be aware of foreign law requirement to keep grant-funded assets in host country
Federal Research Considerations
•
Credentialing medical professionals
– Can U.S. clinicians freely practice abroad? In developing countries?
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Patient care issues
– Licensing and credentialing of health care professionals
– Treatment of patient records; privacy
– Storing and dispensing medications
– Disposal of biohazards and other waste
•
Local procurement complications
– USAID and other host country rules
•
Foreign gift and contract reports
What should you do?
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Raise issues when you see them…
If project will be…….
“International
project alert!”
Engaging contractors
Having US employees or TCNs
traveling to foreign country
Using subcontractor or local
partner to “hire” on your behalf
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Who you gonna call?
General Counsel’s
Office
Project team or PI
External Professional help
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NACUBO Resources for
International Activities
 International Resource Center (IRC)
 International Webcast Series (available on www.nacubo.org)
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Questions?
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Congratulations – you made it!