During the past year, the uncertainty that came with the COVID-19 pandemic combined with travel bans caused many companies to put a hold on new expatriate assignments. However, the increased rate of vaccination, especially within the US, is now creating opportunities for companies to consider re-starting international assignments. At the same time, the combination of increased spending by governments to fight the pandemic along with reduced tax revenue due to pandemic-induced economic slowdowns, are creating an environment ripe for tightening regulatory compliance for cross-border assignments and business travelers.
The coming increase in global relocation in the face of increased scrutiny will result in heightened risk for those managing mobility programs. Below, we look at some of the key risk areas related to your expatriate employees and four steps companies should consider implementing to help manage the global assignment risk for their expatriate employees.
Key global assignment risks for expatriates
Given the importance of mobility to many companies’ 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
Compliance risk due to increased regulations is on the rise. 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 those 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 business travel can result in work streams 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 expatriate assignments in advance. Through proper review, planning may be possible to lower costs, allowing business units to properly bid on new work and appropriately accrue assignment costs. Preparation of tax cost projections prior to the start of the expatriate assignment allows companies to book an accrual for the full estimated tax cost of the expatriate assignment. The accrual process helps to minimize surprise hits to the business unit’s bottom line.
Prosecution
The risk of prosecution is not just a scare tactic! For example, there have been numerous cases where individuals 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, thus, 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 costly, potentially opening the company up to lawsuits, delays in client deliverables, and unhappy employees. In a recent webinar we hosted, we examined the risks, strategies, and approaches employers can take to help alleviate some of the legal concerns.
Reputational risk
Companies that fail to understand and comply with local requirements risk being portrayed as bad corporate citizens in the local media. It won’t help the mobility department’s reputation if an expatriate ends up in the local news due to a failure to file individual income tax returns or have proper immigration clearance. This kind 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 just as damaging. Expatriate assignments are a significant investment for a company, making it even 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. Expatriates 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.
Steps you can take to minimize global assignment risks for your expatriate employees
Although daunting, there are basic steps that can be taken to help companies manage risk for their mobility programs.
1. Communicate and coordinate
As reflected in the risk areas above, the mobility program can touch multiple departments within an organization. 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 expatriate program management and day-to-day regulatory and compliance requirements. Processes should be set up to track and manage both international expatriate 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 expatriate and the expatriate 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):
- Will a new entity be required to meet local legal, immigration, or tax requirements?
- As noted above, does the Home employer already have a PE in the Host location or is there a danger that the employee will create a PE by their presence or duties?
- Which entity should bear the costs for the employee’s remuneration and other costs?
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 restricting expatriate employee activities in the Host location and identifying Home and Host entity responsibilities and limitations.
Other critical documentation to consider:
- Forms to reduce or eliminate withholding requirements, as applicable
- Expatriate assignment and tax equalization policies that are appropriate from legal, market, and company risk perspectives
- Assignment letters that reflect the agreement between the company and expatriate
- Certificates of coverage as applicable and obtained from the pertinent social security administration
- Employment contracts, as required under local employment law and to support available planning
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 global 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, 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 and expatriate assignments. However, through communication, coordination, and documentation, your organization can manage their global assignment risk.
GTN’s Mobile Workforce Management solution helps clients track and manage the tax risks and compliance requirements related to their entire workforce, including expatriate assignees, global and domestic business travelers, remote workers, and work anywhere employees. Schedule a call with our team to talk through your specific situation and ask any additional questions you may have.
Author: Mark Tirpak
Mark is Managing Director for GTN's South region. He has over 20 years of professional experience in advising multinational companies on global mobility related issues, including expatriate taxation, payroll, equity compensation planning, international assignment policy review, and program administration. Having been an expat himself enhanced his desire to assist and help simplify the process for assignees who are overseas. +1.713.244.5020 | mtirpak@gtn.com
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