Whether you manage business travelers, short-term international employees, or remote workers, you have no doubt heard about the “183-day rule.” Both globally and domestically, many tax jurisdictions expect an employer (as well as the employee) to track and report non-resident business travel. However, simply applying a “183-day” threshold does not always work to ensure tax compliance. Here we will take a deeper dive into the impact of income tax treaties on the tax cost of business travel, short-term assignments, and remote work scenarios.
Will income tax treaties always provide tax compliance protection to my mobile employees?
Some companies fall prey to the fallacy that, if their Home country has an income tax treaty with the Host country, their cross-border employees won’t be subject to taxation in the Host country if they are there for fewer than 183 days. Although most income tax treaties include a 183-day stipulation, it is only one of several requirements for determining whether an employee qualifies for treaty relief. For example, the business traveler will first have to be considered a tax resident of the Home country. In addition, many income tax treaties also require that both of the following conditions be met in order to qualify for income tax relief in the Host country:
- The remuneration is paid by, or on behalf of, an employer who is not a resident of the Host country; and
- The remuneration is not borne by a permanent establishment (PE) that the employer has in the Host country.
It is important to note that the meaning of these two conditions can vary by treaty. For example, some countries will use a legal definition of the word “employer” while others may look at it from an “economic” perspective (i.e., which company is bearing the responsibility and risk for the employee’s work). As well, although a PE can be a fixed place such as a building, a PE can also result from the length of a project or due to the specific activities being performed by the employee (e.g., the employee is concluding or heavily involved with negotiating contracts on behalf of the Home country employer in the Host location). For these reasons, it is critical to understand how the treaty will be applied for the specific Home and Host country combination and scenario, regardless of the assignment duration.
Employers must also understand that income tax treaties only apply to income taxes and not social taxes, which are separate taxes that are often covered by different laws and agreements. Therefore, even if an employee is exempt from income tax in the Host country under an income tax treaty, social tax may still be due.
I've heard that an individual on a short-term international assignment or traveling for business of no more than 183 days will be exempt from tax in the Host location. How does this work?
There is a network of income tax treaties globally. For example, the UK has income tax treaties currently in force with over 100 countries; the US has income tax treaties currently in force with over 60 countries. An income tax treaty typically includes an article, commonly referred to as the 183-day rule, which addresses the taxation of employees working temporarily in another country. If an employee and employer meet the requirements of this article, the employee would not be subject to income tax in that Host location.
Under the Organization for Economic Co-operation and Development (OECD) Model Income Tax Treaty, an employee may claim relief from income tax in the Host location if:
- The recipient is present in the Host location for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and
- The remuneration is paid by, or on behalf of, an employer who is not a resident of the Host country, and
- The remuneration is not borne by a PE which the employer has in the Host country.
As noted above, it is critical to understand how each of the conditions is defined for the countries involved under the treaty. Given that each treaty is unique, we recommend the applicable treaty be reviewed by your mobility tax provider, corporate tax, legal, and/or any pertinent stakeholder to avoid potential traps.
These traps can include, but are not limited to:
- Verifying that there is in fact an income tax treaty between the two locations in question. Without a treaty, local tax laws will apply. For example, the US does not have an income tax treaty with Singapore. Thus, under Singapore tax law, a US employee will be taxable in Singapore if present more than 60 days in a calendar year.
- The number of days allowed in the Host location can be based either upon a rolling twelve-month period or on a tax year basis. In addition, the number of days allowed per treaty may be less than the 183 days noted in the OECD Model Income Tax Treaty.
- Countries may differ on how the “days present” are counted. For example, Sweden includes both the day of arrival and the day of departure as a day present in Sweden for determining the 183 days for treaty purposes.
- The treaty may not apply to local income taxes. For example, several US states, including California and New Jersey, do not follow a tax treaty. Thus, even though the employee could be exempt from US federal tax, they still may be required to pay state income tax.
If our employee is eligible for tax relief in the Host location under the treaty, are any tax filings required?
Even though the employee may be exempt from income tax under the conditions of the treaty, the Host location may still require the filing of an income tax return or other form to document the treaty exemption. For example:
- In general, the US requires the filing of an income tax return if claiming tax relief.
- A German national working in Singapore (exempt from Singapore tax under the German/Singapore treaty) must obtain a signed statement from the German tax authorities and submit this with a letter to the Singapore tax authorities to support the treaty exemption.
- The UK has various reporting requirements for payroll and tax purposes depending on the number of days the individual spends in the UK in a tax year.
Certain countries also require reporting of a treaty exemption even though no income tax is due. Countries are actively conducting audits of companies' compliance with such reporting requirements.
As you can see, the treaty exemptions and tax reporting requirements vary widely and are dependent on the Home and Host location. We recommend each assignment be reviewed to maximize the treaty benefits available and to ensure proper income tax reporting in both the Home and Host locations.
Download our Outsourcing Evaluation Checklist for Your Mobility Tax Program to help you make informed decisions at each step of an international assignment and determine when it's best to bring on an outside vendor for support. This comprehensive checklist will provide the guidance you need to ensure a successful and cost-effective mobility tax program.
We have employees requesting to work remotely in a country that is different than their country of employment. What do we need to consider from a tax policy perspective?
First you should answer the following questions:
- Will this arrangement only be allowed if there are no employer reporting obligations or if the length of stay is under the employer’s threshold for reporting?
- Will it be allowed if there are employer reporting obligations, but no tax withholding obligations?
- Will it be allowed even if the presence of a remote employee may create a PE for the company in that country? As noted above, the creation of a PE may have an impact on the application of available treaty relief.
In determining how long you will allow remote workers to work from another country, you need to be aware that the “183-day rule” is not an absolute rule. Payroll tax obligations can sometimes occur even if there is only one workday in the country. Also, in some cases, having remote workers in another country could result in the company being deemed to have a PE in that country, which could then result in additional corporate administration and tax costs.
Claiming treaty relief and understanding the tax reporting requirements can be complex and requires a case-by-case review to ensure compliance for your locations. Schedule a complimentary consultation with one of our mobility tax experts to discuss your unique situation and develop a plan of action tailored to your company and employee needs.
