There is no doubt that COVID-19 has significantly impacted organisations with a globally mobile workforce. Business trips and new assignments have been postponed, existing assignments have been cut short and workforces around the world, are now required to work from home. Whilst employee health and welfare remains the priority, there is now increasing focus amongst employers on wanting to better understand the business impact of having employees working from an unplanned location. In these cases, what are the key issues for employers to consider in order to reduce employment cost, optimise cashflow and reduce compliance risk?
One typical scenario is where the assignment is cut short and the employee is repatriated, but they continue to work for the host country entity, albeit remotely from their country of origin. When this happens, it will be necessary to revisit the key assumptions upon which the assignment was structured. Key assumptions include the originally planned length of the assignment, the number of days to be spent in the home and host country as well as qualitative links the employee has in each country (e.g. where the family is, where the home is and where centres of vital interest are). These assumptions will generally influence the employee’s tax residence status, as well as the social security and payroll position. In this scenario, the employee will typically find themselves spending more time in their home country than originally anticipated and once the key assumptions have been reviewed, the outcome of this assessment may well be that tax, social security and/ or payroll reporting obligations have been triggered in that home country.
The added complexity can be significant, given there may be continuing tax, social security and/ or payroll requirements in the host country as well. Employers should establish whether relief for double taxation can be claimed, and whether any concessions are available in the home country (e.g. extensions to filing deadlines or disregarding days of presence when assessing tax residence status) as soon as possible, as the employee will now want to understand how their cashflow position, liability to tax and filing obligations (in both home and host countries) have potentially changed, compared to the original setup. Clear and regular communications with the employee will be key to managing their interests during this period of sudden and unplanned disruption.
Assignment costings and budgets should be revisited and if necessary revised, particularly where the employee’s net salary is guaranteed and the home country (to which the employee has been repatriated) has higher taxes than the host country to which they were assigned. Employers may also wish to revisit the compensation package; can this be revised if travel or other living costs have now reduced?
There is also the issue of trailing compensation, such as bonuses or equity awards. It is often the case that such payments are reported and taxed pro-rata, based on the country in which the duties were performed. Spending a period of time working in an unplanned location can therefore create unexpected reporting obligations and liabilities, in respect of these payments.
Within mainland Europe and the US, it is not uncommon for workers to live in one jurisdiction and commute to a different jurisdiction for work. Because of the current situation, these cross-border workers will now be required to work from their homes.
In contrast to traditional long term assignments, cross-border workers are likely to remain tax resident in their home jurisdiction and it is possible that this type of worker was already working from home on a regular basis (e.g. one or two days a week) prior to the health crisis. This means there may have already been tax, social security and payroll reporting requirements in the home jurisdiction. The onset of COVID-19 and the requirement for cross-border workers to work exclusively from home means the home jurisdiction aspect becomes far more pronounced, which in turn may cause tax authorities to look into the historic (as well as current) position.
Similar to assignments, how was the compensation package for these commuters arrived at? What assumptions were used? Was it assumed the commuter would not trigger any payroll, tax or social security considerations in the home country? Again, costings and budgets may need to be revisited if these considerations were not factored in at the outset.
If the employer has no presence in the country in which the cross-border worker resides and works, the activities carried out by that worker should be reviewed to determine whether a permanent establishment may be created in that country (this is particularly important where senior executives are involved). There may also be immigration, employment law, VAT and regulatory law aspects (such as the EU Posted Worker Directive) to consider too.
It is understandable that in this current climate, many organisations are delaying or even cancelling proposed new assignments. On the other hand, we are seeing that other organisations are going ahead with new ‘virtual assignments’, whereby the right person is matched to the right role, but there is no physical relocation, as the employee will work remotely from their country of origin.
It is important that the structuring for this type of ‘virtual assignment’ is based on an appropriate set of assumptions, e.g. is a tax, social security and payroll obligation expected to arise in the host country? The position may not be straightforward once travel restrictions are relaxed and business trips are permitted. For instance, if the employee’s remuneration will be recharged to the host country entity (which is a standard approach, not least because of transfer pricing considerations) even a day’s work in the host country can trigger tax, payroll and filing requirements in that country. Care should also be taken when deciding which entity (home or host) should take a corporate tax deduction for those remuneration costs.
Where the employee will work from their own home, the employer should check whether tax reliefs are available for working from a home office and if so, consider factoring these in when building the compensation package. Many countries will also have employment law requirements in relation to homeworking, so it is important that the employment contract or assignment letter adequately addresses matters such as working hours, employee health and safety, public liability insurance etc.
It may also be the case that the employer does not have a presence in the country in which the employee carries out work. This might apply in the case of international local hires. For example, a UK employer recruits a senior employee on local terms, but that employee is a US national and currently resides in the US, where the employer has no presence. Normally the employee would be expected to relocate to the UK to exercise the employment, but because of the current environment it is agreed that the employee will work remotely from their home in the US. This can create a whole host of issues beyond just employment taxes, similar to those relating to cross border workers. Training and guidelines for HR and other business stakeholders will be needed to ensure the management of these risks is built into the process of initiating virtual assignments.
There are ways to manage the tax and payroll complexities caused by unexpected change, but early analysis is essential. This way, employers are best placed to manage the potential additional costs and compliance obligations that may be triggered. Looking ahead, in a world where commuting and office space costs continue to rise, video conferencing technology continues to improve and flexible working is becoming increasingly prevalent, ‘virtual assignments’ and homeworking arrangements should continue to increase and this will no doubt be accelerated by the current health pandemic. As part of this, it is important that employers start putting in place the necessary processes and governance structures in preparation for the inevitable focus on compliance in this area from authorities around the world.
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