Today’s global challenges have raised the stakes for both companies and countries. Companies have addressed these conditions through increased global relocations while attempting to balance both cost control and growth, especially in emerging markets. Countries have responded in kind by increasingly tightening regulatory compliance relating to cross-border assignments and business travelers. This increase in global relocation in the face of increased scrutiny has resulted in heightened risk for those managing mobility programs. This newsletter provides an overview of key global risks and four areas that companies should consider in helping to effectively manage global assignment risk.
Given the importance of mobility to many company’s growth and talent management, it is critical that key risk areas for both the company and employee are understood and managed.
Regulatory and Compliance Risk
As an example, Canadian tax authorities continue to audit companies for adherence to withholding tax requirements for business travelers who may otherwise be exempt from income tax under a treaty. The authorities typically look back five years to assess withholding tax, with the companies potentially incurring significant costs relating to compliance and difficulties in filing individual income tax returns to receive refunds.
This example reflects the need to fully understand compliance and regulatory requirements for locations where employees travel on business. In this case, the withholding would have applied after even a single workday in Canada, but could have been avoided if proper waivers had been received in advance. Cross-border assignments can result in requirements for many functions within a company, including HR, tax, payroll, legal, finance and relocation departments.
Financial and Budgetary Risk
As illustrated above, failure to comply can lead to unexpected costs and potentially significant penalties and interest. Equally important, however, is the need to understand the costs of proposed scenarios in advance. Through proper review, planning may be possible to lower costs, allowing business units to properly bid on new work and appropriately accrued assignment costs.
Prosecution
The risk of prosecution is not just a scare tactic! There have been numerous cases where individual have been convicted of federal tax charges for failure to appropriately report bank accounts maintained outside the United States. In some countries, tax evasion can be considered a capital offense! Representatives of the company can be held accountable for failure to meet regulatory and reporting requirements. Understanding and meeting regulatory requirements is critical.
Legal and Employment Law
Failure to properly comply with immigration laws can lead to unexpected costs, project delays, legal challenges or deportation for the employee. Failure to consider local employment law can also be very costly, potentially opening the company up to lawsuits, delays in client deliverables and unhappy employees.
Reputational Risk
Companies who fail to understand and comply with local requirements risk being portrayed as bad corporate citizens in the local media. It would also not do much for the mobility department if a top executive ended up on the cover of a local paper due to a failure to file individual income tax returns or have proper immigration clearance! These types of negative publicity can be extremely damaging when entering new markets.
Employee Satisfaction and Retention
The global mobility program can be extremely important to many companies’ talent management and development strategies. While it is obvious that prosecution or negative publicity will lead to issues with employee satisfaction and retention, other more mundane factors, such as ineffective policies, lack of repatriation strategy and poor communication can be as damaging. International assignments can be a large investment for a company making it all the more important to retain and effectively deploy the employee within the organization when the assignment ends.
Permanent Establishment
The interaction between the mobility program and the company’s corporate tax position is an area that is often overlooked. Employees working outside of their home country can result in their home country employer having a permanent establishment (PE) in the host country. An employer with a PE may have additional corporate administration and tax costs. The PE may also prevent the company from utilizing an income tax treaty to shield business travelers from host country taxation. It is important to note that factors such as employee duties and project duration can result in a deemed PE for a company.
Although daunting, there are basic steps that can be taken to help companies manage risk for their mobility programs.
As reflected in the risk areas above, the mobility program can touch a number of areas within the company. Given that decisions made by one functional group can impact the requirements for another group, it is critical that a coordinated, cross-functional process be established to share information.
To assist in this process, companies should consider a centralized database to aid in program management and day-to-day regulatory and compliance requirements. Processes should be set up to track and manage both international assignments and business travelers. Employee and business unit education can be very important to allow for upfront planning and ongoing compliance.
2. Consider the Corporate Tax Position
The corporate tax position can impact the employee and the employee can impact the corporate tax position. For that reason, it is very important to have good communication between the tax and mobility departments. Some questions that may need consideration (especially for a new location):
3. Documentation is Critical
Proper documentation can be very important in mitigating risk. For example, a properly executed secondment agreement between the home and host entity can assist in reducing PE risk by effectively restricting employee activities in the host location and clearly identifying home and host entity responsibilities and limitations.
Other critical documentation to consider includes:
4. Consider a Program Risk Review
A program risk review can be an effective way for companies to identify gaps and risks for high impact areas of the mobility program. Companies can review their internal processes and ability to meet regulatory or other program requirements. Both process focused (e.g., compensation accumulation, talent management and vendor management) and compliance focused (e.g., tax, immigration, equity) areas can be considered in a risk review.
In short, the current economic, regulatory, and legal environment has increased the scrutiny and diligence needed when managing global relocations. However, through communication, coordination and documentation, your organization can manage global assignment risk.
For further information on this newsletter, please contact Mark Tirpak at +1.713.244.5020 or via email at mtirpak@gtn.com.
The information provided in this newsletter is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.