The tax laws of both the country in which they reside and the United States affect US citizens and residents who work and reside outside the US. This article explores the impact of the Bermuda Payroll Taxes Act on exempted companies and their American employees.

Payroll Taxes Act 1995 The Payroll Taxes Act 1995 imposes a tax on employers in respect of their payroll. Payroll is defined under the Act as the remuneration of an employer's employees. Remuneration is defined under the Act as: a) Wages, salary, leave pay, commission, gratuity, fee, bonus, perquisite or allowance; b) Any money paid under a profit sharing scheme; c) Money or other thing of value paid or given to an employee in connection with the termination of employment; Subsequent to its enactment, the Payroll Taxes Act has been amended annually.

The Act contains many exceptions to the general rule. Under the Act different entities pay a rate of tax ranging from 4.75 percent to 12.75 percent. The tax rate on exempt companies is 12.75 percent, on actual remuneration up to a maximum of $250,000, and the employer may deduct and retain from the employee a maximum of 4.75 percent.

In theory, the payroll tax is simple and straightforward. In practice it is not.

Is The Bermuda Employer Paying Too Much or Too Little Payroll Tax? The past year has seen an increased effort by Government to ensure that employers are paying the full payroll tax due. In prior years, some employers were lax in reporting fringe benefit remuneration such as the furnishing of accommodation, meals, discount purchasing, stock options, and employer contributions to non-approved plans.

The increase in the rate of tax, the increase in the amount of payroll subject to tax, and the emphasis on total reporting, should also result in an employer reviewing whether they are paying too much payroll tax and asking themselves the following questions.

To better understand the Payroll Taxes Act, we had a series of meetings and communications with Government. We felt that it was unclear as to when an employer was responsible for the payment of payroll taxes. Government clarified that payroll tax is paid on a payment rather than accrual basis. In other words, the tax is due when payment is made.

The Act imposes a payroll tax on every employer in respect of remuneration paid to an employee for services rendered during that tax period in Bermuda.

Here are some more questions and answers about the tax: What happens if the employee travels extensively out of Bermuda on company business? If an employee renders services for less than 51 percent of the time in Bermuda during a tax period, no remuneration is subject to tax.

What happens when the Bermuda employer has a branch office in the United States, and an employee from the United States office comes to Bermuda for one week each month to work? Remuneration paid to this employee is not subject to payroll tax.

What happens when the United States parent company sends an employee to Bermuda for six consecutive weeks to install a new computer system? Remuneration paid to this employee is subject to payroll tax and it is the responsibility of the Bermuda entity to pay the payroll tax.

What if an employee decides to defer the receipt of their bonus? The bonus is subject to payroll tax at the time it is paid, not the time it is declared.

If an individual worked in the New York branch during all of 2000, returns to Bermuda on January 1, 2001 and receives a bonus in February 2001 relating to work performed in the United States in 2000, is it subject to payroll tax? No.

If an employer grants an individual the option to purchase a share of stock at $85 when the fair market value of the stock is $100, does the employee realise taxable income? The employee is considered to have remuneration of $15 that is subject to payroll tax.

In the above example, suppose the option price was $100? Then there would be no taxable remuneration. What if the employee exercised the option five years later when the stock had a fair market value of $125? This would not be taxable remuneration.

If club dues are paid for an employee, is this considered taxable remuneration? Yes.

If the club was used for both personal and business purposes, how is taxable remuneration determined? If detailed records are kept and the business element can be separated from the personal element, than only the personal element is subject to tax.

Our special thanks to Mr. Michael A. Caines of Government who was extraordinarily helpful in supplying us with information and guidance concerning the Payroll Taxes Act 1995, and in his infinite patience in answering the myriad of questions which we had.

Foreign Tax Credit Can a United States citizen who pays the 4.75 percent payroll tax use this amount as a foreign tax credit on their US tax return? The Internal Revenue Code and underlying Regulations state that a citizen of the United States may claim a credit for the amount of any income taxed paid or accrued during the taxable year. A foreign levy is defined as an income tax if it is a tax, and that predominant character of that tax is that of an income tax in the US sense. Further, a foreign levy is a tax if it requires a compulsory payment pursuant to the authority of a foreign country to levy taxes.

The regulations do offer an example of a foreign country that imposes a flat tax on the gross wages of an employee.

While the Payroll Taxes Act 1995 impose the tax on the employer, until recently, the Act treated the employer's failure to secure a refund of the payroll tax from the employee, as additional remuneration paid to the employee. In essence, the Act treated the employee's 4.75 percent as an obligation of the employee, and when the employer bore the 4.75 percent tax, the law considered that act to be the payment of an obligation of the employee, which resulted in additional remuneration to the employee.

In the absence of a clear answer to the question, the aggressive may claim the payroll tax as a foreign tax credit.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo yexpatriatetaxservices.com BUSINESS BUC