The future of global mobility tax
Compliance with global tax and employment laws used to be so much easier ....
In the past, global mobility tax largely dealt with international long-term assignments, which were typically arranged at the request of the employer. For these types of assignments, tax implications were generally understood in advance, and company agreements with expatriate employees were relatively standard in how they addressed company and employee tax issues. In addition, expatriate employees were typically located in cross-border markets where their employers already had operations.
That’s all changing.
What began as a need to “work from home” during the pandemic is evolving into a “work from anywhere” trend. This includes flexible, remote and short-term global working arrangements based on lifestyle choices made by employees.
Companies can now recruit employees from new locations, which means they need to quickly learn the tax and employment law requirements in numerous markets to accommodate their workforce.
The consequences of this phenomenon are showing up in two critical risk areas: competition for talent and multi-jurisdiction tax compliance.
How to attract, retain and engage a globally competitive workforce
Managing an international mix of employment laws, immigration rules, income and employment taxes, and regulatory compliance hurdles is a demanding and complex process. What worked 10 years ago, or even five, isn’t sufficient in 2022 or beyond.
Becoming an employer of choice means taking a rigorous and fearless inventory of your company’s processes and assumptions. For example:
- Will your current technology keep a global workforce securely connected?
- Is your internal risk management expertise sufficient to manage shifting requirements?
- Do your performance metrics adequately reflect global workforce success factors?
- Are your HR tools and processes in alignment with the real needs of your people?
- Are your front-line managers equipped to keep cross-border teams engaged?
- Are your current service providers up to the task? (e.g., payroll, benefits, legal)
- How does “work from anywhere” impact planning and goal setting?
- Will recruiting or relocation practices have to change for a global workforce?
- How does a globally mobile workforce affect your brand with current or prospective employees?
Discuss these issues openly with your leadership team — and document them carefully. Your answers can lead to important innovation opportunities. They may also help you identify potential tax issues.
Navigating the tax implications of a globally mobile workforce
Global recruiting can trigger cross-border tax issues for a variety of reasons. For example, immigration laws can delay or block employee relocation, even if both parties are agreeable to the terms. And that’s just one of the complexities you may encounter as you introduce “work from anywhere” policies or expand the number of countries in which you operate.
Consider these potential tax consequences of a globally mobile workforce:
- Transfer pricing: Transfer pricing is a complex tax issue for multinational companies because two or more tax authorities can audit the same intercompany transaction. Transfer pricing rules apply to goods, services and royalties — effectively, any internal transaction that crosses borders, including cost sharing and recharges between companies. Most tax authorities require transfer prices to be consistent with the “arms-length standard” (i.e., what unrelated companies would charge each other). Audit adjustments to transfer prices can result in additional tax owed, late payment interest, non-deductible penalties and possibly double tax.
- Permanent establishment (PE): PE is a term applied to activities in cross-border locations that usually trigger a taxable presence. Income tax treaties between countries define cross-border activities that constitute PE. In addition, the direct hiring of employees across borders will trigger PE for a company in the country of employment. Companies must decide whether to operate and meet tax obligations as a branch of the foreign company or to establish a subsidiary in the new market.
- Employer of record (EOR): Unless prohibited by local tax law, some companies use a third-party EOR instead of making a direct hire to avoid the PE issue. An EOR may be a short-term solution for companies to quickly access workers in a new market before they establish a subsidiary to meet their cross-border needs.
- Dual social security tax: People working outside their country of origin may be covered by the social tax systems of two countries at the same time, for the same work. In that case, both the employer and employee may be required to pay tax in both countries. The U.S. Social Security program covers expatriate workers, both those working in the U.S. and abroad, to a greater extent than other countries.
- Totalization agreements: To avoid double taxation on cross-border social taxes, the U.S. established totalization agreements with 30 countries. Their objective is to maintain coverage under the system an employee will likely have the greatest connection to while working and in retirement.
- Tax equalization agreements: When a company sends an employee to work in another country, a tax equalization agreement is often used to guarantee the assignment will not reduce the employee’s after-tax pay. The agreement considers the difference in tax rates between countries, as well as differences in the taxable income treatment of allowances (e.g., per diem or payment of an employee’s portion of social tax by the employer). These factors can result in a larger tax burden for the employer for cross-border assignments.
- Employee income tax: While tax residency is generally defined by tax law in each country, tax treaty provisions often include residency tiebreakers for individuals who meet the statutory tax residency requirements of more than one country. Many treaties include an important exception to individual taxation on compensation earned while performing services in another country. Personal cross-border income tax can be a complex matter for individuals to manage directly. Employers need to determine the amount of tax assistance they provide in their global mobility programs.
These are just a few compliance concerns that occur with a remote, mobile workforce. Companies that are transitioning to a “work from anywhere” workforce must closely monitor local tax laws and changing interpretations by governing authorities.
Common reasons for increased tax authority scrutiny
During the pandemic, many tax authorities were lenient regarding residency and tax issues affecting remote workers. Now that public health conditions have eased and emergency remote work circumstances are evolving into permanent arrangements, governments are beginning to increase recovery and collection activity for tax obligations arising from remote work in their jurisdictions.
The rise in social media activity is helping governments track business and employee activity with greater accuracy. For example, many employees use fitness trackers as part of their wellness programs. These applications capture precise time and location data via smartphones or wearable devices that can be used to enforce tax compliance like never before.
Even without international workers, U.S. companies with remote workforces in multiple states may face increased tax compliance complexity. Tax and employment laws vary on a state-by-state basis. Employees are generally subject to personal income tax withholding in the state where they work, but there are exceptions.
For example, some states have reciprocal agreements allowing personal income tax to be withheld in the state of residence, even though work is performed in a reciprocal state. Other states require employers to withhold tax in the state where the headquarters is located unless the company requires the employee to work in a remote location. An employee’s presence in another state may trigger an income tax nexus in that state for the employer. Companies need a way to monitor and manage employee locations and resulting tax liabilities.
How Wipfli can help
Companies that artfully manage staffing and compliance complexities will have a distinct advantage in the years ahead. The innovation and vigilance these issues demand can pay big dividends in engagement and productivity — and prevent or mitigate unintended tax consequences. If you’d like to learn more about international tax or global mobility tax issues, contact Wipfli.
*This article was originally published on Centuro Global.
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