Globalization has transformed employee mobility, expanding it beyond the traditional short- or long-term assignments. Today, a mobile workforce encompasses a range of arrangements, including remote and hybrid work options, as well as short-term business travel. This shift has brought about greater flexibility in terms of how and where employees work, enabling organizations to tap into a wider pool of talent and operate more efficiently in a globalized world. And when employees have greater flexibility as to how and where they work, companies and employees alike must navigate complex reporting and filing requirements to avoid serious financial, legal, and reputational repercussions.
With increased government scrutiny and risk, it's essential for companies and their employees to provide comprehensive and accurate information to their vendors, including their tax provider. This information is critical in order to effectively manage global costs, tax risks, and other aspects of a global mobility program.
In this article, we'll explore three essential elements necessary for successful cost and risk management:
- Tracking and sharing detailed travel and workday information
- Completing a comprehensive tax organizer
- Providing a detailed compensation breakdown
By utilizing these elements, companies can help ensure compliance with global regulations and answer the most common questions from their mobile employees.
The Importance of Tracking Travel and Workdays for Global Mobility
For a company and tax provider, a detailed journal of travel and workdays is one of the most basic and important requirements for managing a global mobility program.
The number of days a mobile employee is physically present and/or working outside of their Home tax jurisdiction can have a direct impact on multiple functions of the company. It can have an impact on payroll, tax, and immigration requirements, including reporting and withholding obligations, visa authorizations, and work and residence permits. These requirements apply not only in the employee's Home tax jurisdiction but also in any other tax jurisdictions where the mobile employee may be working or present.
The information regarding mobile employee’s work and non-workdays is critical in determining, for example, the “source” of income, or whether the mobile employee might be subject to (or exempt from) tax in a Host tax jurisdiction (i.e., based on days presence, whether an income tax treaty or reciprocal agreement is in place, or the income earned in the Host jurisdiction). A mobile employee’s actual or anticipated days of presence in a Host location may impact, for example, residency, or whether a work permit is required for the Host jurisdiction.
What if I am on a long-term foreign assignment? Do I still need to track travel and workdays?
An assignment is typically considered “long term” if the length of the assignment is beyond one year. Although mobile employees from most countries can often break Home country tax residency while on long-term assignments, US citizens and green card holders are subject to worldwide taxation regardless of where they are working or the location of the payroll. As Host country taxation may also apply, there is the possibility of taxation in multiple locations for US long-term mobile employees.
US mobile employees on a long-term assignment can mitigate double taxation through application of the Foreign Earned Income Exclusion (IRC Section 911) and/or foreign tax credits. The qualification for the IRC Section 911 exclusion directly depends on the employee’s travel and workdays. In addition, to obtain proper foreign tax credit, an employee’s tax provider will need to source their income based on US versus foreign workdays. Therefore, it is imperative that mobile employees keep a detailed record of their travel and workdays throughout their assignment years and even after repatriation.
As noted previously, it is important for both US and non-US mobile employees to track travel for considerations such as the allocation or “sourcing” of income between work locations and the determination of residency status. Companies need this information to identify potential reporting, withholding, and immigration requirements.
What if I am just a business traveler or on a short-term assignment? Do I still need to track travel and workdays?
Business needs, and the often higher costs associated with long-term expatriate assignments, have led to a rapid increase in the use of short-term, commuter, and/or “business traveler” scenarios. Countries have long recognized these types of scenarios and have concluded treaties and other agreements to address temporary cross-border situations. Many of these treaties have a so-called “183-day rule” that limits taxation in the Host location for individuals spending fewer than 183 days in a defined period. However, it is a common misconception that Host country taxation will never apply for assignments of less than 183 days.
A treaty may not exist or apply in all scenarios. A given treaty may also have different limitations and/or other conditions that need to be met to apply any Host country tax exemption. As a general rule, individuals on short-term travel may not meet Host country tax residency criteria but may still be subject to taxation on income relating to services performed in the location. This “sourcing” of the income is most commonly linked to the percentage of an employee’s workdays in that location.
In the end, each country/jurisdiction will have its own mechanisms for determining when an international mobile employee becomes subject to taxation. The travel calendar is critical for tracking days of presence for residency determination/treaty application purposes, assisting in sourcing income if the employee is subject to Host country taxation, and for properly calculating available credits/exclusions that may apply under domestic law.
What if I am a foreign national working in the US? Do I still need to track travel and workdays?
Absolutely, and especially in the transfer year. Your employee’s tax provider will need to determine an appropriate filing status (i.e., full year resident, non-resident, dual status) based upon a number of factors, including their days of presence in and outside the US. Depending on their residency status, the tax provider may also need to use the workday information to source income between the US and non-US locations.
What if I am on a domestic assignment within the US? Do I still need to track travel and workdays?
Each state has its own guidelines regarding de minimus presence that triggers reporting and tax withholding requirements. Again, it is important for your employees to track their travel and workdays so the appropriate tax reporting and withholding can be considered for both the company and employee.
Maximizing Global Mobility Tax Benefits through Completion of a Comprehensive Tax Organizer
With the possible exception of tax providers, the majority of the population doesn’t look forward to gathering the information needed to complete their tax returns and filings. Unfortunately, the failure to properly gather and report income and other requested financial information can come with steep penalties and may even have legal implications. Tax providers themselves are under increased scrutiny and can also be subject to financial and legal penalties for failing to exercise due care in preparing tax returns.
For these reasons, most tax providers will request that mobile employees complete tax organizers. The organizer is designed to ask the questions necessary to assist mobile employees in compiling and providing the necessary information for the tax provider to appropriately complete their tax filings. By carefully reviewing and answering the questions in the tax organizer, the mobile employee may even be able to identify ways to minimize their tax burden through identification of previously untaken deductions or credits.
Providing appropriate details to the tax provider will also assist in preventing tax notices that may be generated for failing to properly report items already provided to the government from such sources as employers or financial institutions.
The Role of Providing a Detailed Compensation Breakdown in Global Mobility
The accumulation and reporting of compensation information for mobile employees can be a daunting task, even for the largest and most established international assignment programs. Mobile employees on foreign assignments often receive compensation and reimbursements from a variety of sources and locations. There may be differences in the fiscal years between the Home and Host locations, leading to differences in reporting periods. Each jurisdiction may have different rules on what is considered taxable and/or reportable and on how to calculate the taxable income inclusion for non-cash benefits.
Companies can face significant risks and/or financial penalties for failing to appropriately report and withhold taxes for their employees. In addition, mobile employees who are on international assignment often receive uplifts to their “usual” base compensation to address incremental assignment expenses. These uplifts include items such as relocation and tax costs, differences in Home and Host country housing and cost of living, and incentives for international travel.
The actual compensation and benefits provided under typical policies can often be two to three times the cost of the employee’s stay-at-home compensation, so it is important to provide as accurate compensation information as possible. Especially when considering that company compensation is typically the largest item on the individual’s personal income tax return and therefore often has the biggest impact on the overall tax cost of the assignment.
What makes a detailed compensation breakout so critical?
It is critical to have a detailed breakout of all payroll and off-payroll items paid to your mobile employees from Home and/or Host locations. Having an accurate and itemized summary allows the company and mobile employee to achieve the following objectives:
- Proper allocation of income between jurisdictions based on timing of payments and/or type of compensation as appropriate for Home and Host jurisdiction purposes.
- Accurate determination of reporting, withholding, and/or payroll requirements for both Home and Host jurisdictional purposes—possibly with different fiscal years.
- Proper application of company tax reimbursement policies—as the mobile employee may only be subject to taxation on certain income elements and often would not receive the benefit for company-paid tax gross-ups.
- Proper application of taxation for Home and Host country purposes (e.g., a housing allowance may be taxable in a given location where a direct rental payment to a landlord by the company may be nontaxable.)
Although the compilation of accurate worldwide compensation is challenging, it can be made easier through the proper set-up of processes and use of technology.
In today's globalized world, the success of a company's mobility program depends on many factors, including compliance with tax, payroll, and immigration regulations. By working closely with a knowledgeable tax provider, keeping accurate records, and sharing important information, companies and their mobile employees can mitigate the risks and costs associated with all types of mobile work arrangements. Regular communication and collaboration between all parties involved are crucial for achieving these goals.
At GTN, we are committed to helping our clients succeed in the global marketplace. If you have any questions or concerns about managing your global mobility program, schedule a call with our team.
