The number of businesses choosing to move employees abroad, as part of their efforts to increase their international presence, is increasing each year. Unfortunately, some businesses are exposing themselves to unnecessary risks when it comes to tax compliance in the Home and Host countries of those employees by failing to have a plan in place to avoid mobility tax problems. Below are five common mistakes made by employers who move employees abroad.
Countries are starting to recognize the potential income they are losing by failing to properly account for employees working within their borders, even those doing so on a temporary basis. To correct this, many countries are beginning to employ new technology that allows them to better monitor financial and bank records to help ensure that those individuals who are earning income in their country are also paying taxes there. Immigration records are also beginning to be shared with the tax authorities.
Failing to properly account for mobile employees in both their Home and Host countries can lead to serious financial consequences for both employees and their employers, who may face bills for unpaid taxes, penalties, and interest. Tracking employees to ensure that they and their companies are complying with all applicable tax rules and regulations will help avoid unpleasant future surprises.
Even those employers who have sent employees abroad on short-term assignments in the past may need to review their employee tracking systems and procedures. Until recently, some employers have been able to send mobile employees to some Host countries for short-term assignments and remain confident that the Host country would not realize the time they spent in that country and determine if those employees were subject to tax there.
However, many countries that have been lax about collecting taxes from employees on short-term assignments have made recent efforts to improve their tax collection practices when it comes to such employees. Therefore, no company should feel complacent about reviewing their employee tracking systems for their international employees simply because they have avoided accounting for the taxes on employee income from short-term assignments in the past.
Establishing a clear policy for addressing the mobility tax issues presented by employees operating internationally will help a company avoid the future morale issues that can pop up when an employee discovers that a coworker has negotiated a better deal as part of their international relocation package. Companies cannot operate under the assumption that its employees will not compare their relocation packages. A clearly worded policy will help explain any differences between the relocation packages of employees being moved abroad and ensure that the company and its employees are complying with local immigration regulations and tax laws.
A clear policy for addressing the issues facing employees being relocated internationally on a short- or long-term basis will also help avoid the time and expense of renegotiating relocation benefits each time an employee is moved abroad and will ease the administrative complexities of managing individualized benefits packages.
Each country has its own tax rules and regulations for employers and employees. Failing to implement company policies that account for those differences can lead to significant compliance issues in a Host country. There is no universal policy that will cover the tax and immigration situations faced by mobile employees in every country. Companies need to know ahead of time that they need to account for the time and expense of crafting country-specific compliance packages each time a company moves employees into a new Host country.
Additionally, companies may need to draft different policies for situations in which employees are being assigned to a Host country on a temporary or permanent basis. For example, many companies may limit tax support for permanent transfers, with tax equalization being applied only for temporary assignments with Host country tax complexities. Companies may also choose to provide more support for scenarios that have a specific business purpose, as opposed to moves that are requested by an employee to accommodate personal goals and objectives.
When setting up the policies and procedures that will apply to employees moving to a Host country, it is important that all of the relevant stakeholders have the opportunity to participate in the process. In addition to Human Resources, this should usually include a company’s tax specialists and legal representatives in both the Home and Host countries to ensure that there are no violations of tax, employment, or immigration laws either at home or abroad.
Additionally, though they may not be able to provide guidance on mobility tax and immigration issues, company business unit managers (line managers) should be involved in the process so they have a clear understanding of the costs and other issues that may result from their decision to transfer or assign employees abroad. Finally, a company’s payroll department should be involved, especially when a company is setting up new payroll operations in a Host country.
Managing and addressing the requirements of a mobile workforce demands an intense focus on developing a program that is both compliant and effective. Building a mobility program that aligns with business policies and global expansion while managing exposure and risk is essential, and can often require the help of many vendors, including tax, immigration, relocation, and payroll.
Managing all of the providers that make up your external mobility vendor team can be a challenge, so it is vital that you ensure all of the vendors you work with have the experience and capabilities to provide both the “rules” and practical considerations for the challenges you may face in either the Home or Host location. Each of your vendors should have an approach that is tailored to your business and aligns with your specific needs. Ask yourself these questions to determine how well your providers align with your needs:
Any vendor should be able to provide timely answers to your questions. They should be well versed in your account and know the specific details of your program. If you are not getting the level of proactive and personalized service you expect, perhaps it is time to re-evaluate your vendor relationships.
Subpar attention to global mobility programs can cause undue headaches down the road, so make sure the vendors you work with are flexible and willing to customize approaches based on the needs of your global mobility program and business.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.