Companies that plan to send employees outside of their Home country should first know about the possible tax complexities that may result from the use of an international workforce. Here are five things employers need to know before sending employees abroad.
Your Company May Need Additional Help with Tax Compliance
Your accounting department may work well for your company’s current domestic operations, but it may lack the expertise or resources to address the payroll reporting, tax payment, and mobility tax issues that can arise when sending employees abroad. Unless your company already has a significant international presence, it is likely you will need to hire either an in-house mobility tax specialist or an outside firm to ensure the company is complying with its filing requirements in the Home and Host countries.
An outside mobility tax specialist should have a working knowledge of the payroll reporting and tax filing obligations in the mobile employee’s Host country, as well as an ability to identify how the international complexities will impact any domestic compliance requirements. Their expertise will guide your company through the mobility tax issues and payroll compliance obligations that arise when an employee is working outside of their Home location.
There are several factors that can impact the overall cost of having employees working abroad. A good mobility tax specialist will be familiar with planning opportunities that may be available to set up the scenario in a tax efficient manner.
The amount of time an international employee spends in a Host country is a key factor in determining whether that employee has established a tax filing requirement there. For example, a company may view an international assignment as simply a prolonged business trip, but that does not mean the Host country will agree.
Many companies expanding their operations internationally are aware of the so-called “183-day rule” for determining whether an employee has established a tax filing obligation in a Host country for income tax purposes. However, this rule does not automatically apply to all scenarios. An income tax treaty between the Home and Host country would need to be in place, specifying this specific threshold.
In addition, any treaty will likely have additional rules that need to be met, often requiring the employee’s payroll to be maintained in the Home country with compensation expenses being deducted by the Home country employer. It is critical to understand both the domestic tax rules in the Home and Host country and the possible impact of any bilateral agreements prior to sending employees to a location.
Employers should also be aware that not all countries treat income in the same manner, so items such as a mobile employee’s housing expenses may be non-taxable in one country, but included in income in another. Properly structuring international assignments to take advantage of available tax planning opportunities is critical to ensuring the overall tax cost of the assignment is minimized.
A mobility tax specialist will know the tax positions of both the Home and Host countries, as well as the availability of any other income or social security agreements that could apply to the scenario. In this way, they can guide you in structuring the scenario in a tax efficient manner both for assignment duration and in setting up, documenting, and delivering the compensation and benefits packages.
Assignments Abroad May Increase Your Employees’ Tax Burden
Not all countries tax income at the same rate, and an employee’s international assignment may result in a move from a low-tax country to one with a significantly higher income tax rate. Your company should take steps to ensure that employees assigned internationally do not see their net income reduced as a result.
Mobility tax specialists are skilled at working with companies to develop tax equalization or other reimbursement policies appropriate for the company, the tax laws of the Home and Host countries, and each employee’s specific circumstances. For example, a company may want to provide different tax support for a mobile employee who requested an international assignment than it would for an employee selected for an international assignment by the company.
Employees May Need Help Understanding Their New Tax Situation
It is rare that an employee who begins work abroad has the resources to address their new tax situation without help. A mobility tax specialist can simplify the complexities of an unfamiliar tax system for a mobile employee and provide assistance with completing the required tax filing and reporting obligations in the Home and/or Host country. Additionally, mobile employees who are either US citizens or permanent residents (i.e., green card holders) may not understand that they still have filing and reporting obligations in the United States while working abroad.
Failure to properly address compliance requirements can create significant risks for both the company and employee, including financial, legal, and reputational considerations. To assist in managing these costs and risks, many companies will provide tax support for their employees, including tax briefings and tax return compliance services in both the Home and Host countries.
Technology Makes It Easier for Tax Collectors to Track Down Employees
The IRS and most of the world’s other tax authorities are getting better at locating employees who are operating within their borders, thanks to new technology and agreements allowing tax authorities to better scrutinize financial and bank records. Just because a company’s employees operated in a Host country in the past without being discovered by tax authorities does not mean future mobile employees assigned there will fare so well.
As noted above, there can be serious consequences for both the employer and employee if compliance requirements are ignored. These increased enforcement efforts make it more important than ever for employers to seek out mobility tax specialists to ensure their international workforce is tax compliant in their Home and Host countries.
The information provided is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.