Mobility Mondays

There is no doubt that Global Mobility is one of the most complex areas of HR and Reward. There are at least two countries to consider, and many specialists, stakeholders and suppliers that have to work in harmony to deliver the right experience to the employee and enable the right outcomes for the business.

Among the many risks that global mobility professionals have to manage is compliance, and key among them is tax. Taxes can be both a significant cost and compliance risk to an employer. Consequently, globally mobility professionals should have a good understanding of the key issues in this area as done correctly, this can be an area that adds real value to the business.

Compliance risks

The global mobility process involves both the ‘corporate’ and the ‘employee’ and as a result the compliance risks for both need to be managed. There are legal and regulatory risks to consider such as immigration, labour law, posted worker directive across Europe and of course tax.

In the area of tax, both the corporate and the employee will have compliance requirements that need consideration. Managing both of these areas is part of the mobility professional’s role.

A summary of the key considerations is in the table below, all of these considerations must be taken into accountand acted on individually. These are complex, and it’s important that advice is obtained on these matters to avoid non-compliance, associated penalties, interest and penalties. 

Corporate/Employer considerations	Individual considerations
Payroll taxes and related reporting  Is the employer required to set up a payroll registration in the country of work and account for payroll taxes?  How can double payroll taxes and related cost increases be avoided?	Tax registrations Does the employee need to register with the local tax authority?  Are there particular tax concessions or regimes that reduce the taxes due and by when must registration take place?
Social security taxes In which country is social security due and on what compensation? Avoid additional costs of paying social security in two countries (where possible) by applying the relevant cross border social security agreements.	Tax return filing obligations Does the employee need to file a tax return in the new country of work? By when must this be done?  If a tax return is not required by law, should one be filed to reclaim any refunds or repayments to prevent double taxation?
Permanent establishments (PE)  Does the nature of the work the employee is performing result in a presence in that country for corporate tax purposes?  Are changes required to the structure of the work arrangement to reduce the likelihood of a PE?	Tax payments  When are the tax payments due and in which locations?  How has the tax rate changed compared to a pure domestic scenario? What is the difference and how is that managed?
Transfer pricing  Which entity will bear what part of the overall cost of the work arrangement? What tax deductions will be allowed for the costs and in which location? What value of deduction will be allowed?	Personal income How will personal income be taxed in the new location? What steps can be taken to prevent or mitigate taxes due? Do any specific tax filing obligations arise (for example relating to bank accounts such as FBAR in the USA)?
Compensation tax planning Can the structuring of the work arrangement or the delivery of compensation be aligned to take advantage of tax reliefs or deductions that reduce the overall cost of the arrangement?	Trailing liabilities  Will the employee have to pay host location taxes even after the work arrangement has ended? How will bonuses and share incentives taxation change as a result of the work arrangement?

How do these Tax issues apply to different globally mobile work arrangements?

I like to think the tax issues that apply are in part related to how far a globally mobile work arrangement differs from a purely domestic work scenario. A local employee who works only in one work location and has all compensation paid solely from the local payroll represents the pure domestic work scenario.

The more a work arrangement differs from a domestic arrangement the more tax issues probably require consideration.

That deviation can be in two dimensions; work and employee physical location, which tends to trigger changes in obligations, and then compensation make up which tends to drive complexity around compliance.

As the location of work changes and compensation make-up and sources change, such as new allowances, reimbursements or expenses, so do the tax issues requiring consideration.

The table below contains some key issues that apply to different types of globally mobile work arrangements. A number apply to all arrangements such as payroll, tax filings, and social security for example, these are not repeated.

 

Work arrangement type	Detail	Key tax issues to consider
Locally hired expat	The acquisition of a non-local national to work on a local employment contract.	Do any special expat tax exemptions apply that could provide beneficial tax rates or taxation to the employee?
Intra-country business travel	Work duties performed in new locations within a country.	In some countries with City, State, Local, Canton taxes (USA, Switzerland) payroll reporting and tax returns may be triggered.
Cross border business travel	Work duties performed in new locations beyond national boundaries.	Are payroll deduction and reporting obligations triggered? Is social security due – is it possible to prevent dual contributions and cost?
Cross-border or regional role	A role with ongoing requirements to work in particular locations or geographies outside the normal home country	Are the business travel, hotel costs etc., taxable? Is the cross-border aspect of the role really a permanent office or work location? Are there any local Directorship appointments? These can trigger payroll and tax return reporting requirements. Is a permanent establishment being created by the employee?
Commuter work arrangement/ short term assignees	A role where the employee lives in one country but regularly works in another country.	Are dual payroll deduction and reporting obligations triggered? How will cash flow for the employee be managed? How can double taxation costs be avoided?
Long-term assignment	An assignment that usually involves a relocation from one country to another.	Have the right expatriate tax concessions or reliefs been correctly applied to keep overall employer costs down? How is global compensation from all sources (relocation providers, payroll, home and host expenses) being corrected reporting in the home and host payrolls? How are costs in one country cross-charged to the other? What policy and mechanism underpins this?

 

Conclusion

The tax issues that require consideration can differ by global mobility work arrangement type and the locations involved. There are a number of core considerations such as payroll, tax filings and social security. Non-compliance could lead to interest, penalties and negative publicity and attention that should be mitigated by proactive up front review. Up-front review of the arrangement may also highlight tax planning that could significantly reduce overall costs.

With global talent pools, it is ever more critical to ensure that the right talent mobilises at the right time, to the right place, to ensure customers and clients receive the right service. It can give an organisation a competitive advantage.

Global Mobility is a multi-disciplinary expert area. Finance, Payroll, Tax, HR, Reward and others have to understand each other’s expertise areas and language. Over the course of time, Global Mobility itself has also developed its own technical jargon. Let’s look at this in some key areas, focusing on the compliance and taxation areas I help organisations with.

Compensation

How will taxation aspects be managed?

• Tax equalisation
  Tax rates around the world differ. Employees working in a new location can trigger taxation there. Establishing the tax differences and then working them through with an employee can be a technically complex, time consuming and costly process and can become a barrier to employee mobility. To resolve this, a number of organisations adopt a tax equalisation approach. This broadly results in the employee paying no more, or less, taxes than they did when working in their home country. As a result, the tax differences are neutralised and the employee can focus fully on their role (rather than the differences in tax rates and tax payment timings).
  
  
• Tax protection
  In some ways similar to Tax equalisation above, except the outcome and purpose is to ensure the employee is not worse off. If they are better off, then this is allowed.
  
  
• Gross paid/local
  This is the default position used for almost all domestic employees in an organisation but can also apply in the globally mobile scenario. This basically means the employee is responsible for taxes arising (in all locations). In the context of a cross border work arrangement, this can be complex to understand for the employee and complex to administer as tax advice and support is constantly required and the arrangement can result in some cash flow challenges for the employee.
  
  
• Local plus
  A local plus is an employee who is largely paid as a local. The employee pays tax on salary and regular compensation. However, for a limited period of time they receive additional support, housing and education as two examples. The tax on these items can be settled by the employer. The arrangements are often used either to localise an assignee or to attract a worker from another country to relocate and join the local company workforce.

Payrolls

Getting employees paid

• Net paid
  In a number of globally mobile work arrangements tax equalisation (above) will apply. The effect of tax equalisation can be to convert gross pay to net pay. As a result, the employee is entitled to an after taxes ‘net’ amount. This person is now a net paid employee. In a net arrangement the employee earns the same amounts regardless of how tax rates may change in their host location. In tax equalised arrangements, the net pay is normally determined after deducting a stay at home notional tax amount. This is usually called hypothetical tax.

• Shadow payrolls
  Payroll obligations can be triggered in the countries in which the employee is working. Salary and payments are made through payroll in the home country but there is a need to meet payroll obligations in the new country of work. A shadow payroll is a payroll that doesn’t pay the employee, but is a mechanism that allows the employer to meet their local payroll tax payments and reporting obligations. The compensation is not paid, but is shadowedthrough the local payroll to keep the employer compliant.

• Gross up / Net to gross
  This is a term used to describe the payroll calculation process to convert net compensation to gross. The gross is required because the gross is the amount of compensation on which payroll taxes is due and upon which payroll tax reporting should be based. Not all payroll systems have the ability to perform these calculations so often tax advisors assist. If you have net paid employees or those that require a shadow payroll an early area to check is your local payroll capability to these calculations.

Compliance

Meet your employer obligations

• Trailing compensation
  This is the term given to compensation that is paid after an employee stops working in a location, but in respect of which tax reporting is still required in that location. Bonuses and share incentives are two examples. The performance, or earnings, period for these types of compensation often relate to duties, or tax residency, in the country of work. As a result, even if they are paid after the employee has left the country, taxes (and therefore payroll) still arise. Shadow payroll reporting may be required in the host country but care also needs to be taken in the payroll country of payment too (taxes might be due in two locations so solution to this may be needed).

• Permanent establishment
  This is the term given to the presence of a business in a location that results in corporate tax implications. Just like people, corporate entities can also either be present, or not present, in a particular country. In the context of employee mobility, the nature of duties performed in a new country, or the concentration of lots of employees over time, can result in a permanent establishment of their employer. The consequences can be very costly and complicated. The corporate (the employer) may have to file corporate tax returns and action associated tax obligations. If employees are being deployed to a country where there is no local entity, or the work being performed is not for the local entity, this issue should be prioritised for review.

• Certificate of coverage
  This is the name of a document that usually confirms the country in which social security is payable. The document is usually issued under the provisions of a social security totalisation agreement between two countries or in the case of Europe under cross-border social security coordination rules. In Europe, these forms are called Form A1. These are very important documents as they form the basis on which double social security contributions can be avoided.

These are just few of the key terms commonly used in Global Mobility. Some of these we have already covered in detail previously, but keep an eye out for further ones.

As we approach the holidays, no doubt things have started to quiet down for some supporting the deployment of globally mobile talent.

We all know it won’t stay quiet for long into the New Year, so here’s a quick refresher on short term assignments. Cost reduction opportunities and compliance obligations are key priorities.

Short term assignments are critical forms of mobility in any organisation. They give organisations cross border agility and ability. Customers, projects and new markets are often reliant on cross border talent being able to supplement the local workforce, or spearhead new opportunities. This often has to happen to short notice!

Definitions

There isn’t a commonly accepted definition of a short term assignment as it means different things to different organisations, in the context of their own business and policies.

The things that short term assignments tend to have in common include: 

• They are usually at least three months and not usually beyond two years in duration.
• They do not usually involve the relocation of a family.
• The employee remains an employee of the home country and participates in home country benefits (such as pension).
• Payroll is usually maintained in the home country.
• There is usually some kind of policy, or framework, that determines what benefits and allowances are available.

Key areas of focus 

From a compliance, payroll, tax and social security perspective, the following key areas usually need good focus.

1.	Establishing the real start date: One of the hardest aspects of spotting and picking up these types of assignments is the overlap with business travel arrangements. There will be business driven travellers that trigger similar compliance to short term assignments but these won’t always be visible to those who manage assignments and mobility. Here good process and communication between departments is needed. Compliance obligations need to be assessed on the basis of the full presence and work history in location. It is essential to engage with the business and the employee to understand when travel and the role actually began. Retroactive compliance may be required.
2.	Posted worker compliance: There is growing need, especially in Europe, to consider employment related compliance such as, those provided under locally implemented versions of the posted worker directives. There may be notifications to authorities and variations to working terms and conditions to factor in. Identify early, the obligations you have in this area.
3.	Immigration: It goes without saying that workers and employers must be in compliance with local immigration requirements, and this must remain front of mind. Checking nationalities is essential, do not assume the nationality in today’s world of the global talent pool. Equally important is checking where the employee actually lives. Again, in today’s connected world workers can be employed in one country but live in another. This detail can fundamentally alter the applicable immigration process.
4.	Tax policies: Employees working in new countries may trigger taxation and social security there. As a result, both the tax rates, tax payments and deductions that apply can change. The employee will want to understand how this impacts them. Most employers adopt a form of tax equalisation (a compensation approach for taxes). In effect, this results in a process that delivers the same burden of taxes (no more, or no less) than when compared to the situation in the home country working exclusively there. If it is not clear that tax equalisation would apply, then this is an area to confirm, as it impacts a number of knock on areas. Not applying tax equalisation can result in a lot of extra questions from, and costly technical input required by, the employee. This results in a slower deployment process and invariably requires more HR and management attention, time and focus.
5.	Payroll: For shorter arrangements, paying the employee through the home payroll is usually effective. The employee will continue to have fiscal responsibilities at home such as pensions, mortgage and other direct debits or standing orders. Often, supplemental pay needs to be delivered, such as allowances or reimbursed expense. It’s important to assess how these additional items of compensation should be processed for payroll (in both locations), to ensure taxes are paid only when the compensation is taxable, and ensuring that the employee receives what they are entitled to (net after taxes). Payroll taxes and reporting can be due on payments made in other countries and by third parties. A robust global compensation capture process across company locations and different suppliers will be essential.
6.	To hypo tax or not hypo tax? This is closely associated with points 4 and 5 above, and is a niche area that can become a headache with short term assignments. This is really about determining how tax equalisation should be implemented, and is an area that requires mobility tax technical support. This is also an area that, if not handled in the most optimum way, can create additional costs and cash flow burdens for the employer. In simple terms the choices here are about whether to leave the employee subject to home country payroll taxes, or to modify this by adjusting the payroll taxes and/ or moving to a net pay arrangement. The challenge here though, is that there is rarely a one size fits all optimum answer. The right answer that ensures compliance, reduces negative cash flows for the employer and doesn’t result in unpredictable and uncertain pay and taxes for the employees will depend onbespoke analysis. The employee’s tax residency and the taxability in the other country will play a key part in the correct analysis.
7.	Shadow payroll: Where the employee triggers payroll reporting and deductions in the host country, a solution to meet these obligations will be required. Often, a shadow payroll is a good solution. This kind of payroll doesn’t make any payments to the employee. Instead, it is a mechanism to enable the employer to account for and pay over the payroll taxes, and meet compensation reporting obligations. It is said the employer is ‘shadowing’ the compensation (rather than paying it) hence the shadowreference in the name.
8.	Social Security: Social security can be a significant part of the overall cost of an assignment. It’s vital that social security is not paid in two locations (adding to costs) wherever this is possible. A number of country specific rules and cross-border agreements may apply and they will need to be analysed to establish where social security is payable, and what compliance forms and applications are required. Forms A1 in Europe and Certificates of continuing liability are two examples. In addition, social security may, or may not, be due on extra assignment specific compensation and expenses. Careful analysis of the rules is needed to ensure that over and underpayments are prevented.
9.	Tax planning: Cross border international rules:It’s really important to establish the business set up in the host country (is there an entity and if so what sort?), and the business’s plans around cross charging of costs in situations where the assignments are for periods of approximately six months. There may be exemptions from host country taxes (and even payroll obligations) if the costs are not charged to that country (provided other conditions are met). This can be a significant reducer of complexity and associated cost under the applicable tax treaties so it’s an opportunity to not be overlooked. Country tax rules:A number of countries have tax exemptions for short stay,temporary workplaceand related scenarios. Under these rules accommodation, travel, subsistence and related assignment benefits and expenses may be exempt from taxation. Alternatively, there may be changes in how these benefits are delivered as certain tax exemptions may apply. This is an absolutely key area to explore as it can reduce overall employer costs. The taxes on these items are often due by the employer so any savings would be for them. The starting point for this thinking is to initiate assignment structuring support and tax briefings for the employees.
10.	Employee Tracking: For a number of security, welfare and compliance reasons, employers will need to have a system to track and record where employees are working. Such systems could be based on time and attendance and diary systems, or other GPS enabled applications. When in place these systems enable employers to know where employees are present and working and use this information to proactively manage compliance and costs. They can, for example, be used to pay per diems or allowances to employees based on the knowledge that the employee was in fact working overseas.

Conclusion

Short term assignments remain business critical to meet customer and business priorities. However, just because these assignments are shorter, it does not mean they are easier to navigate or administer. Quite often, the compliance and risk aspects relating to managing short term assignments is equal to, if not more cumbersome, than long term assignments. Methodically working through the key focus areas is the key to reducing risk and cost.

Context

Compensation that is delivered in shares (share based compensation), or options over shares, is common place in the world of reward. The value of this compensation can be a really significant part of the overall total reward, or compensation package, of mobile employees. No doubt about it, this compensation brings with it complexity. A number of legal, tax and regulatory matters have to be considered.

Given it is such a significant part of a globally mobile employees’ compensation it is essential that those managing employee mobility have a good understanding of the key compliance aspects to guide the business and employees.

Compliance is another reason ensure this is a key area of focus for global mobility professionals. Share based compensation is often administered and delivered by Company HQ teams. Where globally mobile employees are now working outside of the HQ locations it is really important to check that there is a process to connect awards and delivery of share based compensation to local payrolls and compliance.

Definition – what is share based compensation and why is it used?

The terminology around shares can confusion but there are in the main 3 different types.

• Share options: The employee is given the right to buy shares at a future date at a set price. The employee doesn’t have to buy the shares – hence the language used is one of an ‘option.’ No shares will transfer to the employee unless they exercise the option, or options.
• Restricted stock unit(s): The employee receives an award of shares that is transferred to the employee at some future date (and usually at no cost to them).
• Restricted stock: The employee receives a transfer of shares but cannot sell them yet (so there are “restrictions”) – but could do at a future date.
• Phantom awards: These have nothing to do with ghosts or ghouls! These are share awards (like the above 3) but end out paying in cash rather than shares. There can be local country regulatory rules that make owning and selling shares difficult or not possible for employees – in these situations, Phantom awards are used.

There are lots of different names of plans within companies but usually the awards are one of, or multiples of, the types above. Shares are used as compensation to align the interests of employees and management with the shareholders (the owners).

What are the key tax and social security considerations?

Share awards are compensation, compensation that is usually subject to income tax and social security. Special specific rules may apply in different countries but in general there will be considerations for employers and considerations for employees.

Employers:

• Determination and deduction of payroll taxes (tax and social security) as per local law from the shares to transfer to the employee. This happens often by reduction in the number of shares to be transferred to the employee
• Transfer the amounts deducted as payroll taxes to the fiscal authorities
• Report participation to local tax and social security authorities in payroll and other local reporting
• Transfer the proceeds of sale of any shares to the employee (sometimes the payroll process can be used)
• Review if tax approved or tax advantaged versions of the share awards available locally? How can these be accessed and are they appropriate for the organisation?
• How should the cost of the awards be allocated and accounted for between the different business units involved?

Employees:

• How do employees settle amounts they owe for acquiring shares under an option exercise?
• Understand the difference between tax deductions that are made by their employer and the eventual tax due to the fiscal authority (on filing of their tax return). When will any additional payments be due?
• Can any tax advantaged, or tax favoured schemes, reduce the taxes due?
• Is there any specific reporting to be done as part of net wealth or assets reporting to fiscal authorities?
• Are there further tax considerations on the sale of shares? Are capital gains taxes and when?

What complications can there be when share based compensations holders become globally mobile?

These are the areas that those involved in global mobility should watch out for (or ensure someone in their organisation is focused on them).

1. Specific cross border tax rules need to be applied to establish what portion is taxable and reportable in which country. A process is required to ensure this happens.
2. The tax deduction (before transferring shares to the employees) become “global” – a more complex tax calculation is required to establish the required tax deduction. Local country and cross-border tax support will be required by the HQ team administering the tax deduction process.
3. Cross border social security rules may come into play. The relevant rules should be analysed to ensure social security is paid to the correct country authority and double payments are avoided wherever possible.
4. Employee tax return reporting will get more complex. Special double taxation relief aspects of tax returns will need to be completed. The employee will usually require assistance to complete their tax returns.
5. Cross charging arrangements may result in different tax treatments for employees. In some countries the cross charge itself to a local business can trigger income taxes and payroll obligations – these should be analysed and communicated to employees.
6. Employees may not be aware of capital gains considerations on the sale of shares in a new country (particularly when moving from a country that doesn’t tax capital gains). A local tax overview covering how share based compensation should be made available to the employees relocating.
7. The amount of taxes due may be reduced through considering the application of local tax advantaged share based compensation schemes and/or interaction with local expatriate tax concessions. These should be explored to ensure that legitimate tax and related cost reductions are not missed.
8. Tax rates around the world vary so the employee may have higher (or lower) taxes due on share based compensation as a result of global mobility. Tax equalisation, tax protection and other tax reimbursement approaches should be considered to prevent tax surprises later.
9. Local regulatory rules should be checked to see if any awards should be converted to cash (Phantom), rather than share based awards.
10. The taxes due on share based compensation can be significant, particularly where tax equalisation may apply. Budgeting for these costs would enable finance to accrue and prevent surprises.

Conclusion

Share based compensation is amongst the most complex compensation that is paid to globally mobile employees. There are a number of process and technical considerations that have to methodically considered to prevent non-compliance and tax related surprises.

Context

Alongside more fluid forms of employee mobility such as business travellers and commuters, permanent transfers are becoming an ever more common feature of global mobility programmes. Often referred to as ‘one-way’ moves, they bring with them many of the considerations that apply to assignments. For this reason, a detailed understanding of the risks and opportunities that apply are key knowledge areas for those advising, or overseeing employee mobility.

Definition

Permanent transfers usually involve a local employee in one country, moving to join as a local employee of another country. The employment changes, the payroll changes and the move is usually for an unlimited duration. Despite all of this, the employee concerned is not normally a local citizen or national, but an ‘expat’.

In many ways, the permanent transfer is treated the same as a local employee: local payroll, local pensions and benefits and local employment contract. Depending on the business rationale for moving, the employer may also provide relocation support and provide support with housing and/or education. These elements are often referred to as the ‘plus’ elements in a ‘local plus’ arrangement. Plus arrangements can often be intended as tax free in the hands of the employee. This means if, for example, housing support is taxable, then the taxes due are settled by the employer.

Opportunities

There is no doubt that we exist in a world where the talent pool for organisations is truly global. Different countries around the world recognise this and offer tax incentives for certain types of workers to attract them. This means that despite the fact the employees are locally employed, they may be able to access tax breaks. The tax breaks usually fall into two categories:

1. Expat tax breaks
These potentially reduce the amount of income tax that is payable by the employee. It could be as a result of travel and workdays overseas, or could be as a result of their specific status in the country. The net result is that the employee can earn more after taxes, and/or the employer can pay more to the employee (after tax), without necessarily having to increase the overall salary. These are important areas to identify early in managing a permanent transfer so that cost savings can be identified and not missed.

These tax breaks come with specific requirements. There can be dependencies in terms of how pay is structured and/or delivered or specific rulings and applications need to be made within designated timeframes in line with specified forms and processes.

2. Employer tax breaks
Similar to the above, special tax rules can also apply, that either reduce or remove from the taxes due certain ‘plus’ benefits. This can be items like relocation, home leave trips, housing and education support. Often, the taxes due on these plus elements are the responsibility of the employer, so reducing these taxes can result in significant savings for the employer and reduce the overall cost of the move and the annual recurring costs. Sometimes, the delivery of these benefits needs to be changed slightly to deliver a lower tax cost. If the tax rules around these are identified early, they can built into costings and discussions around the move and save employer costs.

Countries in which the above types of tax breaks exist include France, Netherlands, India, Ireland, Italy, India, The Netherlands, Norway, Spain, Switzerland and the UK.

• Timing of move, or timing of payment related move support
  This isn’t always an aspect of the move that is always something that can be controlled but is worth consideration. In some circumstances, changing the timing of the move can deliver a different tax residency status for the employee, which can in itself, mean the taxes due by the employee or the employer can be reduced. It is worth reviewing whether delaying, or bringing forward a move, by a few weeks can result in savings.

  Often, permanent transfers will receive relocation support. If the settlement of the invoices relating to this is close to the end, or beginning of a tax year, then there may be some opportunity to reduce the taxes due by the employer by paying or delaying the payment of these invoices. 

• Trailing compensation/ share incentives
  There are elements of compensation that may have been earned already (before the relocation) but are ‘paid’ after the move takes place. Bonuses, share options and awards are good examples. In these types of compensation, specific cross-border tax rules can apply to taxation. The application of these rules could result in tax savings. Take the example of a bonus. The bonus may not be taxable in the new country, but could still be taxable in the first country but at reduced tax rates that apply to a non-resident tax person. Similarly, the same concepts could also apply to stock options and share awards too.

Other considerations

There are some areas which, if not identified and thought through, can deliver complexity and surprises later. Here are some aspects to be aware of, consider and work through as needed.

• US nationals/ tax filers
  It’s important to know if the permanent transfer involves a US national, citizen or green card holder. The tax rules that apply to these employees always need consideration of the US tax aspects, as it’s not possible to look at the host country tax rules in isolation. This can also impact the net pay of the employee and the overall costs for the employee. Make sure you check the nationality and US tax filing status of any permanent transfers.

• Benefits
  Often, the permanent transfer employee will have spent time contributing to pension arrangements or social security in the country in which they had worked. Now they are moving to work in new country, they will probably contribute to pensions and social security in the new country.

• Responsibility for taxes
  Letter of employment for permanent transfers often refer to local plus elements and benefit. Sometimes, however, they are silent on the point of who is responsible for the tax due on these items (employee or employer). If this is not clear, then it’s also possible the employee and employer have a different understanding to each other which can cause issue later on. It’s best to state whether each local plus benefit is ‘gross’ or ‘net’.

• Families moving/employment starts before full relocation
  When an employee starts a local employment as part of a permanent transfer, before they and/or their families have relocated to the new country, the taxation and social security consequences can be different to what is expected.
  
  There are many practical reasons why these scenarios develop but they can result in the employee having one leg in each country’s tax and social security system. Extra cost and complexity can result.

• Compensation structures
  It is worth finding out what the business plans to do with the employee once the assignment has finished. If an employee is in a high salary/ low tax location as a local employee, moving them next to a high tax or lower salary location can be then be a challenge. In some scenarios, where the clear intent or plan is to move the employee again, an assignment structure (rather than a local employment) may well be more appropriate.
   
• Trailing compensation
  Bonuses and share awards can be taxed with reference to the country in which they were earned regardless of when they are paid or delivered. For this reason, it is essential to check in the case permanent transfers, that the delivery of these types of compensation takes tax rules into account. If a bonus or shares are taxable in the country in which the employee used to work, and then is delivered in the country in which they now work (and after local taxes have been deducted), it can result in a lot of complexity and confusion for the employee.

Conclusion

Permanent transfers are an increasingly prevalent form of employee mobility. A number of tax related opportunities apply, and working through them can deliver reduced cost and an enhanced compensation to the employee. Understanding the tax aspects are key in making sure the right costing for the move is approved and cost savings are not missed.

With global talent pools, it is ever more critical to ensure that the right talent mobilises at the right time, to the right place to ensure customers and clients receive the right service. It can give a firm a competitive advantage.

Global Mobility is a multi-disciplinary expert area. Finance, Payroll, Tax, HR, Reward and others have to understand each other’s expertise areas and language. Over the course of time, Global Mobility itself has also developed its own technical jargon. Let’s look at this in some key areas, focusing on the compliance and taxation areas I help organisations with.

Policies / Process

• Tax equalisation
  Tax rates around the world differ. Employees working in a new location can trigger taxation there. Establishing the tax differentials can be a complex, time consuming and costly process and can become a barrier to employee mobility. A number of organisations adopt a tax equalisation approach that broadly results in the employee paying no more, or less, taxes than they did when working in their home country.

• Tax protection
  In some ways similar to Tax equalisation above except the outcome and purpose is to ensure the employee is not worse off. If they are better off, then this is allowed.

• Gross paid/local
  This is the default position used with the vast majority of employees in an organisation but can also apply in the globally mobile scenario. This basically means the employee is responsible for taxes arising (in all locations). This can be complex to understand for the employee and complex to administer as tax advice and support is constantly required and can result in some cash flow challenges for the employee.

• Local plus
  A local plus is an employee who is largely paid as a local. The employee pays tax on salary and regular compensation. However, for a limited period of time they receive additional support, housing and education as two examples. The tax on these items can be settled by the employer.

Payrolls

• Net paid
  In a number of globally mobile work arrangements tax equalisation (above) will apply. The effect of tax equalisation can be to convert gross pay to net pay. As a result, the employee is entitled to an after taxes ‘net’ amount. This person is now a net paid employee.

• Shadow payrolls
  Payroll obligations can be triggered in the countries in which the employee is working. Salary and payments are made through payroll in the home country but there is a need to meet payroll obligations in the new country of work. A shadow payroll is a payroll that doesn’t pay the employee, but is a mechanism that allows the employer to meet their local payroll tax payments and reporting obligations.

• Gross up/ Net to gross
  This is a term used to describe the calculation process to convert net compensation to gross. The gross is required because the gross is the amount of compensation on which payroll taxes is due and upon which payroll tax reporting should be based. Not all payroll systems have the ability to perform these calculations so often tax advisors assist.

Compliance

• Trailing compensation
  This is the term given to compensation that is paid after an employee stops working in a location, but in respect of which tax reporting is still required in that location. Bonuses and share incentives are two examples. The performance or earnings period for these types of compensation often relate to duties or tax residency in the country of work. As a result, even if they are paid after the employee has left the country taxes (and therefore payroll) still arise.

• Permanent establishment
  This is the term given to the presence of a business in a location that has corporate tax implications. Just like people, corporate entities can also either be present, or not present, in a particular country. In the context of employee mobility, the nature of duties performed in a new country, or the concentration of lots of employees over time, can result in a permanent establishment of their employer. The consequences can be very costly and complicated. The corporate (the employer) may have to file corporate tax returns and action associated tax obligations. If employees are being deployed to a country where there is no local entity, or the work being performed is not for the local entity, this issue should be prioritised for review.

• Certificate of coverage
  This is the name of a document that usually confirms the country in which social security is payable. The document is usually issued under the provisions of a social security totalisation agreement between two countries. In Europe, these forms are called Form A1. These are very important documents as they form the basis on which double social security contributions can be avoided.

These are just few of the key terms commonly used in Global Mobility. Some of these we have already covered in detail previously, but keep an eye out for further ones.

Introduction

Tax issues and global mobility go hand in hand. There can be tax matters for the employee and for the employer. The corporate tax implications (tax matters that relate to the employer entities) are generally less well understood in the world of Mobility/HR, than the payroll and employee and employer issues.

Within the corporate tax area is transfer pricing. In the context of employee mobility, this is an area that concerns itself with how the cost of employees is borne and cross charged within a group. Mobility often has to work in partnership with finance and tax departments around this issue.

A high level of understanding is therefore essential for mobility professionals. The issue impacts what costs are allowed, or should be deducted, to determine the profits from a corporate tax perspective. It can change the overall costs to the company if not correctly managed.

What is the issue?

The International Tax Framework in the corporate tax area has experienced significant changes in the last few years. Countering tax evasion and avoidance has become a top priority at both EU and international levels due to the consequences of the last financial crisis, and weaknesses and misalignments of the international tax system dating as far back as the 1920s. In short, fast changing business models and structures had, over time, become misaligned with the rules that apply to them.

As a result, the OECD and the G20 crafted the BEPS project. This was launched in 2013 with the OECD’s report Addressing Base Erosion and Profit Shifting. It targets identified deficiencies in national and international tax rules that leave room for loopholes and mismatches.

The project signals the determination of countries, having recognized the international reach of the issue, to coordinate their actions for the elimination of the deficiencies. Two years after the project was launched, specific recommendations had been issued by the OECD on the appropriate measures at national and international levels. 15 areas of action were identified as priorities. The work proceeds at a fast pace with more and more countries implementing proposed changes.

Two BEPS actions that require closer attention from global mobility perspective are: Action 7: preventing the artificial avoidance of permanent establishment status and Action 13: country by country reporting.

In view of the latest BEPS changes, it is advisable to review intercompany agreements and transfer pricing related policies in place, in order to assess whether they meet the recent BEPS standards and do not raise further risks.

Standard policies for the mobile workforce may no longer be suitable if they do not take into consideration the employees activities, role, levels and the nature or value of the services rendered by this mobile workforce.

The impact of getting the transfer pricing right or wrong is all about compliance and tax efficiency. For example, a tax authority may not allow a sending company to deduct the costs of an assigned worker from its profits. In the receiving location, the company may not be deducting enough costs. As a result, too little or too much profit may be taxed in the two countries. This issue, when it applies to many employees over many years can over time become a big tax issue.

Best practice guidelines

The intercompany secondment usually sees a company temporarily assigning an employee to another company, belonging to the same group, but located in a different jurisdiction. The hosting company would normally, directly or indirectly, benefit from the activities carried out by the employee. 

Under current best practice, the company should properly prepare and keep accounting and contractual documentation that clearly shows and describes the activities and related costs of the seconded employee. This can include:

• secondment terms and conditions
• description of functions and activities to be performed by the seconded employee
• details of recharged costs
• criteria to determine recharged costs
• how to split secondment costs between the companies involved. 

Often, the costs that are recharged between the entities are the labour/payroll costs. However, entities may agree a mark-up on the costs in order to recognise and compensate for the full service being provided by the seconding employer.

It is always advisable to clearly identify who bears which cost within an intercompany secondment agreement between the two companies (sending and receiving). This is usually separate from the secondment or assignment agreement with the employee.

The company who assigns the secondee remains their employer for the duration of the secondment and, may continue to pay actual salary and wages, administer employee benefits, bonuses, taxes, employment insurance, and social security payments. These costs and expenses will then be reimbursed by the hosting company, who may also bear additional travel expenses, board and lodging, materials and supplies directly provided to the secondee.

The sending and receiving companies can determine how the costs are recharged between the companies. It will be necessary to consider the business goals of the assignment, the mobility policy type, where the short and long term benefits sit and what appropriate mark ups should apply.

It should also be noted that the cross charging to a group company can also lead to changes in compliance. For example, the cross charge may prevent an exemption under a tax treaty (so income taxes are triggered) or it could be a determining factor in whether, or not, payroll is triggered in the receiving country and company.

What action is required?

In view of the BEPS changes, it is advisable to review intercompany agreements and people related transfer pricing related policies and approaches to assess whether they meet the recent BEPS standards and do not raise further risks. As mentioned above, standard policies for a mobile workforce may no longer be suitable.

Additional considerations

Taking into consideration the changes on permanent establishment (PE) thresholds as part of BEPS a mobile workforce might also give rise to hidden PE risks. PE risk is covered in a separate Mobility Monday article. It would be also wise to review what capacity seconded employees keep to negotiate and sign contracts or whether they have an advisory and more consultative role.

BEPS has increased also reporting and transparency. Another relevant consideration for global mobility is country by country reporting, which deals with the reporting of the number of employees on a full-time equivalent basis. How are globally mobile employees dealt with?

Conclusion

In global mobility, transfer pricing concerns itself with the cross charge of costs between group companies in respect of employees.

Recent developments at a global level mean that this area required careful review so that too little or too much tax is not paid, and the arrangements are robust and reasonable on review by a fiscal authority. It’s a key area for mobility/HR professionals to work closely with finance and tax experts.

There is no doubt that Global Mobility is one of the most complex areas of HR and Reward. There are at least two countries, many specialists, stakeholders and suppliers that have to work in harmony to deliver the right experience to the employee and enable the right outcomes for the business.

Amongst the many risks that global mobility professionals have to manage is compliance and key amongst them is tax. Taxes can be both a significant cost and compliance risk to an employer. Consequently, globally mobility professionals should have a good understanding of the key issues in this area.

Compliance risks

The global mobility process involves both the ‘corporate’ and the ‘employee’ and as a result the compliance risks for both need to be managed. There are legal and regulatory risks to consider such as immigration, labour law, posted worker directive across Europe and of course tax.

In the area of tax, both the corporate and the employee will have compliance requirements that need consideration. 

A summary of the key considerations is in the table below, all of these considerations must be taken into account and acted on individually. These are complex, and it’s important that advice is obtained on these matters to avoid non-compliance, associated penalties, interest and penalties. 

Corporate/Employer considerations		Individual considerations
Payroll taxes and related reporting Is the employer required to set up a payroll registration in the country of work and account for payroll taxes? How can double payroll taxes and related cost increases be avoided?		Tax registrations Does the employee need to register with the local tax authority? Are there particular tax concessions or regimes that reduce the taxes due and by when must registration take place?
Social security taxes In which country is social security due and on what compensation? Avoid additional costs of paying social security in two countries (where possible) by applying the relevant cross border social security agreements		Tax return filing obligations Does the employee need to file a tax return in the new country of work? By when must this be done? If a tax return is not required by law, should one be filed to reclaim any refunds or repayments to prevent double taxation?
Permanent establishments (PE) Does the nature of the work the employee is performing result in a presence in that country for corporate tax purposes? Are changes required to the structure of the work arrangement to reduce the likelihood of a PE?		Tax payments When are the tax payments due and in which locations? How has the tax rate changed compared to a pure domestic scenario? What is the difference and how is that managed?
Transfer pricing Which entity will bear what part of the overall cost of the work arrangement? What tax deductions will be allowed for the costs and in which location? What value of deduction will be allowed?		Personal income How will personal income be taxed in the new location? What steps can be taken to prevent or mitigate taxes due? Do any specific tax filing obligations arise (for example relating to bank accounts such as FBAR in the USA)?
Compensation tax planning Can the structuring of the work arrangement or the delivery of compensation be aligned to take advantage of tax reliefs or deductions that reduce the overall cost of the arrangement?		Trailing liabilities Will the employee have to pay host location taxes even after the work arrangement has ended? How will bonuses and share incentives taxation change as a result of the work arrangement?

 

How do these Tax issues apply to different globally mobile work arrangements?

I like to think the tax issues that apply, relate to how far a globally mobile work arrangement differs from a purely domestic work scenario. A local employee who works only in one work location and has all compensation paid solely from the local payroll represents the pure domestic work scenario.

The more a work arrangement differs from a domestic arrangement the more tax issues probably require consideration.

That deviation can be in two dimensions; work and employee physical location, which tends to trigger changes in obligations, and then compensation make up which tends to drive complexity around compliance.

As the location of work changes and compensation make-up and sources change, such as new allowances, reimbursements or expenses, so do the tax issues requiring consideration.

The table below contains some key issues that apply to different types of globally mobile work arrangements. A number apply to all arrangements such as payroll, tax filings, and social security for example, these are not repeated.

Work arrangement type	Detail	Key tax issues to consider
Locally hired expat	The acquisition of a non-local national to work on a local employment contract.	Do any special expat tax exemptions apply that could provide beneficial tax rates or taxation to the employee?
Intra-country business travel	Work duties performed in new locations within a country.	In some countries with City, State, Local, Canton taxes (USA, Switzerland) payroll reporting and tax returns may be triggered.
Cross border business travel	Work duties performed in new locations beyond national boundaries.	Are payroll deduction and reporting obligations triggered? Is social security due – is it possible to prevent dual contributions and cost?
Cross-border or regional role	A role with ongoing requirements to work in particular locations or geographies outside the normal home country.	Are the business travel, hotel costs etc., taxable? Is the cross-border aspect of the role really a permanent office or work location? Are there any local Directorship appointments? These can trigger payroll and tax return reporting requirements. Is a permanent establishment being created by the employee?
Commuter work arrangement/ short term assignees	A role where the employee lives in one country but regularly works in another country.	Are dual payroll deduction and reporting obligations triggered? How will cash flow for the employee be managed? How can double taxation costs be avoided? Is a tax equalisation arrangement required?
Long-term assignment	An assignment that usually involves a relocation from one country to another.	Have the right expatriate tax concessions or reliefs been correctly applied to keep overall employer costs down? How is global compensation from all sources (relocation providers, payroll, home and host expenses) being corrected reporting in the home and host payrolls? How are costs in one country cross-charged to the other? What policy and mechanism underpins this?

 

Conclusion

The tax issues that require consideration can differ by global mobility work arrangement type and the locations involved. There are a number of core considerations such as payroll, tax filings and social security.

Non-compliance could lead to interest, penalties and negative publicity and attention that should be mitigated by proactive up front review. Up-front review of the arrangement may also highlight tax planning that could significantly reduce overall costs.

Have you ever heard the following?

“I never stay more than 183 days in other countries. I do not have any tax obligations there.”

“Our employees never travel for more than one or two months to other countries. Taxes abroad? This is no issue for us.”

Often, the focus is on counting the working days in other countries. If below 183 days, then no taxes apply. However, this approach is incorrect. There is much more to the 183 day rule.

What is the main principle of the 183 day rule?

The rule relates to Double Taxation Treaties (DTTs). DTTs are Treaties determined between countries that exist to prevent double taxation. They can override domestic tax rules, and are important in the world of global mobility, as they provide a mechanism to prevent double taxation and simplify compliance. 

Where employees live in one country and work in another, the first thing to check is if a DTT between the two countries exists. If not, there is no 183 day rule to consider. Instead, national rules and domestic tax laws of the relevant countries apply. 

If a DTT exists, then it is necessary to first establish the country the individual is resident in under the DTT, this is known as a Treaty Residency. For people who are only tax resident in the home country and not in the country they work in, this is generally quite simple. In most cases individuals are treaty residents in their home country. Once the Treaty Residency has been established, the 183 day rule can be reviewed.

Example

An employee lives with his family in Italy. During the week he works in Germany where he has a flat. He spend his weekends and holidays with his family in Italy. In January 2019, he was on a business trip in Italy for two weeks. In which state is the salary for this business trip taxable? The employee is tax resident both in Italy and Germany under domestic law. Under the Italian/German DTT they are treaty resident in Italy. As the employee worked in the same state in which they are treaty resident, the 183 day rule does not apply. The business trip is taxable in Italy.

What is required to enable the exemption under the 183 day rule?

Now, let’s assume individuals work in a state in which they are not treaty resident. In these cases, salary relating to working days in the other country is not taxable there, providing all of the following conditions are met: 

1. The individual spends less than 183 days in the work state.
2. The remuneration is paid by or on behalf of an employer, who is not a resident of the work state.
3. The remuneration is not borne by a Permanent Establishment (PE) of the employer in the work state.

If all three conditions are met, the salary is not taxable in the country in which the work was performed. These are general rules. It is important to review the relevant DTT. General principles of the 183 days rule are similar but the detail can differ between DTTs. Let’s review the conditions individually.

1. The individuals stays less than 183 days in the state of work

Depending on the DTT, the 183 days can be in:

• a calendar year 
• the tax year of the country in which the individual works
• any twelve month period.

The last option is quite tricky for HR departments. Manual counting of days is time consuming. Weekends and even holidays in the country of work have to be counted. 

Example

An employee from Germany was on business trips in China during 2012 and 2013. In both years he stayed in China for 95 days (August to December 2012 and January to May 2013). The employer has no office and no PE in China. HR reviewed the China/Germany DTT in 2012 and 2013. They established that the salary referring to working days in China was taxable in Germany, because in both years, 183 days in China were not exceeded.

The same employee was on business trips in China in August to December 2018 (95 days) and again in January to May 2019. The employer still has no office or PE in China. Is the answer the same?

No. The Germany/China DTT has changed. Now, the 183 days may not be exceeded in any twelve month period. As the employee stayed in China for more than 183 days in the period August 2018 to May 2019, the salary relating to working days in China is taxable there.

As you can see, it’s important to always check the relevant and current DTT and not rely on experience with DTTs of other countries or from prior years.

2. The remuneration is paid by or on behalf of an employer, who is not a resident of the work state.

At first, this condition appears easy. If the employer has an office or establishment in the country of work then salary is taxable there, if it is borne there. Is that true?

No. In some countries an ‘economic employer’ approach applies. This approach reviews if the legal employer corresponds to the economic employer. In general terms, the economic employer is the entity into which the employee is organisationally integrated and, which bears the salary costs of the employee. Costs borne by the entity where employee is working usually results in taxes due in that country, but it’s not always that straightforward. 

Example

From January 2018, an employee was posted from Italian HQ to a subsidiary in Germany for 5 months. His family stayed in Italy. During the week the employee lived in a flat in Germany. Although the employee worked for the German subsidiary, the salary was not charged to the German company, but was borne by the Italian HQ. The Italian HQ does not have a PE in Germany.

HR of the Italian HQ established that the employee stayed in Germany less than 183 days and had no German employer. During an audit of the German subsidiary, the auditor found out that the employee was organisationally integrated into the German subsidiary and, that the salary should have been charged to the German subsidiary in accordance with special corporate tax principles known as transfer pricing. Are there any consequences for taxation of the salary? 

Yes. The taxation of the salary now has to be reviewed on the basis that transfer pricing rules were met. Following transfer pricing rules, the German subsidiary should have borne the salary, with the consequence that the German subsidiary becomes the economic employer. Salary relating to working days in Germany is taxable there.

3. The remuneration is not borne by a PE of the employer in the state of work.

It is often thought that a PE is something that has to be formally or deliberately established or founded in another country. It is not. If special conditions are met, companies can have a PE in another country.

Example

In November/December 2018 a technician, living in Germany, works for 8 weeks on an installation project of his employer in Poland. The project started in March 2018 and was scheduled to finish in February 2019. Due to illness of various team members, the project was finalised in April 2019.

The Poland/Germany DTT states an installation results in a PE if the duration of the installation exceeds 12 months (the reason is not relevant)

Although the reason for exceeding the 12 months period for the installation was the illness of employees, the German employer now has a PE in Poland. The salary relating to the working days in Poland was (respectively had to be) borne by the PE. The salary is now taxable in Poland.

Summary

The 183 day rule is not as easy as it may first seem. Understanding the commercial set up in a country and the specific recharging structure of a globally mobile employee is key. A detailed review of relevant legislation and facts can then follow and this is key to managing employee related risks.

It’s important to:

• Check treaty residency.
• Check relevant treaty rules for counting the 183 days.
• Check the corporate set up in the state of work.
• Check if the economic employer approach is applicable.
• Check if there is a PE in the state of work.

Trailing compensation is an important area for those involved in employee mobility to understand. There are payroll reporting and payroll taxes obligations that cannot be met without the identification of trailing compensation. 

Those involved in the employee mobility process are well placed to identify and therefore ensure compliance and avoid related employee pitfalls.

What is trailing compensation?

Tax rules around the world generally need a trigger for a country to tax an employee’s compensation. One logical trigger is physical presence and tax residency - the employee lives in a particular country and should therefore pay tax there. 

Another trigger is that the compensation was earned when the person was taxable there (but is no longer resident there). If this compensation is then paid after leaving the country this is what’s known as 'trailing compensation' - trailing because it is paid after leaving but still relates back to a period of residence. 

The concept of trailing compensation can in theory apply to any type of compensation that meets the definition above but the usual examples are bonuses and incentives (such as shares awards). 

What are the complexities here?

The complexities arise in two main areas - payroll and compliance and then around tax impacts on the employee.

Payroll

Payroll reporting and tax withholding in countries is often closely connected with whether or not the relevant compensation is taxable in that country. If the compensation is paid in another country (which could be the current payroll and employee location) then there can be a disconnect between where the payroll reporting and deductions have been done and where they should have been.

Example (UK to US but principles could apply to any countries).

• Employee was in the UK throughout the calendar year 2018.
• In January 2019 the employee is seconded to work in California, USA.
• The employer has a financial year-end of 31 December and each year in March pays a bonus relating to that period. 
• A bonus of $75k is paid in March 2019. The employee is in the US on US payroll so it’s paid there and US payroll makes US Federal and California tax deductions. This is now 'trailing compensation'.
• Deductions totalling 40% (US Federal and California taxes are made. These total $30k so the employee received $45k net. 
• The whole of the bonus is actually taxable in the UK as was earned in the UK but no taxes have been paid there.
• In theory, the employer payroll should have reported the earnings in the UK and deducted UK payroll taxes. 

Payroll compliance in the UK is probably not correct. This is an area that can often be reviewed in payroll audits. It is bad enough that one case results in payroll taxes underpaid that result in employer penalties and interest. However, unless a process to systematically address the issues is implemented then many employees, in many countries with many awards over many years can quickly build up to a very significant global employer compliance risk and problem.

What does this mean for the employee?

Let’s continue with the example above. The issue we have here is the employee only received $45k after US taxes as $30k was deducted as US payroll taxes but UK taxes are also due.

As no tax was retained under UK payroll the UK taxes have to be paid through the tax return process. That UK tax is due on 31 January 2020 and now we have a problem. 

The UK tax due is at 40% or another further $30k - so by 31 January 2019 the employee has had to settle, or had deducted at source, $60k of a $75k bonus meaning they only have $15k left and have effectively paid a 80% global tax rate! This would usually result in a less than happy employee.

The bonus which originally most likely was intended as a motivational reward to the employee, recognising their contribution in 2018, now no doubt becomes a source of agitation and frustration.

Eventually the position will be corrected as the US tax return for 2019 is filed and claims to prevent double taxation are made. It could be well into late 2020 before a refund of US taxes is made to partially, or wholly, refund the US taxes withheld. 

Share options and longer term incentives

You can see that in the relatively simple example above we have compliance and employee issues in two counties that can carry on for well over a year after the payment date of the bonus. 

Share options and share awards can have a much longer award life. It’s not that unusual that these kind of awards have three or even five year lifespans. Consequently, if an employee has worked in three or more countries during the life of the award then on the exercise of the options, or the transfer of any shares to the employee, there may well be country employee payroll tax reporting and deduction obligations in three countries. This is a real challenge for the employer to analyse. In addition, the employee has to somehow understand how this all impacts their global tax rate and tax payment timings and income tax return reporting’s in respect of the shares. 

So what are the solutions?

Trailing compensation is commonly an area for fiscal authority focus in payroll audits. It is so because it is a complex area and is not easy to ensure compliance. You can see from the above example that the issue can lead to a lot of extra complexity for the employee too. 

So what can be done to manage the compliance and mitigate complexity for employees?

• First and foremost, those in reward, compensation and benefits and mobility must build a process through which to identify potentially impacted employees.
• A historical record of employee movements across borders is simply a must to address the challenges. The records should include secondees and assignees but also local to local transfers too. 
• Work with cross border tax experts and establish how trailing compensation needs to be reported and subjected to payroll taxes in different countries so that the organisation is compliant with payroll obligations.
• Simulate the impact on impacted employees so you can understand and communicate to employees what to expect. The impact isn’t always negative from an employee perspective - depending on the countries and tax rules involved it could result in lower taxes than when compared to simply living and working in one country alone.
• Consider if any of the tax consequences require some kind of policy support or related considerations. For example, an employee could have been subject to 25% tax on a share award that has taken three years to mature. That same award may be taxable at 45% directly as a result of an assignment or secondment initiated by the employer. The employer may now want to consider if they will protect the employee against the increase. Tax equalisation or tax protection may need to be considered.
• Expect payroll processing to become more complex and provide support. Trailing compensation can result in part or whole of awards or payments needing to be taxed and reported in two or more countries. This is usually non-standard processing for payrolls and extra lead times and support are most likely required.

Conclusion

Trailing compensation is a potentially complex area from a process and technical perspective that has clear implications for employer compliance and employee reward. 

Identification of the relevant cases is the starting point. Those involved in global mobility play a key role in identification and therefore the ability of the organisation to have the right resultant processes. 

Alongside the assignment policy, the tax equalisation policy (the documentation of the tax equalisation approach) is a key enabler of employee mobility. The policy usually sits as part of the suite of Reward or Compensation and Benefits policies in an organisation although the Tax Department too can be an owner.

As tax equalisation involves the management taxes due by the company the policy plays a significant role in the financial and compliance management aspects of a mobility programme. These policies drive compensation entitlements and reward and, as such, heavily impact the employee experience too. Given this, it is essential for those involved in global mobility to understand these policies and identify where they aren’t working or require development.

Not all organisations will have a policy in place. This article may prompt thoughts on whether your organisation needs one.

Refresher – what is tax equalisation again?

Fundamental to understanding tax equalisation policies is the concept of tax equalisation. Tax rates and rules between countries differ. As employees become globally mobile they can trigger taxes in other countries. As they do this, two things happen:

• The overall burden of taxes changes. The overall tax rate can go up so the employee is worse off.
• The administration of taxes gets much more complex. New tax filings are required, taxes and payroll are due at the same time in two or more countries and there is a need to understand how the taxes paid in one country interact with taxes due in the other.

To manage this complexity companies often adopt the philosophy of tax equalisation which ensures that the employee remains responsible for broadly the same burden of taxes as if the employee carried on working only in their home country.

A number of policy approaches and practical details are required to underpin this approach and those items are usually found in a tax equalisation policy. The policy helps take the philosophical and conceptual to the practical.

What is in a tax equalisation policy?

The policy is there to support the delivery of a tax equalisation approach. It should answer important practical questions and provide guidance to negotiate ambiguity. These are really key because tax equalisation creates new deliverables, obligations and responsibilities. Each of these requires clear inputs and guidance on a number of important aspects.

As examples:

• Hypothetical tax calculations need to be produced. What gets taken into account?
• Tax Returns have to be prepared. Who should prepare the tax returns and how should personal income in the host country be treated – who pays the tax due, company or assignee?
• Interest and penalties may be due if certain deadlines are not met. Who is liable for these costs?

Tax equalisation approaches very often require the appointment of objective tax advisors who will need detailed guidance on a number of aspects. Tax is a technical issue and the policy usually has to get into some detail around this. For this reason, tax equalisation policies are often closely developed and maintained with external specialist mobility tax advisor support.

To whom does a tax equalisation policy apply?

Tax equalisation policies can apply to any employee group where cross border taxation is an issue. This means it applies to short term and long term assignments but also to commuters and business travellers.

I've also seen tax equalisation policies, or frameworks at least, developed for regional roles and board members where the seniority of roles results in taxation in more than one country.

Tax equalisation approaches can even apply in the same country, the US for example has different tax rates in different states and cities. If at the request of the business the employee has to travel to new cities or states these can materially impact their personal tax liability and with it the payroll obligations of the employer. Some organisations will therefore have a tax equalisation policy of some sort to cater for this State to State scenario.

How detailed or comprehensive should a policy be?

This is a really key point because it really does depend on the business and the size and scale of employee mobility.

It’s really important to note that the level of detail that applies in different organisations and to different groups can differ. This is closely connected with the culture of an organisation as well the level of detail that is practically required.

A lack of detail isn’t necessarily a bad thing. High level guiding principles can be interpreted and applied to new situations. Tax rules are after all constantly changing and updating and maintaining a policy that handles every change can be really cumbersome.

On other hand, detail is generally desirable as the number of employees who are tax equalised increases. The volume of deliverables under the policy for example hypothetical tax calculations, tax returns and tax equalisation calculations can quickly grow. This can be across multiple countries and tax systems. In these scenarios more detail is essential otherwise mobility professionals will spend a lot of time on interpretation and administration. Documenting and agreeing global and local tax positions under the policy can save a lot of time and deliver a consistent employee experience.

What are some main areas covered in a policy?

As covered above, the level of detail is usually driven by the corporate culture and approach of an organisation along with the size and scale of the employee population to whom tax equalisation applies. That said, there are some common items it is useful to include. 

Below are 10 key areas that are often necessary to include.

1. Definitions: Tax equalisation policy and process can involve the usage of a number of technical compensation and tax related terms. It is a good idea to define these so that all are clear on their meaning.
2. Scope and timing: Which sort of taxes does tax equalisation apply to? National, Federal, State, Canton, City? What about social security taxes? When will tax equalisation apply from and to?
3. General principles: Some form of wording that describes the high level purpose of the tax equalisation approach. This is usually that the employee should be no better or worse off from a tax and social security perspective on company income when compared to the liability on a stay at home basis but there are company specific nuances.
4. Process summary: The key steps (deliverables) along the tax equalisation cycle. For example these can include hypothetical tax calculations, payroll deductions, tax briefings, social security certificates of coverage, tax returns, tax allocation calculations and year-end tax equalisation reconciliations.
5. Responsibilities: Statements that set out what responsibilities and obligations fall on the employee, the employer and any third party providers (tax advisors etc.
6. Compensation subject to equalisation: clarification on the different types of income tax are part of the tax equalisation process – salary, bonus, share incentives, pre- assignment bonuses or awards etc.?
7. Personal income: Clarification on how personal (non-company) is dealt with under the policy.
8. Tax refunds and reimbursements: Sets out the basis under which the company may settle taxes in respect of the employee. Usually, there is a statement that refunds or returns tax or reductions in tax liabilities that relate to company paid taxes to the employer.
9. End of assignment: How will the policy work or apply after the end of the assignment. This is a complicated area as some compensation can be paid after the end of the formal assignment but relate back to the tax equalised period (bonus, share incentives)
10. Global and local tax positions: How will tax returns be prepared? How will company and non-company income have tax exemptions allocated to them? What tax deductions will be recognised for the purposes of calculating hypothetical taxes? 

It is worth noting that every £,$,€ that is recognised as a deduction for hypothetical taxes directly increases the tax liability for the employer. The policy plays a key role in tax cost management,

Conclusion

A tax equalisation policy is key in enabling employee mobility in a compliant and cost effective way. Often the global mobility professional is in situations where they have to explain how their company approach works either to the business or to employees. An understanding of the approach is vital to help the business manage risk and cost and ensure the employee experience from a compensation and reward is equitable and holds no surprises.

Dinesh Jangra Crowe  United Kingdom

 

 

Perhaps of all the ‘tax’ compliance related risks those involved in mobility come across the Permanent Establishment (PE) risk is maybe the least well understood. This article should help in changing that. 

For a number of reasons, PEs are ever more in focus at tax authorities at local and international levels and therefore represent a high risk. In addition, more informal and fluid employee mobility that is a feature of the times now can result in more PE risk.

Those involved in global mobility can play a key role in the identification of the issue. As such, a high level understanding is key to enable global mobility professionals to assist organisations in the successful management of related risks.

Context

Before we get into what PEs are let’s look at the backdrop against which they may appear.

Those involved in employee mobility will be well aware that globally mobile employees can result in changes to tax related compliance obligations for the employees and for the organisation. As examples, employees may have changing or new tax filing and payment obligations and the organisation itself may have new and more complex payroll deduction and reporting requirements. 

Obligations for the employer organisation can exist in the home and host location organisations. Although the home and host organisations or entities may well belong to the same global group they are usually regarded as being independent by tax authorities. These entities have obligations of their own to tax authorities under corporate taxes. Just as employees can trigger tax implications through their presence or residency in a country so can these corporate entities.

The PE issue relates to the home employer organisation. In the context of global mobility it is a taxable presence of the home employer (for corporate taxes) in the host country caused by the presence and activity of the employee or a group of employees over time.

What types of employee mobility are highest risk?

In theory, any kind of employee mobility scenario can give rise to a PE risk in the host country.

That said, a lower risk scenario is where an employee is sent from one entity (home entity) on a formally documented secondment/assignment to the host entity and all the duties that then follow are performed for the host entity only. Not all employee mobility fits this scenario. As a result, the follow types are among those that require attention.

• Employees working in a country where the employer and/or group has no corporate presence at all.
• Business visitors.
• Multi country or regional roles.
• Senior executives or management who perform duties outside the country in which their employer or organisation is desired to have a corporate presence.
• Commuter roles.
• Assignees/secondees who do not work exclusively for the host entity alone.
• Employees who work from home offices, or other (none office) places of work.

What are the implications of a PE?

Unexpected costs, management time and effort and reputational risk can follow when employees create a taxable presence of the home employing company in the host country.

Where this occurs, the employing company (home employer) can (unknowingly) become liable to foreign corporate taxes in respect of the profits that relate to the overseas activity. In addition, foreign tax filings can be triggered and require attention.

Unfamiliarity with local tax law and compliance requirements in the foreign country can make this a difficult process to manage (or to even identify in the first place).

The cost of non-compliance with corporate related tax obligations in the foreign country can become significant with the addition of interest on unpaid tax and related penalties. These costs can quickly rise again if there are a number of years or even multiple countries involved. As well the tax dues, corporate taxes related registrations, tax returns and other filings can also be required.

Alongside considerable management time and energy that is then required to put things right there can also considerable professional advisor costs related to bringing the compliance up to date. At the risk of stating the obvious, this can all come as a nasty and costly surprise to the business.

What gives rise to a foreign taxable presence?

The existence, or not, of a PE in a foreign country is often difficult to determine as the rules are complex and their interpretation is frequently subjective.

Consideration should be given to the risk of creating a foreign taxable presence whenever employees are globally mobile. Issues to be considered should include:

• What activities the employees will be performing and in respect of whom whilst working abroad?
• What is the nature and location of the “operational base” where the work will be performed?
• What management authority or capacity do the employees hold?
• How many employees are being sent abroad to work on a particular project or over a period of time?
• How long will they be “in territory” individually but also collectively?
• How are employees representing themselves on business cards and letterheads, what addresses do they use and which employer appears on them?

Situations which may give rise to a taxable presence in a host country when employees are globally mobile include:

• The creation of an office (even at the customer site) to service local customers or clients.
• The creation of a manufacturing or servicing facility.
• Sending engineers to service / repair / install a customer’s production facility over a period of time.
• Conducting marketing research / gathering market intelligence for third party clients.
• A common scenario which can potentially give rise to a foreign taxable presence arises where a salesman or sales team has the ability to conclude sales contracts in a foreign country.

The phrase “the ability to conclude sales contracts” is often difficult to interpret. The concept of ‘concluding’ in this context is not limited to the act of just physically signing a contract but also includes the negotiation of contract terms leading up to the formal signature. This can be the case even where the contract is referred back to Head Office for ‘rubber stamping.’

If a foreign taxable presence is created, it will then be necessary to determine the profits on which corporate tax is payable in the foreign country. 

In recent years, many countries have developed steps to counter international tax avoidance which will make it more difficult to avoid the existence of a taxable presence in a foreign country.

Conclusion

PE isn’t always the best understood risk in the area of employee mobility – a high level understanding, however, is a must.

Those involved in global mobility are often in a unique position to spot that the issue may exist in a particular work arrangement or project. Once identified, close collaboration is required with the Finance and/or Tax department of the organisation to understand how to assess and best manage.

Proactive management is key. With careful review and planning, it can be possible to avoid a PE in a particular country through reviewing what duties are performed and not performed there. Equally, if a PE is to be created then getting ahead to enable timely compliance can bring with it much reduced costs and management attention than when compared to a non-compliant scenario.

Three key steps to keep front of mind:

• Identify and monitor relevant employee staff visits and their duration.
• Identify the nature of the activity which is to be undertaken abroad.
• Assess whether there is a risk of creating a foreign taxable presence and whether this can be mitigated or proactively managed for compliance.

Dinesh Jangra Crowe United Kingdom

 

 

Net to gross calculations are often referred to when mobility interfaces with Finance and/or payroll. 

As these terms are not part of everyday language there can be a bit of mystery around them. That said, they are important concepts to understand to enable the business to make the right provision or accrual for the costs of globally mobile employees. After all, nobody likes cost surprises. Equally, most tax authorities require reporting through payroll or tax returns of the gross compensation. So for compliance it’s important to know the gross amount.

Net to gross calculations are also important from a compensation and benefits perspective. 

Terminology

Critical to understanding this area are some crucial terms - and net Gross is the amount of pay before taxes are deducted. Net is what's left after taxes are applied/deducted. From a finance perspective the gross is the cost to the business and the number that probably needs to be reflected in payroll reporting.

Context

When organisations look at compensation in the context of employee mobility two key concepts have to be thought through.

• The first is what do we pay the employee - what is the right salary?
• The second is what is the impact of tax changes between countries and how does that impact what the employee would really receive after taxes?

As a result of thinking through these concepts organisations often decide that the employee should receive a net pay entitlement. In other words, a certain amount of compensation after taxes (a net pay scheme).

Net pay schemes

The net to gross calculation is a sort of backwards tax calculation.

Rather than starting with gross pay and deducting taxes, the starting point here is the net pay. For example an organisation may establish the employee should receive EUR 4,000 a month after taxes. To process the payroll and understand the real cost they need to understand real gross compensation. The net to gross calculation establishes what gross would be needed to deliver the EUR 4,000. This could look as follows:

Gross compensation Income tax Social Security Net compensation

10 - 4 -2 4

The business and the payroll now understands the amount to report and accrue for costs is 10.

These calculations are not straightforward and usually require some expert support because (amongst other things):

• The payroll system can’t always do this backwards calculation from a capability perspective. Globally mobile employees can be a very important employee subset but are usually small in number and payroll is set up for the rest, the vast majority of the employees who are paid gross.
• Equally, the local tax system may have a number of deductions, exemptions or tax reliefs that have to be applied and these can often vary at an individual level. The tax residency and status of the individual has to be determined.
• The calculation involves 'grossing up'. As the taxes due are actually payable by the employer, they then constitute further compensation on which tax is then due - the tax on the tax conundrum.
• Often, the taxes due are not due just in one country and are not just of one sort (social security taxes as well as income taxes may apply.

Benefits

Alongside cash globally mobile employees often also receive benefits such housing, medical, education and allowances. They may also continue to participate in pensions etc. in their home country. These benefits may also be taxable in the new country in which they are working so it is necessary to understand what the true cost of delivering these benefits actually is (again, so that right cost accrual can be made). Here again, a net to gross calculation can be prepared to understand the total cost to the employer (inclusive of taxes).

Employees don't expect to pay the tax on assignment benefits or pay tax on compensation that is not taxable in their home location but is in the host. This extra cost usually passes to the employer.

Target nets

A final common use of net to gross calculations can be in the compensation and benefits area. It can be relevant where employees are moving on a local to local basis. In these examples, the employer or employee has a target net in mind (after taxes) and needs to understand what the gross should be. Again, it’s a sort of backwards calculation.

The different between this and net pay schemes (above) is that no grossing-up is needed as the employee is paying the taxes due themselves.

Conclusion

Net to gross calculations play an important role in cost management and compliance in relation to globally mobile employees.

They can be technically difficult to perform but once done provide important management cost information for the business.

These calculations can be an important input and part of assignment costings which can be used to get approval for an assignment to go ahead from management.

The net to gross calculation establishes which compensation or benefits items are taxable and which are not. This leads to good questions like can similar value to the employee be delivered in a way that isn’t taxable to the employee or perhaps taxable in a more favourable way. This is the starting of tax planning and can be a real game changer from an assignment cost reduction perspective.

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Gerardo Mendoza Crowe, Mexico

 

Business travellers are a real hot topic in Global Mobility, HR and Tax. As it is a hot topic, it is essential that those involved in employee mobility understand the key issues. 

Why is knowledge of this area important?

The business will often turn to those handling employee mobility to lead and guide them on how to manage business travellers (whether or not they are formally part of their remit). This is because key to successfully managing the issues is the technical knowledge, process and policy expertise that supports general employee mobility. Those who handle employee mobility may want to consider proactively volunteering to define and co-develop how to manage business travellers. This way, they get to influence and co-design the process and ensure it does not create unnecessary extra process or workloads. 

What are business travellers?

Organisations will have employees who are on assignments, secondments or other forms of structured employee mobility such as commuters or local transfers. The structure that supports these moves will usually result in some compliance steps that assess and manage immigration, payroll, social security and tax obligations. Typically, for these moves someone in the organisation with the right experience and the right knowledge is involved. Business travellers can be very different.

Business travellers are the informal employee mobility in an organisation. This travel happens organically as and when the business requires it. It can range from a single business trip to an ongoing project in a new location or even a change in role where the employee is regularly required to work elsewhere (for example a regional role or an appointment to a Board in another country). These cases are not always managed by those managing the formal mobility in an organisation so this creates real risks for the business.

I would say business travel risks also exist in formal mobility scenarios. I call this the third country workday scenario. For example, say there is an assignees who has been sent to work from the U.K. to South Africa. Due to an opportunity or project the assignee starts to spend time working in Kenya. Kenya is a third country and care is needed to check what compliance obligations there may be there because the structured focus may very well be only on the home and host (UK and South Africa).

Why are business travellers a topical issue?

This is partially because there is a real focus on this area in payroll audits - a trend that is rapidly gaining momentum globally. Another reason it's topical is because tax and fiscal authority audits are leading to actual fines and reputational damage. Some well-known organisations have been fined in this area in a number of countries.

New ways of working and technology are enabling work anywhere options. With such flexibility comes added risk as where work is physically performed can get disconnected from the country of employment and payroll.

What obligations and risks are associated with business travellers?

This could easily be a very long list. Overall, it is all about cost, compliance and business disruption.

I usually think about the considerations in three broad buckets. 

Tax matters: Is payroll reporting required? Where is social security due - how can dual liabilities be avoided? What tax filings does the employee have to file? Is the employee giving rise to a presence in the other country that could trigger corporate or sales tax obligations? Are business travel and accommodation costs taxable - are there surprise extra costs here?

Legal matters: Does the employee hold the right work permission/ visa to legally work in the new location? Are there any reporting, registration, notification or compensation payment obligations under local rules and the Posted Worker Directive in Europe? Can the employee acquire rights under local labour law - how can this be mitigated?

Operations, welfare and wellbeing: What additional payroll processing and reporting complexity is there - can the systems cope? What disruption to clients and customers and ultimately the business is there if the employee is refused entry or denied departure? Can you quickly identify where employees are in the case of an emergency? Do you know the impact continuous and extended business travel is having on employee wellbeing and welfare?

Why are business travellers challenging?

Technical issues often need bespoke analysis at an individual level across areas like immigration, tax, payroll, tax, employment law and social security. The following are also real hurdles to cross;

Fluidity: The challenge around managing business traveller risks is strongly connected to the fluid nature of those undertaking business travel. A business trip or two can quickly become an extended work period that triggers compliance. If you don’t have reliable start and end dates how you can assess compliance? How do you know a person actually came back and when? There could also be gaps between trips but to assess compliance you have to count all previous trips - how do you get this data?

Ownership: Organisations do not always find the business traveller issue drops nicely into a single function or team remit. This means that cross function communication and collaboration is key to identify owners and stakeholders. This can be a complex and time consuming process. 

Reactive approaches: I often hear that organisations don’t feel action is needed because nothing has gone wrong. I would always add ‘...yet’ on the end. The mindset should be around proactively preventing issues rather than mining for issues or waiting to fix them once they’ve occurred. This is a real issue because securing spend to invest in managing the issue is not easy if nothing has ever actually gone wrong...yet. 

Data and process: Managing the issues will often have dependencies on good, clean and reliable travel data, collaborative travel providers and systems and good process across jurisdictions. This simply isn’t how the status quo may be - so taking action becomes difficult whilst risk mounts up. 

Conclusion

Awareness of the issues and recognition of them is a key first step to managing business traveller risks. Those managing mobility manage similar risks in more structured scenarios so have the expertise to be real leaders in this area and shape how organisations respond.

Some key actions could be:

• size the issue - how prevalent is it - what’s at stake? Does the risk indicate action is required?
• clarify ownership- who needs to be involved and who needs to be consulted? Most importantly, who will drive it?
• review process and technical solutions - what technology and external support is needed? Understand total costs of ownership. There are lot of business traveller tracking tools on the market. Recognise that the cost and effort needed in implementing a system is part of the overall investment or annual cost. A system may now identify new compliance requirements - tax returns, payroll set ups, certificates of coverage, immigration applications and so on. It's important to understand and factor in these downstream costs too so the business has the complete picture in terms of cost and resource requirements.

Dinesh Jangra Crowe LLP United Kingdom

 

 

Those managing and involved in global mobility will be well aware that employees working in new locations result in changes to compliance obligations for both the employee and the employer. Understanding these changes and managing them is key in managing mobility related risk. Double tax treaties play a role in establishing some criteria that can reduce the complexity and compliance obligations in short term secondments and assignments. As such, an understanding of how they work at a high level is essential. Double taxation treaties are often referred to as Double taxation agreements and tax advisors often also refer to them as DTAs and DTTs. 

Introduction

A Double Tax Treaty is essentially an agreement between two countries which has an overall goal to avoid taxation of the same income twice (double taxation). Double taxation would be an issue for employees since it could significantly alter their net pay after tax and result in significant extra costs for employers.  These agreements are also commonly referred to as ‘double tax agreements’ or simply ‘tax treaties’.

Each country has their own tax system and their own tax rules (domestic rules). Tax Treaties sit across the top of these domestic rules and can override them. In addition to eliminating double taxation, tax treaties also facilitate the exchange of information between tax authorities and provide the framework to prevent tax evasion and the resolution of disputes between countries (for example - which country should tax which income or gains when both technically can do so under their domestic rules). 

To eliminate double taxation, tax treaties provide different rules for different types of income and receipts such as capital gains. They provide for the allocation of taxing rights between countries. However, tax treaties do not create a tax liability if under the domestic tax law of a country a liability does not exist. 

Countries normally use model tax treaties as a framework for negotiating, concluding and revising tax treaties. A model tax treaty is provided by the Organisation for Economic Co-operation and Development (OECD). The model tax treaty is widely used in negotiations by both member and non-member OECD countries. 

How are Double Tax Treaties used in practice?

The countries of the world do not have a uniform tax system. For example, some countries tax income that relates to that country and others tax all income, regardless of where it arises.

As a result, you can have employees who are resident in the country in which they are employed (country 1) but are required to travel to other countries (country 2) to perform work. Those duties in the other country could then be taxable there. The result, there can be taxation on the same income in both countries. 

Where there is a tax treaty between the two countries this double taxation could be eliminated provided certain conditions are met. This can result in no income tax in country 2. This is normally only applicable in the course of short periods of work such as projects. Where income tax in country 2 can’t be eliminated (because the conditions are not met) then the same treaties can provide the basis for a tax credit - effectively meaning tax is not paid on the same income twice. 

Countries usually need to connect an individual to its tax system before it can tax them - otherwise everyone would be taxable everywhere. Tax residency is usually a key connecting factor - others include nationality or immigration status (as is used by the United States). In cross-border employment scenarios it is not that uncommon that an employee will become resident in two countries. When this happens it is necessary to apply residency tie-breaker rules to determine where the individual is resident in order to apply the provisions of the tax treaty.

Conclusion

Global mobility professionals and those involved in managing cross border employees work require a high level understanding of tax treaties. The rules in those treaties can simplify or reduce compliance in situations where employees are working for a relatively short period in other countries for example less than 183 days (although there are other conditions to be met and exceptions such as Directors and Economic Employers to check). 

The key point when managing cross border employees is to work with the business to highlight if managing the employees’ presence in a country as well as the finance set up (which country bears the costs for the employee) can reduce compliance and related costs that often the business would not have built into the overall project.

Sivakumar Saravan Crowe, Singapore

 

Human Resources and Mobility professionals can come across employees who have Directorships. These types of employees can very often give rise to different kinds of compliance and reporting obligations. As these employees are often senior, it’s all the more critical to identify payroll and reporting obligations early. The very nature of their roles means their appointments are matters of public record and can be easily uncovered by fiscal and tax authorities. This makes them a particularly risky group of employees. 

Context

Often global and multinational groups and businesses operating all over the world, will have local companies or entities in different countries. It is not uncommon that these local entities then have Directors who do not live that country - Non Resident Directors. These Directors are appointed either because HQ wants to retain some oversight and operational control or because they have specific skills and knowledge that are crucial to the successful operation of the business locally.

Taxation

The key thing here is that exemptions that may apply for normal employees may not work. The commonly known 183 days rule doesn’t always stop payroll or taxation for Directors. Here is why. The basic principle is simple and laid down in Article 16 of the OECD Model Tax Convention (that regulates and influences how countries tax) stating that:

"Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State."

This means that a director is taxed in the country where the company for whom he performs his Directors duties is situated. Physical presence in that country (by the Director) may not even be required.

In practice however the practical application of the relevant rules vary from this simple starting point. These variations can result from:

• the nature or legal form of the companies concerned
• the nature of the duties/ roles exercised: directors, liquidators, persons with ‘similar functions’, leading functions of day to day management or of a commercial, technical or financial nature,
• whether the Director is treated as employed or self-employed under local rules.

In respect of the final point, there is often a misconception that someone who deals with the day-to-day management must be an employee, whereas in practice this is not the case.

To complicate things a little more, there may be a need to establish what compensation relates to specific Directors duties and what compensation relates to general duties performed in the country - the tax / payroll treatment may be different.

As a result, tax technical analysis is recommended to verify the applicable domestic and relevant double tax treaty rules.

It should also be noted that when a non-resident director is taxed in the country where the company is established, it is possible that they will also be taxed in their home county. Double taxation may apply and this will be need to be resolved.

Social security  

Social security is a key cost and payroll related tax for employees and employers. For social security purposes, contributions in principle need to be paid in the country where the duties are performed.  

In the case of non-resident directors, we quickly find situations of simultaneous duties in two or more countries. The question then arises under which social security system the does the director fall?

Within Europe, the cross border social security rules need to be analysed to determine where (in which country) contributions are due. 

Other bilateral agreements between countries can also regulate where contributions are due. 

However, in case there are no agreements between the countries where the director performs their duties, it is possible that the director (and their employee) will need to pay social security contributions in two (or more) countries. This can result in duplicate costs and additional compliance reporting. 

Labour law

Consideration should also be given to local employment/labour law. A Director may require a specific local form of Directors service agreement that requires specific local clauses or obligations. This should not be overlooked. 

Conclusion

Non-resident Directors represent a highly visible but complex class of employee for compliance. They are often senior executives, well compensated and therefore present a high risk. 

Most HR and mobility professionals will want to ensure that this class of employee is compliant in all locations they are working. Key to this is understanding the different issues involved and working with the business to ensure they are reviewed with experts and any arrangement is compliant and cost effective. 

Marc Verbeek Crowe Spark, Brussels

 

I often hear organisations talk about how they opt for a commuter role rather than an expat or relocation move because it keeps things simpler.

This expectation however is often misplaced as commuter roles have the potential in some ways to be more complex from a compliance perspective (payroll, tax and social security). It’s important for Mobility / HR and Tax professionals to understand why so they can guide the business accordingly.

What is a commuter?

Let’s define what we mean by commuter. A commuter is an employee who lives in one country, is employed there but is required to work regularly in another country. There could be a weekly or a monthly pattern but what’s key is they are required to be outside their home country on a regular basis – it’s not just a business trip. No relocation is involved, the family, the family home and payroll remain in the home country.

For many reasons commuter roles have definitely been on the rise in recent years. Some of the key reasons include roles becoming more cross border in nature and the perception that commuter roles are viewed as cost effective alternatives when compared to expat roles. Brexit has been another trigger – presence is required in countries for regulatory reasons but the employee is settled at home (UK) so starts to commute.

Why can they be more complex?

To understand why a commuter can be more complex from a compliance perspective we probably need to understand why a typical expat assignment can be less so. In an expat scenario, or even a permanent transfer, there is usually a relocation. That relocation, family and home moving, often means the employee breaks tax residency in the home country. As a result, tax and payroll can over time primarily be a focus in the host country.

Commuters often stay tax resident in the home country – so there is payroll, income tax and social security potentially in both countries. Once worked through, cross-border social security rules can mean the social security is due in one country only but you are then still left with dual payroll and income taxes. The result is payroll gets very complex with specialist knowledge and adjustments being required to prevent double tax withholding and the income tax filings and liabilities for the employee get ever more complex.

The home country employer may also need to register in the host country for social security or payroll taxes. There are also related considerations around immigration, employment law, corporate tax permanent establishment and regulation such as posted worker directives to consider too. If that wasn’t enough to think about, it’s also necessary to check how travel, accommodation and subsistence costs are taxed in both countries. These are very often reimbursed or paid for directly by the employer so if they become taxable there can be hidden tax liabilities that can be unwelcome surprises and costs.

What tips are there?

There are solutions and methods to manage the complexities around payroll and taxes but early analysis is absolutely key. This way you can help the business understand the potential changes in obligations that can be triggered. The analysis may also help in identifying the compliance triggers in the host country, for example a certain number of days worked each year. The arrangement can then be structured or managed to either avoid tripping those triggers or at the very least the business is fully aware of what it is signing up for with the related additional complexity and costs.

Dinesh Jangra Crowe United Kingdom

 

For some, this is an area where just the mention of it can start to cause confusion. I am hoping therefore this is a useful write up. First of all, I will mention that often an abbreviated form - just FTC is used. Tax experts often refer to foreign tax credits as ‘FTCs.’

So what are FTCs and why do they occur?

When employees work across borders they may trigger taxation in more than one country – the home as well as the host country (for example). Let’s call home (Country A) and host (Country B). When taxation has been triggered in both countries income tax may become payable in both locations. It is not uncommon that one of the two countries (say Country B) taxes all of the income including the income taxed in Country A. In effect we have what is known as double taxation. Income tax is due on the same income in two different countries. Income tax is due in Country B on everything and in Country A as well (usually on a smaller portion of the income).

Double taxation, of course, would be unfair and would be very costly and demotivating to globally mobile employees. In a number of scenarios, such as where tax equalisation applies, the tax liabilities are transferred to the employer. This double taxation then becomes a potential cost to the employer.

Tax systems recognise that double taxation would be unfair. For example, if Country B charged tax of 25 on income of 50 and then Country A charged tax of 15 (on that same income of 50), then we have total tax of 40 or a tax rate of 80%. In response to this tax systems usually provide some mechanism to remedy this double taxation. One such mechanism is foreign tax credits. Where allowed, a country would compute the tax liability due but then give a “credit” for the tax paid in the other location.

Developing the example we had earlier:

• Country B tax is 25
• Country A tax is 15
• Country B tax due is 10, (25 -15).

Country B has given a “foreign tax credit” so that the Country B tax due is reduced and double taxation is remedied. It’s not exactly this simple as the workings and calculations are significantly more complex and involved but this illustrates the point,.

Foreign tax credits are quite common in the area of mobility because often tax is driven by economic activity (as one example) and the employee is working in more than one country. Another cause can be compensation that is earned over multiple years – bonuses or equity compensation as examples. The employee may have worked in more than one country during the period to which these earnings relate so more than one country taxes and one of the countries taxes it all.

The double taxation issue can also be very relevant for payroll, after all no employer wants to pay payroll taxes on the same income in more than one country. Tax experts usually find ways of resolving this but it requires detailed knowledge of local and cross border payroll and mobility taxes.

In general, foreign tax credits are usually best left to be managed by tax experts as they can get complex quickly. That said, it is important for those working in the area of mobility to understand they exist. If you are told tax is due in more than one country on the same income, then a fair question is to check how is that resolved. Is a foreign tax credit available? If you are told that there are payroll obligations in two countries it is fair to ask if there are payroll taxes on the same income that will be costly for you as an employer. Again, a fair question is whether a foreign tax credit (or something similar) is available to resolve the double payroll tax?

The foreign tax credit is one of the ways in which double taxation is managed.

There are other methods – exemption for example, but this is not covered here.

Dinesh Jangra Crowe United Kingdom

 

Social security is part of the payroll obligations that an employer has and usually consists of an employee and employer component. Like taxes, social security rates differ by country. It’s also important to note that in some countries social security is closely connected to the concept of pension and other related benefits so the ability for the employee to continue to pay into their home country social security system can be a key (and sometimes even an emotive) issue.When an employee from one country is sent to work in another country their compensation can be subject to social security taxes in both countries – so social security is due in the home and the host country (a double cost to the employee and the employer). To eliminate these dual costs a number of countries have signed agreements referred to as social security 'totalisation' agreements. The agreements usually clarify in certain situations the single country in which social security is due and provide a mechanism through which payments made in one country can be recognised in the country.In most agreements, if an employee is sent to work by their employer in another country for up to five years and they continue to be legally employed by the home country employer then home country social security only can be due. 

There are a number of detailed considerations that also have to be checked and worked through. Once worked through, the employer and employee can then apply for a document called a Certificate of Coverage from the social security administration of the home country. This certificate of coverage serves as evidence that an employee, an employer, or even a self-employed worker is subject to home country social security and there is an exemption (in part or whole) from contributing to the social security system of the host country. From a payroll compliance perspective this document is absolutely key. The employer in the host country needs to be able to demonstrate the basis on which social security in the host country is not paid. Payroll audits by local tax/social security authorities often ask for copies of these certificates and in their absence can insist the host social security is paid (a double cost).Within Europe, the certificate of coverage concept is usually is governed as part of the European social security rules which can result in a different document called an A1. We will deal with this separately.

 

Nupur Rishi  Crowe MacKay Canada

 

Tax protection is one of a few responses available to employers to help manage the challenge of differing tax and social security rates between countries. 

Different countries of course have different tax and social security rates so the net pay to the employee or assignees (after taxes) can change as they work in a new country. This change can become a barrier to mobility from an employee perspective as it adds complexity and uncertainty as well as changing net pay. We’ve discussed tax equalisation separately- this seeks to neutralise any differences – so the employee is no better or worse off. Tax protection, on the other hand, seeks to “protect” against any increases only. Consequently, the employee can therefore be better off, but should not be worse off (from a tax perspective)

For example, say the tax rate in the home country was 35% but it was 39% in the host country. In this case the employer would effectively settle the 4% extra tax under tax protection. Similarly, if the tax rate in the host was 29% then no employer assistance would be required.

This arrangement is usually deployed by employers where they recognise the tax differences issue, or there is double or multi-country taxation but they don't want apply a tax equalisation approach. In theory, it also allows the employee to benefit from any local country tax breaks which can be an incentive to take up the assignment. Usually, tax protection is part of a gross pay approach (so employee settles the taxes due) and then a reconciliation can be prepared to review if tax protection has in fact been triggered. Sometimes these reconciliations are prepared as standard each year and other employers prefer to have them prepared “on request” (employee has to request or they are prepared for certain employee categories only).  Whilst this approach may seem like it is “light touch” from an employer perspective my experience is it can actually get complex quickly. The tax is due by the employee so they usually become very focused on the amount and timing of taxes due in all locations to understand if they are worse off in any way. As a result, the requirement for line management /HR and expert support can increase.

 

Dinesh Jangra Crowe United Kingdom

 

Different countries have different tax and social security rates. If an employer sends an employee overseas for a work assignment, the new work location may result in different tax rates being applied so the take home pay after taxes could be different.

The purpose of a tax equalisation approach is to neutralise this and ensure that the employee is no better or worse off from a taxes perspective.

The approach usually (but not always) applies to stay at home compensation only. Personal and non-company income is usually (but not always) outside this arrangement.

The administration of the process involves the deduction of an estimated notional/ hypothetical tax from the employee. The actual taxes payable on company compensation then become payable by the employer. The estimated notional/hypothetical tax is then reconciled each year. Tax equalisation approaches enable and promote employee mobility.

Dinesh Jangra Crowe United Kingdom

 

Shadow payrolls are a key concept for those involved in mobility to become familiar and comfortable with.

They are an essential mechanism through which payroll compliance is delivered. An understanding of why they are used is essential so that those managing mobility can partner with the business to ensure it remains compliant and explain how process will work.

Increasingly, fiscal authorities are very well aware that globally mobile employees receive compensation from a number of sources (which makes compliance more complex) so this is often an area of specific scrutiny in payroll audits.

When might a shadow payroll be required?

The scenario that gives rise to a shadow payroll is usually as follows:

•  An employee is working in, or is assigned to a new country or even state.
• They continue to be paid, ‘on payroll', in their home location. However, a payroll obligation for the employer is triggered in the new country or location.
• A solution is now needed to ensure the employer can meet its obligations in the new location - that solution is usually shadow payroll.

What is a shadow payroll?

Essential to understanding what shadow payrolls are is reflecting upon what role traditional payrolls perform first. A payroll probably performs five key functions:

1. Pays the employee money into their nominated bank account
2. Determines and deducts tax and social security amounts due by the employee
3. Determines the employer payroll taxes due - for example employer social security
4. Reports wages, taxes and social security to the local tax/ fiscal authority - employer then pays these over
5. Provides a mechanism to maintain participation in certain benefits (for example - pension).

A shadow payroll is used in a country where there are payroll obligations (B, C and D above) but either no payment is made locally or only part of the overall payment to the employee is made locally. Often no payment is made so is for this reason the terminology 'shadow' is used, it’s not a real payroll as no payment is made but tax reporting and payroll taxes compliance is delivered. Essentially what has happened is we’ve recognised that the physical payment (A above) and the compliance aspects (B,C,D) can be split.

What should shadow payroll include?

Critical to getting the shadow payroll right is the visibility and flow of global compensation. Globally mobile employees could be being paid by their employer in two countries and often other compensation items are provided by or delivered through third parties (relocation and destination services providers).

The starting point for shadow payroll should be all global compensation (regardless of who paid it and where) and then based on the individual employee tax status some or all of those items may be subject to tax and social security deductions, taxes and reporting.

Shadow payroll delivery can be a highly complex area of mobility support because it requires optimised compensation data flows, cross border tax technical knowledge but also because it is payroll there are often tight deadlines to regularly meet. Often, this support is outsourced by organisations.

The shadow payroll is required only in the host country, right?

I'd love to say it was that simple but the reality is the answer is it is probably required in both locations.

The shadow payroll in the host would be the 'new' payroll but some 'shadow' type adjustments are probably required in the home country too. Let me explain using an example:

• The overall compensation package for a globally mobile employee is usually higher than the normal stay at home compensation. For example extra allowances and benefits may being delivered.
• These allowances and benefits may be being paid elsewhere (so not through the home payroll). However, this extra compensation is still subject to employer and employee social taxes and/or wage taxes.
• If the overall package was say US$200k but only US$120k was being paid through the home payroll then the additional US$80k now needs to be reflected for compliance through the home payroll.

Complications and challenges

To be truly compliant, there is often a need to provide the overall global compensation picture to each country each month to calculate the right payroll taxes due.

The problem is the payroll taxes themselves can actually constitute compensation so there now has to be some method to connect the home and host payrolls. For example the payroll taxes due in host on the shadow payroll are subject to home country social security. This can be a real challenge purely from a data and timing perspective.

Another challenge is the multiple of different sources of compensation -home and host payrolls, home and host expenses and benefits, relocation and destinations services. There has to be a good process to globally accumulate all of this compensation to enable the correct reporting.

Once collated, the compensation has to then be analysed to check what items are subject to tax and social security deductions, taxes and reporting. Often, the answer here is very much dependent on the country combination and the individual tax status of the employee.

I won't go into detail on the next challenge which is grossing up of compensation. This effectively means the shadow payroll has to be operated on basis that the employee is on a net pay scheme so the payroll has to perform net to gross calculations. Often I find this is not a calculation the payroll system was designed for. Therefore, the can be significant complexity at the payroll operational level too. 

Conclusion

Shadow payrolls play a very important role in enabling employers to be globally compliant in respect of mobile employees.

Critical success factors to facilitate a good process that doesn't become overly expensive or burdensome are technical know-how, data and process management. If these areas are not addressed, compliance can be a challenge and the burden in terms of workloads for Mobility, HR and Tax professionals can quickly reach unexpected and undesired levels.

Changes to the 30% ruling have been proposed in parliament. After the already announced cap on the 30% ruling that takes effect on 1 January 2024*, two new amendments were adopted (still to be adopted by the Senate).

Degression percentage

The first amendment stipulates that as of 1 January 2024, the amount that can be provided as a tax-free allowance for costs of living outside the country of origin (the 30% ruling) for expats can be set at a maximum of:

• For the first 20 months 30% of the taxable income.
• For the next 20 months 20% of the taxable income.
• For the last 20 months 10% of the taxable income.

For employees who have the 30% ruling in December 2023, a transitional regime applies and the new rules do not apply.

Abolition non-resident taxpayer treatment

The second amendment that was adopted is the abolition of the possibility to opt as a non-resident taxpayer as per the 1 January 2025. Employees with the 30% ruling can opt to be treated as a partial non-resident taxpayer in their annual Dutch income tax return for their Box 2 and Box 3 income. As a partial non-resident taxpayer the employee is not taxable in the Netherlands on his Box 3 income for savings and investments, except for real estate located in the Netherlands. For Box 2 income the non-resident employee is taxable in the Netherlands on the income from substantial interest (>5% interest) only if this is held in a Dutch entity. As a consequence of the abolition, the personal tax liability of the expat may rise. For employees who have the 30% ruling in December 2023 latest, a transitional regime applies. They can still opt to be treated as a non-resident taxpayer up to the 31st of December 2026.

US nationals

For US nationals (or green card holders) with the 30% ruling, additional tax consequences may arise with the abolition of the possibility to opt to be treated as a non-resident taxpayer, due to the specific tax treaty policy with the US.

Conclusion

The limitation of the 30% ruling is a drastic change that will make the scheme less attractive for expats and will lead to an increase of the administrative burden in the salary administration. To benefit from the transitional regime, new upcoming employments with expats should preferably have a commencement date ultimately December 2023 rather than 2024 (if possible, preferable, and feasible). Please contact your contact person within Crowe for more information.

*The 30% ruling can only be applied up to until the WNT-cap of the applicable year. This will be € 233,000 for 2024. The capping measure will be applied from January 2026 instead of January 2024 for employees who already had the 30% ruling included in the December 2022 payroll administration. For employees who applied and were granted the 30% ruling in 2023 the capping measure should be applied in the payroll administration as of January 2024.

Roeland van Esveld Partner, Global Mobility Crowe Foederer Amsterdam [email protected] +31 (0)6 - 13 96 89 83		Rens van Oers Partner, Global Mobility Crowe Foederer Eindhoven [email protected] + 31 (0)6 - 30 70 94 20

This week Deepika Chandak from Crowe UAE, evaluates the impact of Double Taxation Agreements (DTAs) on individuals in the UAE in an evolving Global Mobility context.

Why are DTAs important for individuals in the UAE?

As businesses face the lasting effects of the ongoing COVID-19 pandemic, they have witnessed a fundamental shift in how global workforces operate. What they are currently experiencing is a redefinition of how and where employees work. In this highly unstable global context, tax treaties play an ever-important role in the protection and enforcement of taxpayers’ rights.

Among the key relevant considerations for workers performing their duties abroad, we find the issue of determining how their income will be taxed. DTAs help individuals to avoid issues related to double taxation, to provide tax advantages in both contracting States and to serve as an effective solution to international tax evasion. Finally, DTAs provide individuals with tax certainty of treatment for cross-border trade and investment.

Sample case: Protocol Amending the UAE-Austria DTA

What is the Protocol’s impact on the individuals in the UAE?

The most recent amendment of the DTA between the UAE and Austria, was made through the Protocol signed on 1 July 2021. The Protocol will enter into force on the first day of the third month after the ratification instruments are exchanged and will generally apply from 1 January of the year following its entry into force.

For the purposes of this article, we will only mention those amendments that are specifically relevant for individuals working in the UAE:

• Article 24: Method of Elimination of Double Taxation
• Article 28A: Entitlement to Benefits.

Article 24: Method of Elimination of Double Taxation

This article is updated in respect of Austria, providing that Austria will apply the credit method for the elimination of double taxation instead of the exemption method, as provided under the original DTA. As such, the UAE-sourced income will be subject to tax in Austria, but the taxes paid in the UAE will now be allowed as a deduction against the tax payable in Austria.

Until now, Austrian tax residents did not have to pay taxes in Austria for income that was only taxable in the UAE. With the new Protocol, Austrian tax residents are allowed to deduct the tax paid in the UAE from the income tax paid in Austria. However, as there is currently no Federal Income Tax in the UAE, this translates to a 0% deduction and full taxation in Austria.

Article 28A: Entitlement to benefits

This is a new provision in the DTA which introduced the Principal Purpose Test (“PPT”). The benefits provided by a DTA will not apply if there is evidence to conclude that the application of those benefits was the principal purpose of the transaction. Therefore, the tax authorities could deny its application if the purpose of the taxpayer was to obtain a benefit from the application of the Tax Treaty.

As such, individuals will not be granted the benefits under the UAE-Austria DTA if it is reasonable to conclude, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. This is unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Treaty. Individuals should therefore maintain sufficient documentation to justify the genuineness of their arrangement or transaction.

What’s next?

DTAs are particularly important for individuals living and working in foreign countries and jurisdictions. Most DTAs are updated and/or amended periodically. Therefore, companies with staff who may be affected by this change, should ensure that they monitor the developments in the relevant DTAs and see how they can impact them.

Crowe can help in determining the impact of any DTA changes onto individuals and in analysing how individuals can benefit from the amended DTA. Get in touch with Deepkia Chandak or your usual Crowe contact.

Background

Remember Brexit? It was once one of the most talked about news item in the UK, until the pandemic.

Brexit had an impact on the operation of social security for globally mobile employees to/from the UK and EU. With the UK no longer in the European Union, employers and employees in the UK could no longer rely on the EU Regulations 883/2004 and 987/2009, to manage and simplify their social security liabilities, albeit that these rules broadly remained in place under transitional rules until 31 December 2020. This included employees working and moving between the UK and Switzerland.

From 1 January 2021, the EU Regulations no longer applied to employees working and moving between the UK and Switzerland and it was therefore necessary to manage such cross-border working under the pre-existing 1969 Convention on Social Security, between the UK and Switzerland. The main difference between the EU Regulations and the pre-existing Convention, is that there was no provision for multi-state workers, i.e. employees that worked in the UK and Switzerland on a split basis. Instead, a split workplace principle applied, meaning that employers and employees could have their social security contributions split between the UK and Switzerland based on the employees’ workdays spent in each country.

However, A1 Certificates applied for or in place before 31 December 2020, which had an expiry date beyond that date, remained valid for the duration of the Certificate (unless there has been a substantive change to the secondment).

The New Agreement

On 9 September 2021, the UK and Switzerland signed a new social security agreement which will be in force once it is fully accepted by the UK and Swiss Parliaments (provisionally set as from 1 November 2021).

The new agreement clearly states, as a general rule, that employees will only be subject to the social security legislation in a single State. It also determines the applicable legislation between the States when an employee’s employment activities are pursued in both States, either as a detached worker or as a dual State worker.

A detached worker can remain within their home State legislation, if they are sent by their employer to work in the other State for an anticipated period of up to 24 months. So long as they are not being sent to replace another detached worker.

It is important to understand what is meant by a worker being ‘sent by their employer to work in the other State’ to ensure that this condition is fulfilled. Not all situations are regarded as detached workers.

A worker who works in dual States (i.e. UK and Switzerland) can remain within their State of residence legislation while also working in the other State, so long as they spend a substantial part of their employment activity in their State of residence. Where the worker does not spend a substantial part of their employment activity working in their State of residence, the applicable State legalisation will be guided by where their employer has a place of business.

Notwithstanding the above, multi-State worker scenarios involving an EU country in addition to the UK and Switzerland should be reviewed closely as there is a possibility that a single State liability cannot be achieved.

The new agreement gives employees broadly equal treatment and the same access to social security benefits in each of the States ensuring they are able to receive healthcare cover and state pensions amongst other benefits.

Summary of legislation and period:

• EU Regulations 883/2004 and 987/2009 - From 1 May 2010
• Transitional rules following Brexit - Ended 31 December 2020
• Old agreement 1969 UK/Switzerland Convention on Social Security - From 1 January 2021
• New agreement 2021 UK/Switzerland Convention on Social Security - From 1 November 2021 (tbc)

Next steps

With potentially different sets of legislation that can apply to a single secondment, our recommendation is to review all situations where you have employees working and moving between the UK and Switzerland. Check that you understand which legislation they are covered by for social security purposes and, determine whether or not it is still applicable or if it needs to be revisited with the relevant authority.

For further advice on how to check you are compliant, contact Amanda Chandler or your usual Crowe contact.

Background

In addition to the general provisions of Art. 15 of the OECD Model Tax Convention concerning income from employment, the double taxation treaties between Austria and Germany, Liechtenstein as well as Italy contain a special provision for so-called "cross-border commuters", which as a "lex specialis" takes precedence over the general standard of Art. 15/1 of the OECD Model Tax Convention. The OECD Model Tax Convention does not contain any special regulations for cross-border commuters.

Definition and Right of Taxation

Cross-border commuters are workers who work in the border zone of one state and return daily to their place of residence in the border area of the other state.

The place of work is the place where the employee carries out his daily work. Cross-border commuters are only persons who have their sole residence in the relevant border zone. The establishment of a secondary residence in the border zone is not sufficient. Even if the employee works only one day a week and travels to the neighbouring state for the purpose of performing work on that day, he is a cross-border commuter.

A secondary residence outside the border zone in the state in which the work is carried out does not exclude the applicability of the cross-border commuter regulation except it can be shown that the secondary residence cannot be used in such a way that the worker will return daily to the state of residence.

If a double taxation treaty contains the cross-border commuter regulation, the right of taxation on income from employment is left exclusively to the employee's state of residence. However, Art 15/4 of the Austrian double taxation treaty with Liechtenstein grants the other state a withholding tax in the amount of 4%, which can be credited against the tax levied in the State of residence.

Border zone

It was agreed with Germany that the border zone would be defined as the location in a zone of 30 km on either side of the border. The cross-border commuter's home and place of work must therefore be within a 30-km-wide strip on both sides of the border.

The border zone is not defined in the Austrian double taxation treaties with Italy and Liechtenstein. According to Austrian administrative practice, all places of work are still to be regarded as being located near the border which – taking into account modern traffic conditions – allow a daily commute to the place of work from the place of residence within a reasonable travel time. If, therefore, no second residence is maintained at the place of work and a daily return to the place of residence does in fact take place, the cross-border commuter status would be fulfilled. However, the mere possibility of a daily return to the place of residence would not be sufficient to qualify as a cross-border commuter. With regard to the cross-border commuter regulation in Art. 15/4 of the Austrian Double Taxation Agreement with Liechtenstein, the Austrian tax authorities took the legal view that the cross-border commuter status can also be granted if the place of work is 70 km away.

Critic

In literature, cross-border commuter regulations are criticised, also for reasons of EU law. The justification for this special standard – the cross-border commuter clause serves to avoid disadvantages for persons with limited tax liability – appears to have been overtaken by the ECJ ruling in the case Schumacker (ECJ 14.2.1995, C-279/93). Arguments such as the improved enforceability of taxes and the freedom of movement for workers required under EU law also argue in favour of reconsidering these regulations.

Conclusion

There is a large sum of regulations in Austria that apply on cross-border employments. Nevertheless, also a wide range of simplifications apply. Because of the complexity of this topic we recommend that professional assistance and advice should be obtained in advance.

Christina Eder Crowe Austria

Thomas Folly Crowe Austria

Dinesh Jangra

Cross-border remote working is here to stay. More and more programmes are being announced, formalised or reviewed, adopted and integrated as part of organisational agile working. We’ve covered the compliance aspects in detail, as attention is needed to avoid compliance problems and penalties.

To deliver the win-wins for the employer and the employee, focus is needed to ensure that employees and teams can thrive as part of cross border virtual teams. Dr Phil Renshaw discusses some key issues and techniques that make the difference.

Dr Phil Renshaw

Workforce mobility, like workforces themselves, has always been evolving. Over the decades we’ve witnessed shifts in the countries sending people to live and work elsewhere, the types of people they send (women, younger, less experienced) and what they send them to do (share knowledge, learn from others). We’ve also seen shifts in the way in which they are ‘sent’, from the traditional ‘expatriation with your family’ model, to commuting, to frequent-flying, and many combinations thereof.

And yet, the pandemic has been a huge accelerant in bringing changes to workforces everywhere. In particular, it has brought attention to models where less physical travel and work in other countries occurs, and also within the same country, is done virtually. These types of activity which affect the globally mobile workforce are not new. Yet the numbers of organisations and countries affected has magnified suddenly. More and more businesses are announcing cross border programmes: the ‘work from anywhere’ time is upon us. This brings focused attention on issues from compliance and tax to productivity and effectiveness.

Furthermore, organisations have started to focus more clearly on which types of global working are of most value to them. Can they be successful with less travel? What types of cross border working will be their competitive advantage? This question as to what is the most effective way to deliver work that crosses borders, has been a thorn in many an organisation’s side for a long time. Organisations know why they send someone to live and work overseas (to run a new factory, to learn new practices, to establish new businesses in cheaper locations), but rarely do they know if their chosen approach was the best one – the most valuable one. Now they are focussing on this issue. How much does travel and face-to-face contact improve productivity and the bottom line?

Now, as the ‘return to work’ conversation is starting to develop in many countries, and with financial questions being raised about the need to have employees located in different parts of the world versus working virtually, so companies are starting to assess more deeply the true value of their Global Mobility decisions. The innovators and first-movers are determining what may be both a preference and a competitive advantage.

Step one in this, is understanding the tax, compliance and process management issues of new decisions. Step two, and probably more fundamental to all this, is understanding the role of your employees’ leadership skills. We need to equip our employees with the leadership skills that will deliver success in complex global environments. Where the identification and management of the similarities and differences between people is a precursor to that success.

The role the soft skills play

Achieving win-wins in globally mobile workforces is dependent upon human skills - how teams and individuals work together, across borders. Whether physically together or not.

One of the things that the pandemic has drawn attention to, through significantly increasing online working, is that all people are different. This may seem to be a ridiculously obvious, if not mundane point, and yet, not everyone has addressed it. What we hear all the time about working online, from home, every day, is how challenging it is to understand what motivates other people, to understand how others are feeling and how to help them succeed. How do we work successfully together? Understanding the differences between people, as individuals, is what enables this success. Of course, people have considered this when sending employees to work in new countries, but now they are realising that was not enough.

Most organisations, and definitely those working in Global Mobility, are familiar with the importance of training around cultural differences when an employee is moving to live and work in another country. (Although, regrettably, we know that lots of organisations do not yet invest in this.) The principle of this training in cultural differences is to understand how people from another cultural or geographical background may behave and act in ways that differ to the norms you are used to. The problem here, that is often overlooked, is that cultural differences exist even when people work in the same country or even the same city. And they exist when you work on the phone or online. Hence training/teaching people about specific potential differences will, by definition, be inadequate unless it opens up people’s eyes and ears to looking for difference, whatever that may be, and adjusting appropriately. Training needs to shift from telling people what the differences may be, to developing skills that enable people to identify differences for themselves.

Organisations may invest in broader skills training, say in leadership development programmes, but rarely is this directly associated with working cross border with global workforces. And yet it is here that these skills become fundamental. And this is where the skills of coaching play a part.

Why Coaching Skills play an unexpected key role in all this

Often people familiar with the practice of management coaching will traditionally describe it in a particular way. A model where someone (the coach) sits with their team member or colleagues (the coachee) and follows a prescribed process. A process in which the coachee is encouraged to think for themselves and find their own solutions to their own challenges. The coach does not direct, offer advice or give solutions. While the principles involved here are excellent, the problem with this model is that it fails to recognise the fluidity and complexity of leadership in practice. Most of the time employees do not have the time to dedicate to following such a defined process.

An alternative model is to separate out the core skills that together add up to create this activity we call coaching. This is what we call Coaching On the Go. The core skills of coaching are individually beneficial practices that generate effective leadership. Most importantly, they help us to learn and understand how others behave, what is important to them and what they are thinking. In other words, they help us to identify differences so that we can adjust our actions and behaviours to achieve greater success. Perfect for global workforces, working across borders and working virtually. Here are just three examples.

• Generative listening describes when we give our full attention when listening to others in such a way, that others can truly hear and learn what they say and think; it helps them to understand themselves. Hence when working with others, this also allows you to truly hear and understand what others think, without placing your own assumptions and biases in the way, enabling you to work more effectively with others. Listening in this way is a skill and it needs practice. If you find that you keep interrupting others or waiting for your turn to speak, you are probably not very good at this type of listening.
• Powerful questioning describes how we use open, respectful and curious questions to draw out others’ views and thoughts. It places a focus on the other person’s opinions. Too often we are expected to provide solutions and to solve problems, so much that we fail to stop and ask these types of questions, to gather information and learn about different perspectives. And, we fail to listen carefully to the answers. Again, this skill requires practice.
• Finally. consider delegation, which is rarely considered a coaching skill. And yet, the most effective delegation allows team members to grow and develop, to build new skills to support the team and the boss. Fully in line with coaching principles. Giving the boss more time to manage and lead the team to greater effectiveness. Delegation in this way (as distinct to just allocating work like a supervisor might) is challenging even without crossing borders and considering cultural differences. So, once again, the skills of carefully listening to your team member’s preferences, asking the right questions and delivering the right support, will result in more effective delegation.

Conclusions

Whether working in Mumbai, Madrid or Manchester the skills of coaching allow employees and teams to adapt and thrive. It’s the same when working with remote colleagues only a few miles away! The central and very vital role of coaching builds resilience at individual and team levels in the new ways of working that are now taking shape. Highly effective workforces operating across borders and across boundaries rely on these skills. Your Global Mobility function needs to consider how to support these factors in order to ensure you have the most effective workforce and deliver value to your organisation.

Dr Phil Renshaw Cranfield School of Management

 

Background

A visa is a permit to enter, transit or stay in a country of which the visa holder does not have the citizenship or right to stay, based on other types of permanent residence permit. A visa is usually issued for a limited period and must be in place before entering the country of destination.

A visa covers one country or a group of countries such as for example in the EU, EFTA states, also known as the Schengen states. Countries that are not part of the Schengen area are Ireland, Croatia, Romania, Bulgaria and Cyprus but the area does include Switzerland, Lichtenstein, Norway, Island, Monaco, San Marino and the Vatican. The Schengen agreement provides free movement of citizens within the Schengen countries, in harmony with the conditions for entering a country and rules on short stay visas (up to 90 days).

This article reviews the concept of work visa (work permit) in Switzerland, regarding inbound work activities. Switzerland does have 26 political sub regions (also known as cantons), each with their own migration authorities. Although the regulations are based on federal law, mainly on the Act on Foreigners, there might be a slight difference in the cantonal handling procedure for migration issues.

Business trip to Switzerland

For business trips of up to eight days per calendar year, foreigners (EU/EUFTA and third country nationals) can work in Switzerland without a work permit or the notification procedure described below. This exemption only applies if the business trip was initially not planned to be for more than the eight days. For EU/EFTA-employers the eight days do include business and personal presence, while for non-EU/EFTA employers the eight days are counted on personal level only. Exemptions do apply in certain industries such as construction, cleaning, personal services, etc., here a notification or work permit is required from the first day in any case

EU/EFTA Nationals

EU/EFTA nationals do have a right to obtain a Swiss work permit, when employed by as Swiss domiciled employer. To avoid abuse of migration law, the Swiss migration authorities do verify the economical substance of the employer (e.g. own space, sustainable gainful activity).

For EU/EFTA nationals on assignments for up to a maximum of 90 working days per calendar year (no employment with a Swiss domiciled company), the notification procedure can be applied. With the 90 days notification procedure, a permit to work in Switzerland can be granted by online notification to the Swiss labour market authorities (cantonal authority is responsible). No extensive documentation and formal application procedure are required for this procedure. Nevertheless, labour law regulations and minimum salary or market comparable salary must be paid. A notification must be made eight days prior to the first day of assignment. The notification is always limited to the project or place of work.

For non-EU/EFTA nationals with a valid work permit in an EU/EFTA country for more than 12 months, the EU/EFTA rules do generally apply (e.g. 90 days notification procedure is applicable).

Business travel up to eight calendar days per company and employee are not subject to the registration duties.

Client meetings and contract negotiations are not subject to registration duties, however on the job-training, internships and project related work are subject to registration duties.

Assignments of more than 90 working days per calendar year are not falling under the free movement agreement, hence the same rules as for non-EU/EFTA nationals do apply (see hereafter).

Since 1 January 2021, UK nationals are considered as non-EU/EFTA nationals and respective rules do apply. EU/EFTA rules may remain applicable if the project/work situation was already existing before this date.

Non-EU/EFTA Nationals

Non-EU/EFTA nationals including UK nationals since 1 January 2021, are subject to a work permit approval process when hired locally. Employers must prove that no adequate employee has been found on the Swiss and EU/EFTA job market. Usually job advertainments shall be published on a common job portal for three months.

Assignments to Switzerland of Non-EU/EFTA nationals and EU/EFTA/UK nationals (for assignments of more than 90 days per calendar year) do require a formal work permit. Work permits are usually granted for four months/120 days up to 24 months. The work permit is granted for a specific project or work site and is usually restricted to this specific location or canton.

Both the local employment as the assignment of respective nationals does require compliance with Swiss market comparable salary, requires economical relevancy and is granted for employees with excellent professional experience and/or executive personal.

Exemptions may apply for intra-group transfers.

Swiss work-permit

The work permit is granted for a specific project by the respective canton. Change of the project is subject to a full re-application and will not be approved by the cantonal authorities in most of the cases. Assignments of executive personal may be structured in a way that various job sites can be covered if a local entity of the group is in place (management transfer rules).

Work permits are subject to quotas allocated to the cantons on quarterly basis. If one of the general criteria for obtaining a work permit is not met (i.e. professional experience, salary level, economic relevance) and/or if the quota for a certain type of permit is fully used, the cantonal authority can refuse to grant a work permit for a specific worker.

The application process:

1. Verify the local salary and identify any potentially applicable Collective Labour Agreements (https://entsendung.admin.ch/Lohnrechner/home). A written secondment agreement is a mandatory part of the filing. All salary components must show all salary components separately and in Swiss Francs (CHF). In addition to the Swiss market comparable salary, a per diem of CHF 55 per day or CHF 1,000 per month shall be paid.
2. File the work permit including at the cantonal labour market authority. The whole work permit procedure takes usually between three to six weeks. It may take up to eight weeks in more complex situations or if the economical relevance and educational/professional background becomes subject to further investigation.
3. If the required criteria are not met or if the quotas are fully used, the permit application will be refused. Usually the authorities do grant a chance to file an objection with further proof of relevancy, adjustment to the salary etc.
4. The labour market authority approves the permit application. Depending on the nationality of the employee and type of permit, further approval of the cantonal and federal migration authority may be required before the employee is entitled to work in Switzerland.
5. The employee needs to register at the local municipality and only then is allowed to work (not applicable for the 120 days permit). Swiss medical health insurance or proof of medical health coverage must be available.

Swiss work permit overview

120 days permit 120 working days within 365 days. No quota, no local registration required. May restricted to staying 90 days within 180 days for non-Schengen nationals.	4-month permit / 120 consecutive days 120 consecutive working days. No quota, no local registration required.
L permit Short-term work permit for three months to 12 months with option to extend further. Usually depending on specific project or local employment. Local registration required; number spent outside Switzerland shall not exceed 90 days within the 12 months period. Quotas applicable.
B permit Long-term work permit for up to five years, depending on nationality and personal situation. Option to extend. Usually depending on specific project or local employment. Local registration required; number of days spent outside Switzerland shall not exceed 180 days within 12 months. Quotas applicable.
C permit Permanent residence permit issued after five or 10 years of being a resident in Switzerland (depending on personal situation and nationality).
G permit Cross-border permit issued for employees living outside Switzerland but having a Swiss employment contact. Not applicable for assignments. Not to be compared with the taxation as cross-border commuter, as foreseen in some Double Tax treaties.

This overview does not include business travel of up to eight days and the 90 days notification procedure, because these are not considered as work permits.

Action steps and conclusion

When planning international assignments, the employers must consider the following factors:

1. Nationality of the employee - EU/EFTA or third country national?
2. Residency of the employee – within an EU/EFTA state or outside?
3. Home country – where is the employer domiciled?
4. Host country - where will the work being performed during the assignment?
5. Duration of the assignment?

These considerations do apply for international assignments in general. Nevertheless, to protect domestic markets and local labour market countries have implemented national regulations for cross-border workers, assigned workers, and worker on foreign country employment contracts. Although the EU/EFTA free movement agreement is in place, each host country’s immigration rules must be verified prior to the assignment.

Non-compliance can be subject to penalties and/or ban from future work in a respective country.

Planning ahead of the assignments is key to successful assignment of workers.

Raphael Gaudin Curator & Horwath AG Zurich - St. Gallen

 

The UAE is a key global economic centre. Key Emirates such as Dubai, Abu Dhabi and Sharjah have significant expatriate workforces and populations making the UAE a key centre into which people mobility takes place. Over time, Dubai has become a place to host international businesses as they set-up and maintain their Middle East and Africa hubs and regional offices. 

For those working in the global mobility area, the deployment of talent into and out of the area can present different challenges to those they may be used to in other locations. 

It’s generally understood that there is no income tax in the UAE but it’s worth noting that despite this there are significant other local compliance requirements. Do you know what they are?

Home tax issues don’t always go away

Even with the ‘no tax status’, a key aspect itself in attracting talent into UAE roles, it’s worth remembering that global mobility taxes aren’t a single location issue.

Care needs to be taken to ensure that ‘no tax’ status is communicated and expected only after considering whether the home country of the employee will actually stop taxing the individual. The difference between no tax and taxes can be very significant based on the country so compensation issues arise if an employee is expecting ‘tax free’ status when it is not available. 

For example, a UK based employee going to Abu Dhabi for nine months will still be subject to UK income taxes and social security. This means employer payroll obligations continue too. US nationals and green card holders continue to have US tax returns and taxes to consider regardless of where they work. Similar principles apply for other countries.

Income tax, social security and payroll issues in the home country have to be carefully reviewed to avoid any compensation surprises or employer payroll non-compliance down the line.

So what are the key UAE aspect to work through?

In the remainder of this article below, my colleague Markus Susilo of Crowe UAE explores some key non tax issues to consider.

No tax in the UAE does simplify that aspect of assignment administration. However, there are other local compliance requirements that do need to be worked through and considered across the employment life cycle. These include jurisdiction, immigration, employment regulations, social security, labour laws, national pension schemes and health insurance.

Jurisdiction

Broadly speaking, the UAE divide their economic and legal jurisdiction between the onshore sector, dominated by local business interests with restrictions on foreign ownership, and the offshore sector, which consists of free zones. As of now, there are more than 45 such free zones successfully operating within the UAE. They are exempt from the laws of the UAE, unless the respective free zone authority has regulated otherwise.

Immigration regulations

For a non-UAE national to be officially employed by and working for a company in the UAE, he/she must obtain a residence visa and/or work permit. As most of the workforce in the UAE are expatriates, the process of obtaining a work visa is much more transparent than in other countries. This does not mean, however, that the process is not complex and dynamic and highly dependent on the location of the company (onshore/ free zone).

Visas and work permits are usually valid for two to three years and must be renewed at expiry in order to keep employing the foreign employee. Visa holders can sponsor the visa of their dependents (direct family members) provided that they meet certain criteria such as the amount of salary earned.

Federal labour law

UAE labour law regulates matters related to working hours, vacation and public holidays, sick leave, maternity leave, employee records, safety standards, termination of employment and end of service gratuity payments. UAE labour law applies to all employees working in the UAE, whether UAE nationals or expatriates.

Most free zones have opted to adopt UAE labour law and, in addition, also have to consider other employment regulations for companies operating in their zone. However, employees employed in financial free zones in the UAE can be exempt from UAE labour law and subject to a different set of regulations.

Social security

At the end of an employment relationship, companies are usually obliged to pay a gratuity to the employee which needs to be accrued for during the employment of the employee. Furthermore, in the Emirates of Dubai and Abu Dhabi it is mandatory for companies to provide private health insurance (from authorised health insurance providers in these Emirates) to their employees. Additionally, contributions to the state pension and the social security system is mandatory for companies employing UAE nationals.

Conclusion

There is no doubt that no tax status of the UAE can be a key inventive in attracting talent into the Emirates. It’s important that employers check that this tax free status actually is real, i.e. the home country doesn’t continue to tax. 

For UAE based employees that travel on business out of the UAE, it’s important to review whether their duties and activity are taxable in the locations they are working. Depending on roles and countries, tax and employer payroll obligations can arise.

Global mobility professionals deploying talent into the region should always carefully consider local compliance obligations in the areas of jurisdiction, immigration, employment regulations, social security, labour laws, national pension schemes and health insurance.

Careful review and planning around these issues is key and can prevent non-compliance and penal consequences for employers and businesses

How to face uncertainty and adapt to Individual Income Tax rule changes in China?

With the continuous boom of the People’s Republic of China (PRC) economy, not only more and more seconded foreign employees start to work in China, or extend their work permission, but also young generation with foreign citizen becomes entrepreneurs and starts to run their own business in China. Those of us that work in HR, payroll, finance, and tax areas and each foreigner himself/herself in the PRC have been urged to catch up with newly announced Individual Income Tax (IIT) regulations since the end of last year. A lot of supplementary and detailed rulings were quickly rolled out following the new PRC IIT law and its implementation rule set forth in the second half year of 2018. How do you plan to deal with each specific IIT issue in this year without a clear understanding of detailed IIT rulings? Simply by surfing the internet and calling the tax hotline (12366) of your city? We believe this may not be enough.

The employers located outside China may navigate through a difficult path when seconding foreign employees to work in China where its IIT rulings are constantly changing recently. Normally speaking, immigration, tax, social security and foreign exchange control of host countries are major factors impacting an overseas secondment arrangement. The employer outside China must ensure the seconded individuals to start working in China timely, legally and their relevant secondment arrangement is compliant with local tax rulings as well as to ensure the overall secondment costs are not high. 

So, what’s the Chinese immigration rules look like now?

For short-term business travelers who would spend for no more than 90 days in China, they are required to apply for M visa rather than L visa. Unlike L visa granted for the purpose of social communications and visit, M visa is granted to those who would take business and trading activities in China. M visa is also called short-term work visa. For those who would spend for more than 90 days in China, they need to apply for Z visa (known as work visa). The good news is that expatriates can apply for Z visa from their home countries since year 2017. With these in mind, are you making the right application towards different types of visas for your seconded employees? 

For example, if your local Shanghai entity is going to hire a localized foreign employee who needs to move from another city to Shanghai after accepting your offer. How are you going to alter his work and residence permit to Shanghai? Does he/she need to go back to his home country to start a new round of immigration cycle? The answer is no. If you know how it works, it will definitely ease the administration burden and not delay his/her onboard date. 

What’s the current PRC IIT filing schedule under the new PRC IIT regulations?

For the first time, the new IIT law consolidated four different types of incomes, i.e. salaries and wages, independent incomes, incomes from author’s remuneration and royalty incomes received by PRC tax residents into one annual integrated income subject to aggregate IIT rate(s). While for the said incomes received by Non-PRC tax residents, they are still subject to PRC IIT under different income categories. Except for the said incomes, other incomes like operating incomes, interest incomes, dividend incomes, capital gains from rental income/property transfer and occasional incomes, are still subject to PRC IIT under different income categories.

The comprehensive income received by PRC tax residents is subject to PRC IIT on annual basis; If there is a withholding agent, the relevant PRC IIT should be calculated and remitted to in-charge tax authority by the withholding agent on monthly basis or upon a tax event occurs. If there is no withholding agent in China, these individuals are required to file PRC IIT returns by their own. An annual tax clearance should be performed within the period from March 1 to June 30 of the following year if a tax adjustment is required.

Unlike IIT filing is proceed jointly sometimes in other countries/jurisdiction, the PRC IIT return is filed individually no matter on monthly basis or when the annual one is submitted. As a reference from other foreign countries, i.e. SSN for US citizens and tax file number for Australian citizens, the Chinese identification number (for Chinese nationals), passport number (for foreign nationals), home visit card number (for Hong Kong and Macau residents) and travel permit number for Taiwan residents) are used as individual tax filing number when filing PRC IIT returns through tax on-line filing system. It becomes a unique and unchangeable number by which the Chinese tax bureau would easily supervise the tax filing status of each individual. 

How can you have your expatriates not being taxed based on their global income?

The new PRC IIT reform gave more lenient treatments to foreign employees working in China now. One key change is the residence rule changes from ‘Five-year rule’ to ‘Six-year rule’ effective from January 1, 2019. Disregard of how long they have resided in China prior to year 2019, 2019 is the first year of the ‘Six-year’ calculation cycle. The other change is about 'one-full year tax resident' rule. Foreign employees are considered as one-full year tax residents in China if their physical presence days in China exceed 183-day threshold in a calendar year. Keeping these changes in mind, will you review the current secondment arrangement for your employees and see if any changes needed? If they have to be seconded to China, are you aware of the potential double tax issues from improper secondment arrangement? It is suggested that you have a conversation with your employees to remedy their potential tax costs arising from secondment arrangement in China.

Are dual employment and split payroll still workable in China nowadays?

The dual employment and split payroll arrangements have been implemented in China for many years and never been forfeited thus far. It is not compliant if only China-paid portion to your foreign employees are reported for IIT calculation purposes in China. The correct way is to declare both portions in China as both of them constitute China-sourced income. For those who have regional/non-China duties and responsibilities, both of their incomes paid in and outside China should be reported prior to year 2019 and then, a time-apportionment calculation formula at tax level is available. Effective from year 2019, the time-apportionment calculation formula at income level is applied which is closer to the 'income exclusion' rules implemented in other countries/jurisdictions. 

Where should the foreign employees make statutory social security contributions while on secondment arrangement?

The China social security law requires foreign employees who legally work in China, i.e. obtaining work and residence permit, should make Chinese social security contributions. The contribution base and ratio vary from city to city. In practice, its implementation has not been strictly followed at city level. For example, no fine or penalty is imposed if the employers in Shanghai failed to make any contributions for their foreign employees working in Shanghai while making Chinese social security in Beijing is compulsory. For budgeting purpose, you have to understand different practices of social security contributions in different cities before assigning your foreign employees to China. 

Furthermore, you also need to know more about which countries have signed the ‘totalization agreement’ with each other to explore the opportunity to waive social security tax in host country. 

Most of seconded foreign employees prefer to continuously maintain their social security contributions in their home countries rather than host countries. An allocation of certain portion of their salary income could fulfil this purpose in home countries. That’s why dual employment and split payroll are always applicable in modern world, not only for non-RMB salary payments but also for social security maintenances.  

Can the home-country employer cross-charge relevant compensation cost to host-country employer in China?

Sometimes, the home-country employer would cross-charge relevant compensation cost to the host-country employer in China as the latter one is the economic and beneficial employer. Such remittance is made at the company level. Under the strict foreign exchange control implemented in China, theoretically speaking, it is feasible for cross-charge as long as relevant PRC IIT has been paid. However, due to the strict foreign exchange control implemented in China, there are a lot of processes you need to undergo with the in-charge tax bureau and the remitting bank especially when dealing with a backlog charge for past months or even past several years. Have you planned ahead on how to make cross charges at the beginning of global assignment and what’s the frequency?

Furthermore, at individual level, an individual may purchase or sell foreign currency up to USD 50,000 respectively per person per year. It is allowed to exceed such limit for salary income once its relevant PRC IIT has been paid. With the PRC IIT payment certificate, a foreign individual is permitted to convert after-tax salary from RMB to USD and remit out of China. 

Preferential tax treatments on Annual Bonus and Non-taxable Benefits?

In order to make a smooth transition from old IIT law to the new one, the preferential tax treatments on annual bonus and non-taxable benefits have been retained for another three years, i.e. from Jan 2019 to Dec 2021. Before the end of the transition period, annual performance bonus is still subject to the preferential tax treatment, that is, it is not required to be combined into annual comprehensive income and the applicable tax rate of which is determined by 1/12 of the total amount of annual bonus. If your foreign employees become one-full year tax residents in China and receive such annual bonus payments for this year in February 2020, the said treatment is still applicable. 

During the transitional period, foreign employees may opt to enjoy current tax exemption treatment (i.e. housing subsidy, language training subsidy and children education fees, home leave, meal and laundry) mentioned in the old tax Circular No. 35 issued in 1997 if certain conditions are met. If you have never heard of such exemption rules in the past, why don’t you best utilize it for the last chance for your foreign employees working in China?

In today and tomorrow’s constantly changing world, if you cannot adapt yourselves to face those uncertainties, you will bring some troubles, pains and extra costs to your organizations. We are compliant if we follow the tax rules. We can alleviate a lot of surprises and financial cost more than compliant if we closely catch up with the rapid tax rule updates. We should have a good process at the beginning of seconding someone to go abroad and during the process, we need to think fully, act quickly and finally achieve more.

Please feel free to contact me if you want to discuss any of the issues raised or need our tax services.

African nations provide some of the greatest opportunities to multi-national organisations. With this opportunity comes complexity, and it is imperative that those managing employee mobility into and out of the region understand the specific differences. Through understanding these differences, mobility professionals can the increase speed of talent deployment and the return on investment for their organisations.

Why is Mobility in Africa growing?

Rich in natural resources, with a comparatively young workforce, booming populations and rapid urbanisation that is creating incredible mega cities, are all factors that are serving to accelerate more African nations to become powerhouses of the global economy.

These factors all contribute to growing economies and markets that are ever more important on the global stage. There is no doubt about it, Global Mobility in Africa is on the increase. Getting talent into and out of Africa has long been a feature of certain sectors (natural resources), but it is an increasingly important part of global mobility and workforce plans across more and more organisations. 

Geography

Africa is an amazing place. Geographically, its longest coastline is in Mozambique and it has the world’s largest hot desert the Sahara, in North Africa (3.3 million square miles), roughly the size of the USA. It also has the longest river, the Nile, which has a drainage basin in 11 countries and which stretches 6,650 kilometres from Burundi in the South to Egypt in the North. Africa is the second largest land mass and the second most populated land area on earth (6% of the earths surface and 20% of its land area).

People

The continent has 55 countries with an estimated population of almost 1.4 billion people (2017). This population is expected to reach three billion by 2050. Languages spoken in Africa include, amongst others, Arabic (by 170 million people), English (130 million), (Swahili 100 million), French (115 million), Portuguese (20 million) and (Spanish 10 million).

Economics

Africa is the world’s fourth largest oil producer (Nigeria produces 2.2 million barrels a day), and has 30% of the world’s natural resources. Africa still has the world’s largest remaining reserves of precious metals i.e. gold reserves 40%, cobalt 60% and platinum reserves 90%. Although not the world’s largest deposit, Zimbabwe has a sizeable store of lithium reserves.

Potential

The continent and its nations have vast potential and Africa is, as a result, very attractive from a business perspective. The movement of people as a result of this economic development across the continent is of particular interest to Global Mobility professionals.  

Together with Africa’s vast natural reserves and its economic acceleration, it is reasonable to foresee that there will be vast economic development across the region, which will bring yet more increased trade activity, industry and foreign investment. Trade and industry will naturally result in further increases in people movement, as skills and professional services are procured to satisfy needs.

What is different about mobility in Africa?

It’s certainly not easy to generalise across 55 countries, but some areas mobility specialists will want to keep sharp in focus could include:

Immigration: The immigration process can be less predictable than elsewhere and the timing and documentation requirements can be more case dependent. For this reason, it’s important to start this process as early as possible. In certain countries (for example in Nigeria and Ghana), quotas are in place and this can involve a separate process. Special rules may also apply to different types of employer, such as NGOs and Oil and Gas companies.

Cost: Employers are often surprised by the cost of mobility into Africa. Employees need different types of support and benefits with security, healthcare and housing being more important and costly than often expected. Assignment costings after liaison with benefits and destination services with specific local knowledge are must! 

Tax:It is essential that the concept of an assignee/expatriate be fully understood so that the tax and other pitfalls are not missed entirely. We often find that tax liabilities are missed completely, simply because nobody identified that the entity in question had in fact engaged the services of expatriates/ assignees. The major cause of this, in our experience, has been misunderstandings around what precisely constitutes tax residence in a particular tax jurisdiction.

The tax systems across Africa, with a few exceptions (the most notable being Angola) are all on a residence, as opposed to a source, basis of taxation.

How does residence based tax work?

In most of the countries in Africa the concept of ordinary residence forms the basis and cornerstone of tax residence. In South Africa (SA), for example, a person is tax resident if his/her ordinary residence is in SA (there are a number of indicative factors which indicate ordinary residence). If a person is physically present in SA, the South African ‘Physical Presence Test’ applies to that person. This test is a specific test that effectively counts the number of days present in SA. After having spent a definitive number of days in SA, regardless of what that person’s ordinary residence status is, that person will be tax resident in SA. 

The obvious danger here is that from the time of becoming a SA tax resident, that person’s worldwide income falls to be taxed in SA and the expatriate tax and/or benefits, which may have been applicable up to that point fall away and become non-applicable. This change over point is very often missed, thereby creating a multitude of complexities including penalties, interest and stress.

Each country in Africa has its own specific legislation and requirements concerning its ‘physical presence’ test. The SA presence test is an annual test over a multiple tax year period, and it effectively takes a number of years to become physically tax present in SA. Many countries in Africa have a much shorter time period for physical presence. In many cases, tax residence commences after an initial 183 days.  

Conclusion

The movement of employees into, across and out of Africa, as can be seen, clearly does not come without its complexities. We recommend that professional assistance and advice be obtained prior to the deployment of assignees into the region.

Michael McKinon Crowe South Africa

 

Today we cover US Nationals and Mobility. Without doubt, given the huge size of the US economy and the US talent pool, US Nationals are probably the most populous of all globally mobile employee nationalities. However, as a result of the US tax system, they can probably also be the most challenging from a tax and payroll perspective. The issues discussed here apply to mobile employees but, can also apply to US nationals who are hired on local employments too.

It’s important for those managing global mobility to understand why US Nationals are different and potentially more challenging so they, and the business can be prepared for additional complexity and plan ahead.

So what's the basic issue here?

The issue is one of multiple tax systems or double taxation, which is constantly at play. Almost all countries provide a temporary fix through which the link to their tax system can be temporarily broken. This results in tax and payroll for long term assignments becoming focused primarily on one country.

The US tax system for US Nationals and permanent residents is not like this. US taxes will always need to be considered. By US taxes, I mean US Federal taxes, and then on top of that we also have State and City taxes. US tax returns are usually required every year regardless of where the employee lives and works.

Apart from tax return filings, we also have:

• Complex related bank account reporting.
• The need to consider special tax filing extensions for those working overseas.
• A tax payment system which requires thoughtful, detailed review by the usual payment date of 15 April, and probably also ahead of every 31 December. The 31 December date is vitally important because if the right amount of non-US taxes have not been paid, or accounted for through payroll, there can be some significant cash flow and reporting complexity issues
• Exposure to what can be significant penalties and interest, if these obligations are not carefully managed

For those managing mobility and deploying or hiring US Nationals, they need to recognize that the employee will always have at least two tax systems to consider. As an employer, this results in more payroll, compensation and policy complexity to work through. 

Seeking tax advice in the US and the host country location prior to the move can prevent unpleasant surprises in both tax jurisdictions. Certain parts of the world have NIL or low income tax regimes, for example in Dubai. Mobilising a US National to work in Dubai doesn’t result in the tax free status it can for others. This is a key point.

Which employees are impacted?

Although this article references US Nationals, the issues discussed actually impact a wider population.

• US citizens or US permanent residents (‘Green Card holders’ or GCH).
• Individuals physically born in the US (citizens of birth) - even if neither parent is a US citizen.
• Individuals born outside the US with at least one parent having US citizenship.
• Dual nationals of the US and another country?

What are the requirements for US citizens/GCHs?

A. Tax Return Filings

In general, all US citizens and GCHs (even if they never lived in the US), are required to file US Federal income tax returns annually. They are required to report their worldwide gross income regardless of the source or location of the payment. With the new tax legislation introduced for the 2018 tax year, there is no minimum income threshold for filing.  

A US person is required to file a US income tax return even if the individual permanently lives in a foreign country, or temporarily resides in another country, and their wages are within the FEIE (foreign earned income exclusion). This filing requirement applies whether there is a US tax liability or not.

The FEIE allows the taxpayer to deduct $103,900 (for 2018 adjusted to inflation each year) of foreign earned wages from being taxed on the US Federal income tax return. However, in order to take this exclusion, a person must file a US income tax return.

B. Reporting Requirements - bank accounts

US citizens, US Tax residents and GCHs are required to disclose the highest balance(s) of their non-US financial accounts (i.e. foreign bank accounts) to the Department of the Treasury when the aggregate value of their bank account(s) exceeded US$ 10,000 during the calendar year.  

The Report of Foreign Bank and Financial Accounts (FBAR), also known as FinCEN Form 114 is required whether the individual owns the account (solely or jointly), as well as if you have signatory authority on accounts where you are not the account owner. This reporting applies to children as well as adults.

The signatory authority scenario can arise simply because of responsibilities the employee has as part of their role for their employer.

C. State/Local Income Taxes

Depending on the State and Local tax residency, the employee (and therefore the employer for payroll purposes) may also continue to be subject to state/local income tax while on assignment. Influencing factors include the duration of the international assignment and connections maintained in that state (active local bank accounts, voter registration as well as intentions to return to that state, etc.). Tax laws vary by state and local tax jurisdictions. A tax advisor can review the specific situation to determine if an employer will need to continue withholding state/local taxes while the employee is working overseas.

Why is this all important?

All US persons, regardless of where they are living, may be subject to tax filing requirements. These obligations can exist even if the individual has not obtained a US passport, or even set foot within the US. The US Internal Revenue Service (IRS) is aware that many US persons are not compliant with the filing of US Federal Tax Returns and the reporting of FBARs. In many cases, people are simply not aware of their US filing requirements, which places them at risk of being seriously delinquent in their US filing obligations with exposure to substantial penalties and interest.

As at least two tax systems will inevitably be at play, there will be additional complexity. Where this complexity is created as a direct result of a globally mobile work arrangement, or assignment, we see that these issues over time, will result in the employer becoming involved. Where the employee is tax equalised, it is in the employer’s best interests to manage US nationals carefully at the beginning for the following reasons.

• Tax cash flow and double taxation is mitigated so there are lower overall costs.
• Employees meet their filing tax filing obligations so penalties and interest do not arise.
• Employees understand their “after tax” compensation and payment obligations.
• US payroll reporting and deductions are accurate.
• Related compensation and tax issues are managed carefully and ‘tax surprises’ are prevented.

Conclusion

It's important to understand that US nationals are different because their tax system is different. This means the taxation of their compensation and the related tax reporting requirements are also more complex. 

• Find out nationalities of employees early, is the employee a US national or Green card holder?
• Engage expert assistance early to establish the obligations for the employee, and for you as employers.
• Where employees are tax equalised, focus on tax payments and payroll compliance before the 31 December date each year. We usually advise clients to start reviewing this as the final quarter of each year starts.
• If those with US tax filing obligations will not be tax equalised (local hires for example), ensure they understand how the US and their host country tax system interact, and what that means for their net pay after taxes. Often this is not reviewed in sufficient detail and downstream tax surprises then arise. Inevitably, these are then often transferred to the employer to resolve.
• Don’t expect deployments to NIL or low tax countries to automatically result in NIL or low taxes for US Nationals. Careful review is required.

Intra-country mobility compliance

Mobility and tax professionals will be aware that as employees work across borders they may give rise to changes in compliance obligations such as payroll and income tax filings. What’s not always as well understood is that intra-country mobility can also do the same. Working in different places in the same country can change compliance obligations for the employer. In the UK, we have Scottish Income Tax as an example but the best example of this is probably the USA.

US state to state compliance.

The US Tax and payroll system works in two parts. There is Federal tax as well as State and Local Taxes often referred to as ‘SALT.’ If a domestic employee, or even a globally mobile employee, is working in more than one US city or state it can mean payroll and income taxes to those cities or states are triggered. Employers need a process to monitor where their employees are working to mitigate risk.

Employees working outside of their 'home state' can give rise to payroll related compliance challenges for their employers as well as personally add to their own individual tax compliance burden … with a need to file extra state or city income tax returns. These employees are 'non-resident' because although they work in one state they live in another. As businesses expand, using 'just in time' service delivery methodology and broaden the use of flexible work arrangements, the employers's vulnerability to payroll tax compliance gaps grow.

Why is State Payroll Tax so complicated?

Well, let's start with the 50 state jurisdictions plus the District of Columbia.D.C. does not tax non-residents and nine states do not impose individual income tax on wages  which leaves us with 41 state tax jurisdictions that apply their own sets of rules to non-resident taxation.

The rules then vary from taxation on day one as applied by 24 states … to taxation based on the number of days per individual, the number of days by legal entity or varying wage thresholds to be applied to an employee in a quarter or calendar year. Once you have these rules sorted out, we then have to consider the Reciprocity agreements between certain states to see if there is an overriding agreement  that presents taxation to the 'resident' or 'home' state.  Now that you get the gist of the rules, or at least how complex they can be – let’s look at implementation.

For a select few sectors that use time and attendance/ timesheet systems (like professional services) then perhaps daily physical work location details are readily available? If so, it’s then a matter of applying the rules for each of your employees. Alternatively, if the physical work location data does not exist, alternatives include employee self-reporting, analysis of preferred or travel suppliers’ data as well as GPS smart phone related apps that can help facilitate the process. Gather the data, apply the tax rules and then integrate with company policies that reflect your corporate culture.

While today’s rules combined with the expanded use of a mobile workforce present payroll tax compliance challenges there are cost effective solutions for employers to mitigate their compliance risk. Another key point is having a solution in place to track employees’ workdays can of course can enable compliance but it can also be proactively used to prevent that same compliance from being triggered.

Note: The Mobile Workforce State Income Tax Simplification Act of 2019 was reintroduced with bipartisan support last week with the aim to universally apply a 30-day taxing threshold for non-residents working outside of their home state. Similar legislation aimed at State Tax Simplification was introduced in 2007, 2009, 2015 and 2017.

 

View income tax rates in your state [pdf]

On 9 September 2021, the UK government announced the introduction of the Health and Social Care Levy, which will impact Class 1 National Insurance Contributions (NICs) for employees and employers by a 1.25% increase. This increase will be effective from April 2022. After 5 April 2022, the increase will take the form of a levy. Read our full article on what the impact of these changes will mean for you and your globally mobile employees.

Cost has always been a priority area for mobility and international HR teams to proactively manage. It is without doubt a major focus now. Taxes are often associated with complexity and compliance – difficult areas of the mobility process. Taxes are, however, also an area through which substantial cost savings can also be accessed.

Awareness of the global mobility related tax planning opportunities that apply is a really important opportunity to add value for those involved in, and managing mobility. There can be very substantial cost savings, often savings for the employer under tax equalisation, so it is vital they are not missed.

How big can cost savings be?

They can be very valuable. This relates in part, to how tax equalisation works. 

Tax equalisation is an approach that seeks to neutralise differences in tax rates between countries to promote employee mobility. The employee usually agrees they will continue to pay the same level of tax as their home country. This may be through a hypothetical taxes deduction. In return, the employer then agrees that they will settle the actual taxes due. 

As the employer is settling the taxes due, the compensation becomes what is known as net. Tax rates that apply on net compensation are considerably higher because paying the tax for an employee is in itself, a benefit on which tax is then again due. As a result, grossed-up tax rates apply.

Example: The top rate of income tax in the UK is 45%. If this has to be grossed up for tax and social security, then the tax rate becomes 89%. As a result, £89 of tax due by the employer would be saved if £100 of income/compensation can be removed from tax using mobility tax planning. If £50,000 of compensation is removed then £45,000 of taxes are saved for the employer. If you have 10 employees to which this applied over five years, the savings could be £2.25 million! The savings could be even larger if social security planning was also taken into account.

What’s the top income tax rate in your country? What would the grossed-up rate be?

Who do mobility tax breaks apply to?

The rules differ from country to country so local tax expertise is a must. There are specific tax breaks that apply to globally mobile employees. There are also other tax breaks that were not designed for globally mobile employees, but they do apply to them. 

The tax breaks could apply to all forms of globally mobile employees including long term assignees, short term assignees, local hire employees, business travellers, Directors, commuters and those with regional or cross border roles. 

What kind of mobility tax breaks are there? 

The rules and conditions really do vary location by location. Having reviewed the relevant rules across the world, I would suggest they fall into one of the following groups.

1. Mobility tax concessions. Talent attraction is key to a number of major economies. Mobility tax concessions provide preferential lower tax rates and/or significant exemptions from tax. China, Spain, Italy, France, Netherlands, Russia, Sweden, Portugal, Ireland are just some examples. 
   There are usually specific requirements on the type of employee who can qualify, for how long and there may be procedural rules to consider (an application has to be made by a certain date in a certain way). Early identification of these is critical.
2. Housing is a large part of the overall cost of a globally mobile employee. Grossed-up for taxes it is even bigger! A number of countries have the concept of a temporary workplace or dual household cost which provides exemptions from local taxation for part or all of housing related costs. 
   There are tax breaks in a number of countries for accommodation based on short term assignments. UK, Germany, USA are just some examples. Where you see short term assignments, review if the housing, travel and subsistence will be exempt and under what conditions to ensure cost savings are not overlooked.
3. Pensions are a key part of a globally mobile employee’s compensation. A number of countries provide ‘matching’ rules to exempt foreign pension earnings (employer contributions), if the plans broadly align with the local plans that qualify for local tax advantages. Checking how pension participation is treated locally for tax purposes should be a key step. Accessing and applying the local tax exemptions can really make a difference to the overall assignment costs.
4. Non-host workdays/time apportionment calculations. A number of countries will not tax compensation relating to duties not performed in the host location, provided certain conditions are met. 
   Depending on the number of non-host workdays, this can be a significant tax saving. Think about how many of your globally mobile employees do not just work solely in the host location? Examples include UK, Singapore, China, Hong Kong, France and India. This a key potential cost saving to explore when you know the employee will be working in more countries than just the proposed host location. It should be systematically reviewed to keep costs down.
5. Tax efficient benefits delivery. How particular compensation is delivered can change how it is taxed. Allowances generally tend to be less beneficial than reimbursements unless the allowances are paid in accordance with locally set tax-free limits. 
   Some benefits in some locations can result in lower taxable values (different to the actual cost) if the employer directly pays, or contracts, for the benefit. This could apply for example to large costs like accommodation and education. It’s important to check if this applies to all the costlier benefits forming part of a globally mobile employee’s assignment package.
6. Travel and home leave. Travel to, and from, the host country and home can benefit from tax exemptions in a number of countries. Care needs to be taken to understand the local specifics. For example, are there time limits, limitations to the number of trips, or do they have to be reimbursed rather than paid directly by the employee or as an allowance?
7. Timing and type: The timing of a globally mobile work arrangement and its type – assignment, local, local plus, commuter can significantly impact the taxes costs for employers. It could be that by changing the start date of the work arrangement, or by managing the number of days in the host country that tax status of the employee can be managed in an advantageous way.
   The advantages can be multi-year in impact (and not just relating to the initial year). For example, if an employee is not-resident in a country for the initial tax year (proactively managed so to be) then the tax rate in that first year could be reduced. In addition, that first may allow tax breaks that apply for subsequent tax years to start later (and therefore apply for longer and reduce cost more).
8. Relocation expenses. There are often exemptions for key relocation related expenditure, shipping, temporary accommodation, replacement furnishings etc. A number of countries provide either specific reimbursement, or lump sum allowances, to provide these items are tax free or exempt. Checking the rules and then structuring the relocation support accordingly can be a good way of reducing assignment costs.
9. Social security: Social security rates vary greatly around the world. Employer and employee contributions usually apply and it can be a significant cost aspect of mobility. As employees are deployed and work across borders the rules that apply can change. It could be that an employee working outside their home country removes or reduces the social security due. Not understanding when these changes occur could result in unnecessary costs. Where social security is paid can also to some extent be driven by the assignment structure that is deployed – the length, the employer etc. Proactively reviewing these aspects during the planning stage can deliver savings.
10. Tax policy and process: globally mobile employees trigger taxation that is often borne by the employer – payroll taxes and liabilities on tax returns for example. Unless good policy and process is applied the costs can’t be proactively managed or legitimately mitigated. Example; most countries provide some mechanism to prevent double taxation. If tax preparation support and process is not enabled double taxation cannot be mitigated. It can be as simple as ensuring that the payroll taxes in the host country are correctly treated on home country tax reporting and then ensuring (through the right process) that tax refunds or tax benefits are correctly returned or refunded to the employer (and not kept by the employee). In some countries, doing this in the right way may also result in lower tax rates applying for the payroll taxes due by the employer.    

What complications are there?

Local expert tax assistance is vital because although there are overall themes, the rules and process are always country specific. As a result, it’s necessary to understand what procedural steps there are to consider, to ensure the tax breaks apply. There may also be particular claims that have to be made on an employee’s local income tax return.

In short-term assignments, there can often be ongoing tax considerations in two countries. As a result, care needs to be taken not to focus exclusively on one location only. What is tax efficient in one country may lead to a worse impact in the other country, so it’s important to keep an eye on the overall global cross border tax position. 

Conclusion

Taxes due by employers for a globally mobile employee can be a very significant part of the overall cost of an assignment or cross-border work arrangement. Utilising mobility tax breaks is key in optimising the overall costs. 

It is important for mobility professionals to be aware of these tax breaks to ensure the business doesn’t bear unnecessary extra costs. Equally, it’s key to explore early on the requirements and procedural aspects so key set-up steps are not missed. 

Dinesh Jangra Crowe United Kingdom

 

Mobility will play a key role in driving the global rebound because mobility creates business value through development and skills and knowledge transfer key for customer acquisition and delivery. Clearly defining the business case for employee mobility is as important now as ever. Leading expert Phil Renshaw of Cranfield discusses insights gained from his research on how to maximise value from employee mobility.

Context

What value do we get from international assignments? Frankly, this question is as old as the hills. Most people in global mobility are aware of the ongoing issue: what value (or ROI) does the business really get? How do we show it? Most organisations have little if any idea as to what value they actually enjoy from these investments. They can tell you what they believe may be happening or why they do it, but not what is actually happening.

I first came across this debate when working in my capacity as a professional coach. If you pause to think about it, the skills of coaching have an important role to play in working out the value of an assignment simply because they bring a focus to the goals of all those involved. When coaching we ask open questions, listen and challenge to help colleagues work out what their goals are and how they are going to achieve them. Doing this with all the parties involved in an international assignment (IA), including with the individual assignee, allows you to work out the details of why the business is taking this step and the value expected for everybody. This can then generate the Business Case, and gives you something to track.

Nonetheless, I was amazed by how few people could value their IAs. This truly fascinated me because my background is in finance. Having been a Finance Director, and an expat in financial services, I understood how expensive this all is – who is approving all these costs if we do not know the value?

This set me off on a journey of research, including my PhD at Cranfield University, on the organisational value of international assignments. Through my research I identified several things, including how it helps to interpret IAs as options, strictly speaking ‘real options’. No, we are not going to discuss financial instruments! (Although they are actually straightforward to understand). Rather, people who invest in options follow certain guidelines to maximise the value they get. And this ensures we think of what we’re doing as investments not costs. And GM can follow these too. Here are some of the insights.

Maximising return from mobility

Look at the portfolio
The value of one investment (an IA) can affect the value of another (IA). And hence you need to value the full portfolio of your assignments not just each one on its own. Consider, for example, an organisation which sends its high potentials on assignment as a leadership development exercise. There are a limited number of senior leader roles in any business, and hence if everybody who was sent on such an assignment was successful they could not all be promoted. Therefore, the business must review their IAs on a portfolio basis. If the business only has 20 senior roles globally and 40 strong candidates already in the pipeline, they need to ask whether any more should be sent. Likewise, the organisation should ask if it has enough IAs and international experience for current and future senior roles?

Review regularly
The value of options (IAs) changes constantly due to the complexity of the world around us. An assignee’s day-to-day activities might affect what they learn and their potential impact. Today and in the future. Assessing this only in an annual performance review, risks missing out on the opportunity to make different choices along the way. Hence someone needs to be re-assessing the value of each assignment, by reference to the intended goals and the rest of the portfolio, on a regular basis.

Competing options
There are at least three parties with an interest in the value that is achieved from an international assignment: the home, the host and the individual assignee. They may have very different value expectations from an assignment. These may come out through taking a coaching approach, and yet they may also be hidden. And hence parties may compete with each other for the underlying value.

Consider, for example, an overseas subsidiary led by a team intent on a management buyout – they may want lots of assignees on local terms so that they can persuade them to stay as permanent employees – or to syphon off all their know-how and send them home early. Alternatively, consider an individual who wants to learn new technical skills in order to move to the competition. Someone needs to consider these competing issues at the outset and each time the potential value of an assignee is reviewed.

Who ‘owns’ the investment
Which department or person has control over the decision as to what an individual assignee does during and after an assignment? Is this GM or the Business? In most cases, it is probably the Business. In which case GM needs to engage with the Business so that the need to review assignments on a portfolio basis, on a regular basis, and with an awareness of competing parties is understood and achieved jointly.

Someone has to coordinate this even if they do not ‘own’ the investment. (Of course, given competing options, the individual also has critical ‘ownership’ over what they choose to do.)

Retain Flexibility
Assignments are most often arranged with a specific single business purpose in mind (initially) and for a specific time. Not only am I advocating clarity on the purpose for all parties, and a regular review of performance, creating flexibility adds value. In other words, a clear and explicit agreement that the business will always be looking for opportunities to enhance the value of the assignment – which, for example, may include new tasks, extending the timeframe and even shortening the timeframe. Of course, changes will need agreement given that there are competing options involved. Nonetheless flexibility brings value.

Job rotation is desirable
Building on the idea of flexibility within any IA, the greater the level of regular job rotation within a business, the greater the opportunity to move an assignee into a new role that fits any improved skill base/experience after the assignment. And hence the greater the value an assignee can offer and the Business can gain after the initial assignment. Job Rotation policies positively affect the value of IAs.

It’s not about a single number
Some people get excited about ‘ROI’ being a single number which needs calculating for each assignment. Definitely not. The strict financial definition of ROI is never used in Finance – it’s useless! Rather, ROI refers to a range of calculations – a concept. So, don’t use ROI in GM unless it’s aligned with what your colleagues in Finance say! I think it’s best to avoid the term completely. Prepare business cases to assess the value, using expert opinion which recognises the subjectivity involved. (And, by the way, most of the numbers that Finance creates are subjective and based on expert opinion too.)

Conclusion

These are just some of the factors that will help drive value from IAs. If you want to discuss this further I’d be delighted to help. The key messages are:

• Intentionally and proactively apply the skills of coaching when evaluating assignments
• Review the value of your assignments on a portfolio basis
• Review the value of each assignment regularly and frequently (annually is insufficient)
• Recognise and identify any competition or conflict for the value that IAs create
• Establish who ‘owns’ or controls each IA within the organisation
• Maximise the flexibility within each IA
• A policy of job rotations within the organisation increases the potential value of each IA
• Do not try to calculate a single number to judge the value of your assignments

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Phil Renshaw is a Visiting Fellow at Cranfield University and a Visiting Professor in Leadership and Coaching at the LIBF. His recent publication, Coaching On The Go, is considered to be an excellent and easily-accessible support tool for assignees travelling to new contexts. He has published widely about his Global Mobility research and he blogs about leadership and coaching.
He’d love to talk more with anyone interested – especially if you are interested in further research.

Dr Phil Renshaw Cranfield School of Management

 

Context

Many organisations have begun mobilisations again after COVID lockdowns and many, many more are in the process of planning them in the coming weeks and months. A key area that must not be overlooked is the structuring of mobilisations.

I’ve been advising organisations on employee mobility now for 21 years. Without a doubt, when a deployment gets complex, takes too long and costs end up more than expected, a lack of clearly defined mobilisation structure is almost always a key cause. Those managing employee mobility can be in the middle of all of this. As a result, structuring is a key area to understand for mobility professionals and HR to consult on and bring clarity to.

Many organisations deploy employees to work across borders under tried and tested approaches. These might be for high volume moves, such as secondees or assignees serving long standing customers or internal projects. As they are long standing, the business will be experienced on what to expect. Enterprise wide there is often a well-defined and well understood process. Most importantly, there is probably a tried and tested assignment structure in place. However, I find that this is not always the case.

For some organisations, deploying people across borders can be a new or growing activity or they are handling new types of deployments. Some examples of this would be:

• a mobilisation is taking place across a new home/host combination, one that has not been previously undertaken
• a new project or customers go and live in a new country where the business does not yet have an office or registered or other presence
• a cross-border remote or virtual working arrangement is required
• a whole management team may need to relocate to a new country as the corporate seat. HQ or domicile is moving
• a senior executive is hired into a cross-border role
• Brexit related regulatory change is requiring executives to commute 3-4 days a week to a new office location.

What do we mean by mobilisation structure?

These are fundamentals of a work arrangement. The requirements, or constraints, from the business, the employee or law and legislation.

As a minimum, it’s necessary to consider the following questions.

• Should this be a local employment or secondment/assignment?
• What are the start and end dates?
• Where will duties be performed? What % in which countries?
• Where will the employee live, where will their family live?
• How should variances in tax rates be handled?
• What are there immigration, labour law, payroll tax and social security obligations?
• What compensation should be paid?

Without clear answers to the above areas it simply will not be possible to know the costs and compliance implications – therefore it will be very hard for the business or the employee to know what they are agreeing to or signing up for.

There are many other aspects to consider, listed below. This is not an exhaustive list.

• What entity will employ the individual?
• Where will the compensation and benefits ‘home’ be? - where will pensions etc. be administered?
• What is the employment history? Where have pension and social security contributions been made to date?
• Where will the employee (and their family) live?
• Which country office is the employee expected to be based at?
• What work locations is the employee expected to regularly work from?
• What travel and accommodation costs are expected?
• What is the budget for the role?
• What is the duration of the role?
• What and where is the next role of this employee?
• Does the employee have to take on statutory roles e.g. Directorships etc.?
• Where should the employee receive payroll payments, which location and currencies?
• Are there entities, and what sort, in the countries in which the employee is expected to work? What relationship, if any, will the employee have with that local business?
• What support will the employee get e.g. benefits, allowances etc.?
• What is the role and what will objectives and reporting lines look like?
• How will the costs of the role be met? Which entity/entities will be responsible for the cost and to what extent?

The key point here, is that having too many undecided moving parts makes it very difficult to analyse, agree and implement a structure. This means more complexity, more time and more risk.

Time spent upfront discussing the above matters with the business is time well spent. It won’t always be possible to have answers to all the above matters, some may well remain flexible or the business may be open to a mobility specialist’s recommendations. This is OK, options can then be put forward for those open matters which can then give different outcomes from a cost, risk and employee perspective and the business can pick the option that best meets overall needs.

What can go wrong with deploying without a structure?

1. Losing control

Deploying talent is complicated and time consuming. Where relocations and families are involved, there can be a huge amount at stake for the individual. Against this backdrop, there may be a pressing need for the employee to be operational as soon as possible. If an assignment structure is not clear, things will move slowly and uncertainty will develop. The end result is a loss of control for those who are trying to coordinate and oversee the deployment. Timeframes and deadlines slip as complexity and employee anxiety increases. 

2. Compensation complexity

Tax and social security rates vary across the world. If the impact of these are identified and analysed during the assignment structuring phase then solutions can be identified. Without review, these issues can come as surprises to the employee and the business. Double taxation and unexpected tax rates resulting in lower net compensation negatively impacts the employee experience. Equally, if there are tax breaks the employee could have been entitled, to but these were not identified, and deadlines to take action have passed, there can be a sense the company has cost the employee or itself unnecessary taxes.

Where the employee moves on local arrangements with local pensions and benefits, it is worth considering where they will go next, and their benefits history to date. A number of local to local moves during a career can give rise to a jigsaw puzzle of pensions and social security entitlements in different countries. It can be difficult to understand the value of these and how participation and benefits withdrawal will be taxed, or not, in the eventual country of retirement.

Having a view of where the employee’s next role will be is key. If you are sending an employee to a low tax country on a local employment, and enabling them to pay the low taxes there (so no tax equalisation applies), asking them to then next relocate to a higher tax country can be challenging and/or costly. In this scenario, would an assignment arrangement have been initially better?

3. Increased costs

In some ways this is a by-product of any or all of the above. Most businesses produce an assignment costing and obtain sign-off before employee mobilisation. If a number of aspects of the assignment are not agreed, or final, then a costing simply cannot be accurate. The business will sign off and accrue the wrong costs.

In the tax and social security area, there are a number of structuring considerations that can materially impact the cost of the employee. The applicability of tax exemptions and planning can provide significant savings to both the employer and the employee but they have to be considered in time. It’s never ideal to discover a tax planning technique that can reduce costs to the employer, or increase net pay to the employee, has been missed or is not possible as the assignment structure doesn’t enable it.

Conclusion

Deploying employees without having agreed an assignment structure creates a number of challenges and is best avoided. This may also apply to virtual and remote working arrangements.

The areas listed in ‘What do we mean by assignment structure?’ are a good list of questions to gather information on as soon as possible, in order to analyse and recommend a structure. Wherever possible, the structure or most of it, should be agreed with the business before the employee is actively involved, and in all cases before the mobilisation begins. Not doing so can result in delays, non-compliance, complexity, avoidable additional costs and a poorer employee experience.

Top Tips

A bespoke country by country plan, local insight and advice is key to success in global employments. Understanding the order in which key actions have to be dealt with, the interdependencies between them, and the timelines and costs involved are key.

Dinesh Jangra Crowe United Kingdom

 

Context

As travel and lockdown restrictions ease, mobilisations will increase. Planning for cost effective and compliant mobilisations will be key given the financial pressures a number of organisations face. Assignment costings are a key aspect of that mobilisations planning.

There are a number of industry rules of thumb, for example ‘assignees cost three times more than home salary’, which can in fact be accurate in some cases, but finance will always want costs they can plan and accrue for. Most organisations therefore prepare assignment costings that determine the annual cost of the globally mobile employee over the period of the assignment and obtain approval of this costing from senior management.

The costings aren’t straightforward. Ideally, they should factor in the future cost of compensation and benefits. They also involve multiple years and assumptions around key variables like currency and exchange rates.

One of the aspects of these costings that often has people running for cover is taxation. It’s an area that admittedly is quite complex. Let’s look at why, and demystify so that those working in mobility can become familiar with the issues, and be able to support the business in understanding them better.

A key action right now is to look at current mobilised employee costings. Given COVID related demobilisations and employee returns to country of origin, have employees triggered tax residency in a country that wasn’t originally factored into the original costing? Does that costing need to be revisited now to ensure there are no finance related surprises down the line?

What are the tax aspects of assignments costings?

The tax aspects can be a really significant part of a globally mobile work arrangement or assignment costing. Based on having worked on, what must be more than a thousand of these during my career, I would say that taxation aspects can easily be a third or more of the overall costs. When you consider that organisations can annually spend millions (dollars, euros and pound sterling), if not tens of millions, on globally mobile employees, it can be expected that very significant taxes amounts are at stake.

Tax can include income taxes, payroll taxes and social security (both employer and employee). There may also be negative tax costs to consider. Hypothetical tax deductions in a tax equalised arrangement can, in the right circumstances, be treated as a negative cost to the employer and will need to be offset against the payments due to the fiscal authorities.

What makes them complex?

The complexity around tax aspects results from a combination of factors. These can include:

Employers pay the taxes: The term taxes is broader than just income taxes. It includes income taxes that are the responsibility of the employer, because they are a payroll obligation and social security too. On top of that, in many assignments part or all of the taxes due can actually be due by the employer under tax equalisation arrangements. Where this happens, the taxes payable need to be ‘grossed-up’ (a process that calculates the tax due on tax paid by the employer). Tax itself may also be subject to social security, so additional calculations are required to get this aspect right.

Multi-year, multi-country: An assignment can be for a period of two, three or even five years. Two countries are involved so that means that four, five, and 10 tax year calculations may be required as a minimum. I say as a minimum, because tax years around the world aren’t actually all aligned. Whilst a large number of countries do use a calendar year as their tax year, there are a significant number that don’t. As examples - the UK for has a 5 April tax year end, India has 31 March and Australia 30 June. This means that a calendar year in these countries can actually include two tax years. The number of tax calculations required then also increases so two, three and five year assignments may need six, nine or 15 separate tax calculations!

Home and host country calculations need to be linked: Assignees often give rise to tax payment responsibilities in both their home and host country. For example, social security could be due in one country, but income tax due in another country (or both). This means there is a need to constantly consider how the two tax systems interact with each other. A country tax calculation can therefore not be done in isolation, it needs to be prepared taking into account the impact on the other country tax calculation. This leads to ‘circular’ calculations, where an update to one country requires an update to the other and then back again.

Timing of tax payments and refunds: This is one aspect, probably more than any other, that creates questions and confusion. Tax is a trailing aspect of an assignment. Tax years end after the assignment end date which means that the taxes due for the year can’t be finalised until the necessary tax returns are prepared. The tax payment, or refund due, then can then be made many, many months (or even years) after the time the tax returns are prepared. As assignments end, the employees can often transfer to new cost centres so this mismatch between when tax payments and refunds are due when compared to the assignment itself can create lots of extra work.

Different tax treatment in different locations: Life would be really easy if different countries taxed items in the same way around the world. Unfortunately this is not the case. As a result, each item of compensation, or assignment benefit, has to be analysed against the local tax rules that apply to the employee in question. The employee’s own specifics can also result in different tax outcomes. For example, the tax residency or assignment length of an employee may mean certain compensation is taxed differently when compared to others. This level of review is essential to provide an accurate costing.

Tax related support: Tax support services are an essential but somewhat unpredictable part of the tax related costs of an assignment. The work required can often be bespoke by country combination and employee specifics.

What can be done to improve this area?

It's not all complexity and challenge. There are some opportunities in this area to provide real added value back to the business. Here are some things to consider as part of best practice:

Get payroll right: Payroll can play a key role in easing the administration around the costs aspects of assignments. If the payroll taxes paid are aligned (as far as is possible) to the taxes that are actually due, the timing related complications can be reduced. This often means more tax paid is paid sooner. However, where this cashflow issue is not a key concern, it can align costs more directly with the period of the assignments, and cause less surprises and work for finance overall. Review this area if you are seeing significant variances (positive or negative) due on filing the employee tax returns.

Applying tax planning: Unless tax aspects of assignment costings have been reviewed by tax advisors, only a certain amount of tax planning can be included. There are a number of different tax and social security planning techniques that can be applied based on the individual specifics, these can result in significant savings that should not be missed. Similarly, double taxation or even dual social security can often appear in a costing and this should be a red flag to get specialist input from mobility tax experts. Cashflow and total costs can often be improved. If you are using tax advisors to deliver tax briefings and tax returns to your employees and they are not directly involved in the assignment costings, ask them to review your costings.

Establish the correct policy: The assignment costing is mostly a numerical simulation of costs of entitlements that an employee may incur, under the mobility policy or framework of an organisation. What makes these costing more complex, and take longer to finalise is uncertainty. Do spend time to ensure that the entitlements are clear up front, so that time in the costings process is spent reviewing different options, such as employee options in different countries or grades, rather than focusing on the details. Remember, overall cost of an entitlement in a policy should include taxes due on it. Understand which compensation items are taxable and which are not. You might find you can save more money for your organisation and cause less employee dissatisfaction by altering a taxable benefit that the employee values less, than an item that is not taxable that the employee values more.

Provide training support to finance: Assignment costing related questions and issues can often generate a lot of extra work for those managing the mobility process in an organisation. The taxes aspects of those can result in lots of questions from finance as a result of the issues covered above. A training session to go through assignment costings with finance and other stakeholders can be really valuable and reduce the number of queries and questions. Similarly, linking your tax compliance process (tax returns) to the assignment costing accrual by finance, can mean that finance can quickly understand what costs has the business already paid and which ones are still to pay.

Tax related support: Review how tax support is engaged. What proportion of costs actually billed are fixed fee vs hourly rates? Do you accrue for tax service provider costs? What amounts do you accrue for versus what is actually spent? Is someone actively reviewing costs and approving spend? Are you working with a provider that is 'right size' for you giving you compliance and advisory support at the right cost profile for your organisation?

Conclusion

Assignment costings are a critical part of the assignment management process. The tax aspects in them are probably the most complex aspects. Understanding this complexity not only helps the business understand costs better, but also enables mobility professionals to add value by suggesting process improvements.

Context

Cost reductions are very much on the agenda right now, across all functions and all types of business. HR and global mobility team are also impacted. This article covers cost savings that can be achieved through tax planning associated with globally mobile employees. As lockdown and travel restrictions ease and organisations remobilise employees this is a critical area for HR and global mobility team to review and add value to their organisation.

Taxes are often associated with complexity and compliance – difficult areas of the mobility process. It is also, however, an area through which substantial cost savings can also be accessed. There can be very substantial tax savings, often savings for the employer under tax equalisation, so it is vital they are not missed.

The rules differ from country to country so local tax expertise is a must. There are specific tax breaks that apply to globally mobile employees. There are also other tax breaks that were not designed for globally mobile employees, but they do apply to them. 

The tax breaks could apply to all forms of globally mobile employees including long term assignees, short term assignees, local hire employees, business travellers, Directors, commuters and those with regional or cross border roles. 

How big can the savings be?

They can be very valuable. This relates in part, to how tax equalisation works. 

Tax equalisation is an approach that seeks to neutralise differences in tax rates between countries to promote employee mobility. The employee usually agrees they will continue to pay the same level of tax as their home country. This may be through a hypothetical taxes deduction. In return, the employer then agrees that they will settle the actual taxes due (in each location). 

As the employer is settling the taxes due, the compensation becomes what is known as ‘net.’ Tax rates that apply on net compensation are considerably higher because paying the tax for an employee is in itself a benefit on which tax is then again due. As a result, ‘grossed-up’ tax rates apply.

Example The top rate of employee income and social tax rate in the UK is 47%. If this has to be grossed up, then the tax rate becomes 89%. As a result, £89 of tax due by the employer would be saved if £100 of income/compensation can be removed from tax using mobility tax planning. If £50,000 of compensation is removed then £45,000 of income tax saved for the employer. If you have 10 employees to which this applied over five years, the savings could be £2.25 million! The savings could be even larger if social security was also taken into account.

What kind of mobility tax breaks are there? 

The rules and conditions really do vary location by location. Having reviewed the relevant rules across the world, I would suggest they fall into one of the following groups.

1. Tax residency reviews. In broad terms, residency is a concept that connects a person to a tax system and enables a country to tax that person and create tax/payroll related obligations for their employer. 
   
   The timing and duration of employee activity and stay in a country can alter their residency and the taxes due by the employer and
   the employee. It’s very important to ask what if questions as assignments are planned to see if by starting or ending a mobilisation sooner or later if the residency is altered and tax can be reduced.
   
   Right now with the COVID situation, we have seen lots of employees end up in unplanned locations. This is an area for immediate review as this unplanned presence can bring with potentially higher or lower tax costs depending on what happens next.
   
   
2. Mobility tax concessions. Talent attraction is key to a number of major economies. Mobility tax concessions provide preferential lower tax rates and/or significant exemptions from tax. China, Spain, Italy, France, Netherlands, Russia, Sweden, Portugal, Ireland are just some examples. 
   
   There are usually specific requirements on the type of employee who can qualify, for how long and there may be procedural rules to consider (an application has to be made by a certain date in a certain way). 
   
   
3. Housing is a large part of the overall cost of a globally mobile employee. Grossed-up for taxes it is even bigger! A number of countries have the concept of a temporary workplace or dual household cost which provides exemptions from local taxation for part or all of housing related costs. 
   
   There are tax breaks in a number of countries for accommodation based on short term assignments. UK, Germany, USA are just some examples. Where you see short term assignments, review if the housing, travel and subsistence will be exempt and under what conditions to ensure cost savings are not overlooked.
   
   
4. Pensions are a key part of a globally mobile employee’s compensation. A number of countries provide ‘matching’ rules to exempt foreign pension earnings (employer contributions), if the plans broadly align with the local plans that qualify for local tax advantages. Checking how pension participation is treated locally for tax purposes should be a key step. Accessing and applying the local tax exemptions can really make a difference to the overall assignment costs.
   
   This is an area where surprises can exist. This is because pensions are often an invisible (not reported) compensation item in the home country because they have local tax approval. The same is not always true in the host location. It’s an area to check has been properly reviewed.Non-host workdays/time apportionment calculations. A number of countries will not tax compensation relating to duties not performed in the host location, provided certain conditions are met. 
   
   
5. Depending on the number of non-host workdays, this can be a significant tax saving. Think about how many of your globally mobile employees do not just work solely in the host location? Examples include UK, Singapore, China, Hong Kong, France and India. This a key potential cost saving to explore when you know the employee will be working in more countries than just the proposed host location. It should be systematically review to keep costs down.
   
   
6. Tax efficient benefits delivery. How particular compensation is delivered can change how it is taxed. Allowances generally tend to be less beneficial than reimbursements unless the allowances are paid in accordance with locally set tax-free limits. 
   
   Some benefits in some locations can result in lower taxable values (different to the actual cost) if the employer directly pays or contracts for the benefit. This could apply for example to large costs like accommodation and education. It’s important to check if this applies to all the costlier benefits forming part of a globally mobile employee’s assignment package.
   
   
7. Travel and home leave. Travel to, and from, the host country and home can benefit from tax exemptions in a number of countries. Care needs to be taken to understand the local specifics. For example, are there time limits, limitations to the number of trips, or do they have to be reimbursed rather than paid directly by the employee or as an allowance?
   
   
8. Business traveller exemptions. Some countries will tax short term assignees or business travellers, but a number have specific short stay/business travel exemptions which have to be applied for and approved by tax authorities. Using these means that income tax is not due in respect of these trips. A theme of around 60 days emerges in some locations, Ireland and the UK as two examples. There are also possible exemptions under tax treaties. (See previous Mobility Mondays on Double Tax Treaties).
   
   
9. Relocation expenses. There are often exemptions for key relocation expenditure, shipping, temporary accommodation, replacement furnishings etc. A number of countries provide either specific reimbursement or lump sum allowances to provide these items are tax free or exempt. Checking the rules and then structuring the relocation support accordingly can be a good way of reducing assignment costs.

What complications are there?

Local expert tax assistance is vital because although there are overall themes, the rules and process are always country specific. As a result, it’s necessary to understand what procedural steps there are to consider, to ensure the tax breaks apply. There may also be particular claims that have to be made on an employee’s local income tax return.

In short term assignments, there can often be ongoing tax considerations in two countries. As a result, care needs to be taken not to focus exclusively on one location only. What is tax efficient in one country may lead to a worse impact in the other country so it’s important to keep an eye on the overall global cross border tax position. 

Conclusion

Taxes due by employers for a globally mobile employee can be a very significant part of the overall cost of an assignment or cross-border work arrangement. It would not be unusual for 30%, or more, of total assignment costs to be taxes. Utilising mobility tax breaks is key in optimising the overall costs. 

It’s important for mobility professionals to be aware of these tax breaks to ensure the business doesn’t bear unnecessary extra costs. Equally, it’s key to explore early on the requirements and procedural aspects so key set-up steps are not missed. 

People costs can be the key cost in a business. As people are deployed across borders to service customers, clients and grow the business these costs increase and become more ever more complex. Managing compensation correctly not enables compliance but can also create insight for HR leaders and the business.

Compensation management, or compensation accumulation, was a new phrase not so long ago in the world of global mobility.  Over time, the concepts have quickly developed and become a key aspect of leading mobility programmes. This article is not about deciding the compensation - this is in many ways a real art and science in the area of mobility. Here we focus on the compliance aspects and the challenges and opportunities it brings.

Regardless of how large, or small, employee mobility is in an organisation there has to be focus on this area or non-compliance and unnecessary cost is a real risk. As a result, an understanding of this area is really key for those who manage or oversee employee mobility. In some ways it’s all about understanding what is required and ensuring either in-house or external resources are responsible for delivering it. 

What is compensation and why is it complex?

Compensation is the general term given to:

• payments in cash to the employee
• expense reimbursements
• payments made on behalf of employees to third parties (benefits)
• participation in employer benefits and incentives such as pensions, health insurance, bonuses and share awards 
• payments to fiscal authorities made on behalf employees (taxes and social security).

What makes compensation in the context of employee mobility particularly complex is the number of sources, the different currencies, differing tax treatments and tax years across the world and the multiple process owners and suppliers involved. It’s quite possible that an employee is 'receiving' compensation from 6-8 sources across two countries and in at least two currencies in two countries.

Let’s take the relatively straight forward example – the UK employee working in the US for three years. Here are just some compensation sources that likely apply (there are more!):

1.  UK payroll payments 
2.  US payroll payments 
3.  US expense reimbursements
4.  UK expense reimbursements
5.  Relocation/ shipping expenses for suppliers engaged by relocation management support provider
6.  Tax payments generated by payroll or instructed by tax support provider in the UK
7.  Tax payments generated by payroll or instructed by tax support provider in the US
8.  UK pension payments made by the UK employer
9.  Private healthcare provided by global healthcare insurers 
10.  Accommodation and rent paid by/settled by the US company.

As the above example shows the compensation for this one employee now involves multiple countries, currencies, sources and process and data owners. Add to this the fact that payroll and reporting compliance is likely required in the UK and the US at the same time and they have differing tax years and differing tax and payroll reporting requirements and we quickly see how complex this gets. The compliance around a single employee who is globally mobile can be quite bespoke and is based on the country combination and individual status of the employee so using general country rules aren’t always easy or appropriate.

Local payrolls will be expert in managing the reporting for local payments but will not have the process agility, or resources, to take all the above into account. As a result, additional resources and expertise need to be deployed. 

What risks does this lead to?

There have been a number of drivers in recent years that have made this an important area for review and management.

More and more tax and fiscal authorities are looking to payroll taxes as an area to focus on to protect and grow tax revenues. This very much includes payroll taxes in the international and employee mobility context.

It’s not that unusual that a fiscal authority payroll audit may involve the review of the employee mobility policy and/or assignment letters. Tax and fiscal authorities around the world recognise the complexity that comes with compensation compliance for globally mobile employees and therefore how difficult resultant compliance can be. As a result, it can become the Achilles heel of an organisation where non-compliance can be found and uncovered. Do you know if all benefits and payments your mobility policy entitles employees to are always considered for payroll and expenses reporting? Ensuring payroll compliance is a key priority to prevent exposure to penalties and interest and related risks.

Increasing focus on controls and employee related analytics means that total costs visibility and proactive ongoing management has become a key aspect of most employee mobility programmes. Organisations have to understand the total global costs of an employee and check the costs are as expected and appropriate accruals are made and updated for finance purposes.

From a regulatory perspective the organisation may have officers who are responsible for 'signing off' that payroll compliance is up to date and accurate. This can’t be done without a process in place.

Something that is overlooked is the enterprise workload that managing this area results in. The data comes from many sources, in different formats and there are multiple payroll and reporting deadlines around the world that have to me. Data needs to be carefully and skillfully managed and project management expertise is a must. This can put pressure on the HR, mobility team as they are not always staffed to deliver this workload.

What approaches are there?

As risks have increased in recent years so has the sophistication in the solutions that organisations can deploy. At the most basic level an organisation needs to build or deploy process and expertise that enables the following:

• understands the global compensation of globally mobile employees at an individual level 
• collects the information from all sources on a regular basis
• consolidates the information into a single global total pay summary
• reviews the information collected against compensation entitlement to check it is complete and review any variances (payments made that should not have been or made at the wrong level) 
• uses tax and social security expertise or systems to translate the global total pay into local currency and local payroll reporting and compliance instructions 
• local payroll processing is then shared with other locations in case payroll generated 'compensation' such as wage and social security taxes are reportable in other countries involved 
• provides reporting and people and cost related insight to management, finance and tax preparers

How this process should be managed depends very much on the resources, technology and expertise an organisation has access to.

In some organisations, this area can be managed in-house and others choose to outsource part, or even all, of the process to tax and accounting firms and other specialised providers of global mobility compliance who have developed the required technology and process expertise. Not having a process is a real risk since without it non-compliance will follow.

What benefits can focus on this lead to?

Whilst a driver to implement a compensation management, or accumulation process, is to improve compliance there are a number of other valuable outputs the process can deliver:

• global payroll compliance – reduced exposure to penalties and interest and enabling adherence to regulatory controls and sign off requirements 
• visibility of the total costs of the globally mobile employee population
• provides a mechanism for variance analysis – checking the compensation delivered is the compensation entitlement signed off by the business 
• enables tracking and reporting over time against strategic goals or targets such as cost modelling and analysis and alignment with diversity and talent programmes
• acceleration of employee tax compliance process – globally mobile employees tax returns and related policy reconciliations are prepared quicker so that employee satisfaction is increased.

Conclusion

Compensation management / accumulation is a key consideration for those involved in or managing employee mobility.

Whether you have 10 mobile employees or 1,000, the core parts of the process that required attention are similar. As a minimum organisations should check their current process, roles and responsibilities in this area with their own teams and suppliers to ensure they don’t inadvertently have a gap that will result in risks and lost opportunities. Who in your organisation is responsible for managing that global compensation is accurately reported where required in all locations?

Taxes are often associated with complexity and compliance – difficult areas of the mobility process. It is also, however, an area through which substantial cost savings can also be accessed. Awareness of the global mobility related tax planning (tax breaks) opportunities that apply is a really important opportunity to add value for those involved in, and managing mobility. There can be very substantial tax savings, often savings for the employer under tax equalisation, so it is vital they are not missed.

How big can the savings be?

They can be very valuable. This relates in part, to how tax equalisation works. 

Tax equalisation is an approach that seeks to neutralise differences in tax rates between countries to promote employee mobility. The employee usually agrees they will continue to pay the same level of tax as their home country. This may be through a hypothetical taxes deduction. In return, the employer then agrees that they will settle the actual taxes due. 

As the employer is settling the taxes due, the compensation becomes what is known as ‘net.’ Tax rates that apply on net compensation are considerably higher because paying the tax for an employee is in itself a benefit on which tax is then again due. As a result, ‘grossed-up’ tax rates apply.

Example: The top rate of income tax in the UK is 45%. If this has to be grossed up, then the tax rate becomes 89%. As a result, £89 of tax due by the employer would be saved if £100 of income/compensation can be removed from tax using mobility tax planning. If £50,000 of compensation is removed then £45,000 of income tax saved for the employer. If you have 10 employees to which this applied over five years, the savings could be £2.25 million! The savings could be even larger if social security was also taken into account.

Who do expatriate tax breaks apply to?

The rules differ from country to country so local tax expertise is a must. There are specific tax breaks that apply to globally mobile employees. There are also other tax breaks that were not designed for globally mobile employees, but they do apply to them. 

The tax breaks could apply to all forms of globally mobile employees including long term assignees, short term assignees, local hire employees, business travellers, Directors, commuters and those with regional or cross border roles. 

What kind of mobility tax breaks are there? 

The rules and conditions really do vary location by location. Having reviewed the relevant rules across the world, I would suggest they fall into one of the following groups.

1. Mobility tax concessions. Talent attraction is key to a number of major economies. Mobility tax concessions provide preferential lower tax rates and/or significant exemptions from tax. China, Spain, Italy, France, Netherlands, Russia, Sweden, Portugal, Ireland are just some examples. 
   
   There are usually specific requirements on the type of employee who can qualify, for how long and there may be procedural rules to consider (an application has to be made by a certain date in a certain way). 
   
   
2. Housing is a large part of the overall cost of a globally mobile employee. Grossed-up for taxes it is even bigger! A number of countries have the concept of a temporary workplace or dual household cost which provides exemptions from local taxation for part or all of housing related costs. 
   
   There are tax breaks in a number of countries for accommodation based on short term assignments. UK, Germany, USA are just some examples. Where you see short term assignments, review if the housing, travel and subsistence will be exempt and under what conditions to ensure cost savings are not overlooked.
   
   
3. Pensions are a key part of a globally mobile employee’s compensation. A number of countries provide ‘matching’ rules to exempt foreign pension earnings (employer contributions), if the plans broadly align with the local plans that qualify for local tax advantages. Checking how pension participation is treated locally for tax purposes should be a key step. Accessing and applying the local tax exemptions can really make a difference to the overall assignment costs.
   
   
4. Non-host workdays/time apportionment calculations. A number of countries will not tax compensation relating to duties not performed in the host location, provided certain conditions are met. 
   
   Depending on the number of non-host workdays, this can be a significant tax saving. Think about how many of your globally mobile employees do not just work solely in the host location? Examples include UK, Singapore, China, Hong Kong, France and India. This a key potential cost saving to explore when you know the employee will be working in more countries than just the proposed host location. It should be systematically review to keep costs down.
   
   
5. Tax efficient benefits delivery. How particular compensation is delivered can change how it is taxed. Allowances generally tend to be less beneficial than reimbursements unless the allowances are paid in accordance with locally set tax-free limits. 
   
   Some benefits in some locations can result in lower taxable values (different to the actual cost) if the employer directly pays or contracts for the benefit. This could apply for example to large costs like accommodation and education. It’s important to check if this applies to all the costlier benefits forming part of a globally mobile employee’s assignment package.
   
   
6. Travel and home leave. Travel to, and from, the host country and home can benefit from tax exemptions in a number of countries. Care needs to be taken to understand the local specifics. For example, are there time limits, limitations to the number of trips, or do they have to be reimbursed rather than paid directly by the employee or as an allowance?
   
   
7. Business traveller exemptions. Some countries will tax short term assignees or business travellers, but a number have specific short stay/business travel exemptions which have to be applied for and approved by tax authorities.  Using these means that income tax is not due in respect of these trips. A theme of around 60 days emerges in some locations, Ireland and the UK as two examples. There are also possible exemptions under tax treaties. (See previous Mobility Mondays on Double Tax Treaties).
   
   
8. Relocation expenses. There are often exemptions for key relocation expenditure, shipping, temporary accommodation, replacement furnishings etc. A number of countries provide either specific reimbursement or lump sum allowances to provide these items are tax free or exempt. Checking the rules and then structuring the relocation support accordingly can be a good way of reducing assignment costs.

What complications are there?

Local expert tax assistance is vital because although there are overall themes, the rules and process are always country specific. As a result, it’s necessary to understand what procedural steps there are to consider, to ensure the tax breaks apply. There may also be particular claims that have to be made on an employee’s local income tax return.

In short term assignments, there can often be ongoing tax considerations in two countries. As a result, care needs to be taken not to focus exclusively on one location only. What is tax efficient in one country may lead to a worse impact in the other country so it’s important to keep an eye on the overall global cross border tax position. 

Conclusion

Taxes due by employers for a globally mobile employee can be a very significant part of the overall cost of an assignment or cross-border work arrangement. Utilising mobility tax breaks is key in optimising the overall costs. 

It’s important for mobility professionals to be aware of these tax breaks to ensure the business doesn’t bear unnecessary extra costs. Equally, it’s key to explore early on the requirements and procedural aspects so key set-up steps are not missed. 

Context

Global mobility is about the deployment of employees across borders. Those borders represent state or national boundaries, and those states or nations have their own tax systems.

Tax rates and taxing methodologies differ between countries and this results in different tax rates and differing taxing points (timing of when taxes are due). Compensation also changes in a globally mobile work arrangement, so that new allowances and benefits are now provided to the employee to cover additional costs and support that is required. For example, cost of living allowances, housing, travel and education.

The combination of different tax rates and different compensation results in complexity.

Reasonable questions from employees such as ‘how much will I earn each month after taxes?’ and from finance ‘what will this arrangement cost the business annually’ take on new and additional complexity when employees become globally mobile.

To answer these questions, it’s fundamentally necessary to clarify what tax approach is to be applied to the employee’s compensation. Doing this involves recognising different taxes may be due in a globally mobile work arrangement, and clarifying what portion of those taxes are to be paid by the employee. 

An absolutely key point is that regardless of what taxes are actually due and where, it is possible to agree a different approach between the employee and the employer. Essentially, this agreement is what determines the compensation the employee receives after taxes.

What influences approaches?

There are different compensation tax approaches and the right one to apply will take in account of a number of factors including:

1. Tax rates and timing of taxes: The employee will be concerned with understanding how working in another country impacts their compensation after taxes? If an employee is facing increased tax rates, or maybe compensation is taxed when it would not have been in their home country, this can be a real barrier to mobility.

   It can be possible for the tax rate in the new country of work to be substantially higher than home. The country of work may tax an employee of the award of share related compensation when tax is only due in the home country when the transfer of shares actually takes place (usually some years later).

2. Compensation: As mentioned above, globally mobile employees receive additional types of compensation and benefits. Without these, the employee could be significantly worse off financially, and not having the right support could reduce the likelihood of success in their role.

   Very often, this additional compensation is taxable. The question then arises of whose responsibility is the tax due on these benefits? Does the employee expect to pay tax on hotels or housing costs that are taxable?

3. Talent or compensation home: The talent/compensation home is closely associated with the country in which the employee is formally employed.

It can make sense that where an employee moves to a host employment, that they should now pay tax in that country. Equally, where an employee is working for a short period of time outside country of employment that the taxes they should pay are the home rates. 

Different compensation tax approaches

It is vital to know which approach should be applied. Payroll, tax returns and reporting can’t really be prepared without clarification. This should ideally be determined and documented up-front. If not, the employee may be expecting the wrong compensation, and the business accruing for the wrong costs.

The main approaches usually deployed are:

1. Laisse-faire/Gross: The employee is on their own. All taxes due, regardless of when, at what rate and on what compensation are payable by the employee. The approach is often used when employees are either locally hired (from another country) or, an employee moves on a permanent transfer to a new country.

   This arrangement can work well if the compensation levels are set with reference to local norms (in the new country of work), and there are no additional taxable compensation or benefits. 

2. Gross with net benefits: This is often also referred to as the local plus method. Essentially, this approach results in the employee paying taxes on the compensation that other local employees pay tax on. The employer, however, pays the tax on any additional compensation.

   The arrangement is usually deployed where the employee is receiving taxable benefits (for example, housing, education) and it is undesirable, or inequitable, for the employee to pay the resulting taxes due. 

3. Tax equalised: This approach ensures that the employee pays the same level of taxes as they would have done, had they not undertaken the globally mobile work arrangement.

   This approach will usually result in either the employee continuing to have home country payroll taxes deducted, or a hypothetical tax amount is deducted from them. Hypothetical tax is simply a deduction from pay. The hypothetical tax amount is usually the home taxes that would have been due on stay at home compensation if the employee worked only in the home country. Any actual taxes then due in either the home or host country are payable by the employer. 

   In some scenarios the hypothetical tax deducted isn’t the home country tax rate. It could be a global tax rate or the taxes of another country (neither home or host). This usually applies where there are employees from multiple countries, between whom, compensation and tax rates equality is desired.

4. Tax protected: Similar in concept to tax equalised but here, the employee is allowed to pay less tax than the taxes that would have been due in their home country. If the taxes however are higher, then the employer would pay the difference.

Conclusion

It is simply not possible to determine the costs of a cross border work arrangement or explain to an employee what they will earn each month, without clarifying which compensation tax approach applies.

There are different approaches and the right one will depend on a mix of tax rates, compensation and the talent approaches.

Key to this area is clarity and deciding that upfront. If not done, over time the employee and employer may have different understandings, with differing total employment costs in mind. The result would be surprises that may not be welcome by anyone!

Context

I’ve been advising organisations on employee mobility now for 20 years. Without a doubt, when a deployment gets complex, takes too long and costs more than expected, a lack of clearly defined assignment structure is almost always a key cause. Those managing employee mobility can be in the middle of all of this. As a result, assignment structuring is a key area to understand for mobility professionals to consult and bring clarity to.

Many organisations deploy employees to work across borders under tried and tested approaches. These might be for high volume moves, such as secondees or assignees serving long standing customers or internal projects. As they are long standing, the business will be experienced on what to expect and, enterprise wide there is often a well-defined and well understood process. Most importantly, there is probably a tried and tested assignment structure in place. However, I find that this is not always the case.

For some organisations, deploying people across borders can be a new or growing activity or they are handling new types of deployments. Some examples of this would be:

• a whole management team may need to relocate to a new country as the corporate seat or domicile is moving
• a senior executive is hired into a cross-border role
• Brexit related regulatory change is requiring executives to commute 3-4 days a week to a new office location.

What do we mean by assignment structure?

These are fundamentals of a work arrangement. The requirements, or constraints, from the business or the employee. At a minimum, it’s necessary to consider the following questions.

• Should this be a local employment or secondment/assignment? 
• How should variances in tax rates be handled?
• Where are the immigration, payroll tax and social security obligations? 
• What compensation should be paid?

There are many other aspects to consider, listed below. This is not an exhaustive list.

• What entity will employ the individual?
• The compensation and benefits ‘home’, where will pensions etc. be administered?
• What is the employment history? Where have pension and social security contributions been made to date?
• Where will the employee (and their family) live?
• Which country office is the employee expected to be based at?
• What work locations is the employee expected to regularly work from?
• What travel and accommodation costs are expected?
• What is the budget for the role?
• What is the duration of the role?
• What and where is the next role of this employee?
• Does the employee have to take on statutory roles e.g. Directorships etc.?
• Where should the employee receive payroll payments, which location and currencies?
• Are there entities, and what sort, in the countries in which the employee is expected to work? What relationship, if any, will the employee have with that local business?
• What support will the employee get e.g. benefits, allowances etc.?
• What is the role and what will objectives and reporting lines look like?

The key point here, is that having too many undecided moving parts makes it very difficult to analyse, agree and implement a structure. This means more complexity, more time and more risk.

Time spent upfront discussing the above matters with the business is time well spent. It won’t always be possible to have answers to all the above matters, some may well remain flexible or the business may be open to a mobility specialist’s recommendations. This is OK, options can then be put forward for those open matters which can then give different outcomes from a cost, risk and employee perspective and the business can pick the option that best meets overall needs. 

What can go wrong with deploying without a structure?

1. Losing control
Deploying talent is complicated and time consuming. Where relocations and families are involved, there can be a huge amount at stake for the individual. Against this backdrop, there may be a pressing need for the employee to be operational as soon as possible. If an assignment structure is not clear, things will move slowly and uncertainty will develop. The end result is a loss of control for those who are trying to coordinate and oversee the deployment. Timeframes and deadlines slip as complexity increases.  

2. Compensation complexity
Tax and social security rates vary across the world. If the impact of these are identified and analysed during the assignment structuring phase then solutions can be identified. Without review, these issues can come as surprises to the employee and the business. Double taxation and unexpected tax rates resulting in lower net compensation negatively impacts the employee experience. Equally, if there are tax breaks the employee could have been entitled, to but these were not identified, and deadlines to take action have passed, there can be a sense the company has cost the employee unnecessary taxes.

Where the employee moves on local arrangements with local pensions and benefits, it is worth considering where they will go next, and their benefits history to date. A number of local to local moves during a career can bring a jigsaw of pensions and social security entitlements in different countries. It can be difficult to understand the value of these and how participation and benefits withdrawal will be taxed, or not, in the eventual country of retirement.

Having a view of where the employee’s next role will be is key. If you are sending an employee to a low tax country on a local employment, and enabling them to pay the low taxes there (so no tax equalisation applies), asking them to then next relocate to a higher tax country can be challenging and/or costly. In this scenario, would an assignment arrangement have been better?

3. Increased costs 
In some ways this is a by-product of any or all of the above. Most businesses produce an assignment costing and obtain sign-off before employee mobilisation. If a number of aspects of the assignment are not agreed, or final, then a costing simply cannot be accurate. The business will sign off and accrue the wrong costs.

In the tax and social security area, there are a number of structuring considerations that can materially impact the cost of the employee. The applicability of tax exemptions and planning can provide significant savings to both the employer and the employee but they have to be considered in time. It’s never ideal to discover a tax planning technique that can reduce costs to the employer, or increase net pay to the employee, has been missed or is not possible as the assignment structure doesn’t enable it.

Conclusion

Deploying employees without having agreed an assignment structure creates a number of challenges and is best avoided.

The areas listed in ‘What do we mean by assignment structure?’ are a good list of questions to gather information on as soon as possible, in order to analyse and recommend a structure. Wherever possible, the structure or most of it, should be agreed with the business before the employee is actively involved, and in all cases before the mobilisation begins. Not doing so can result in delays, non-compliance, complexity, avoidable additional costs and a poorer employee experience.

Context

Assignment costings are a key aspect of managing employee mobility. There are a number of industry rules of thumb, for example ‘assignees cost 3 x home salary’, which can in fact be accurate in some cases, but finance will always want costs they can plan and accrue for. Most organisations therefore prepare assignment costings that determine the annual cost of the globally mobile employee over the period of the assignment and obtain approval of this costing from senior management.

The costings aren’t straightforward. Ideally they should factor in the cost of compensation and benefits into the future. They also involve multiple years and assumptions around key variables like currency and exchange rates.

One of the aspects of these costings that often has people running for cover is taxation. It’s an area that admittedly is quite complex. Let’s look at why, and demystify so that those working in mobility can become familiar with the issues, and be able to support the business in understanding them better.

What are the tax aspects of assignments costings?

The tax aspects can be a really significant part of a globally mobile work arrangement or assignment costing. Based on having worked on, what must be more than a thousand of these during my career, I would say that taxation aspects can easily be a third or more of the overall costs. When you consider that organisations can annually spend millions (dollars, euros and pound sterling), if not tens of millions, on globally mobile employees it follows that very significant taxes amounts are at stake.

Tax can include income taxes, payroll taxes and social security (both employer and employee). There may also be negative tax costs to consider. Hypothetical tax deductions in a tax equalised arrangement can, in the right circumstances, be treated as a negative cost to the employer and will need to be offset against the payments due to the fiscal authorities.

What makes them complex?

The complexity around tax aspects results from a combination of factors. These can include:

• Employers pays the taxes: The term taxes is broader than just income taxes. It includes income taxes that are the responsibility of the employer, because they are a payroll obligation and social security too. On top of that, in many assignments part or all of the taxes due can actually be due by the employer under tax equalisation arrangements. Where this happens, the taxes payable need to be ‘grossed-up’ (a process that calculates the tax due on tax paid by the employer). Tax itself may also be subject to social security, so additional calculations are required to get this aspect right.
  
  
• Multi-year, multi-country: An assignment can be for a period of two, three or even five years. Two countries are involved so that means that four, five, and 10 tax year calculations may be required as a minimum. I say as a minimum, because tax years around the world aren’t actually all aligned. Whilst a large number of countries do use a calendar year as their tax year, there are a significant number that don’t. As examples - the UK for has a 5 April tax year end, India has 31 March and Australia 30 June. This means that a calendar year in these countries can actually include two tax years. The number of tax calculations required then also increases so two, three and five year assignments may need six, nine or 15 separate tax calculations!
  
  
• Home and host country calculations need to be linked: Assignees often give rise to tax payment responsibilities in both their home and host country. For example, social security could be due in one country, but income tax due in another country (or both). This means there is a need to constantly consider how the two tax systems interact with each other. A country tax calculation can therefore not be done in isolation, it needs to be prepared taking into account the impact on the other country tax calculation. This leads to ‘circular’ calculations, where an update to one country requires an update to the other and then back again.
  
  
• Timing of tax payments and refunds: This is one aspect, probably more than any other, that creates questions and confusion. Tax is a trailing aspect of an assignment. Tax years end after the assignment end date which means that the taxes due for the year can’t be finalised until the necessary tax returns are prepared. The tax payment, or refund due, then can then be made many, many months (or even years) after the time the tax returns are prepared. As assignments end, the employees can often transfer to new cost centres so this mismatch between when tax payments and refunds are due when compared to the assignment itself can create lots of extra work.
  
  
• Different tax treatment in different locations: Life would be really easy if different countries taxed items in the same way around the world. Unfortunately this is not the case. As a result, each item of compensation, or assignment benefit, has to be analysed against the local tax rules that apply to the employee in question. The employee’s own specifics can also result in different tax outcomes. For example, the tax residency or assignment length of an employee may mean certain compensation is taxed differently when compared to others. This level of review is essential to provide an accurate costing.

What can be done to improve this area?

It’s not all complexity and challenge. There are some opportunities in this area to provide real added value back to the business. Here are some things to consider as part of best practice:

• Get payroll right: Payroll can play a key role in easing the administration around the costs aspects of assignments. If the payroll taxes paid are aligned (as far as is possible) to the taxes that are actually due, the timing related complications can be reduced. This often means more tax paid is paid sooner. However, where this cash flow issue is not a key concern, it can align costs more directly with the period of the assignments, and cause less surprises and work for finance overall. Review this area if you are seeing significant variances (positive or negative) due on filing the employee tax returns.
  
  
• Applying tax planning: Unless tax aspects of assignment costings have been reviewed by tax advisors, only a certain amount of tax planning can be included. There are a number of different tax and social security planning techniques that can be applied based on the individual specifics, these can result in significant savings that should not be missed. Similarly, double taxation or even dual social security can often appear in a costing and this should be a red flag to get specialist input from mobility tax experts. Cash flow and total costs can often be improved. If you are using tax advisors to deliver tax briefings and tax returns to your employees and they are not directly involved in the assignment costings, ask them to review your costings.
  
  
• Establish the correct policy: The assignment costing is mostly a numerical simulation of costs of entitlements that an employee may incur, under the mobility policy or framework of an organisation. What makes these costing more complex, and take longer to finalise is uncertainty. Do spend time to ensure that the entitlements are clear up front, so that time in the costings process is spent reviewing different options, such as employee options in different countries or grades, rather than focusing on the details. Remember, overall cost of an entitlement in a policy should include taxes due on it. Understand which compensation items are taxable and which are not. You might find you can save more money for your organisation and cause less employee dissatisfaction by altering a taxable benefit that the employee values less, than an item that is not taxable that the employee values more.
  
  
• Provide training support to finance: Assignment costing related questions and issues can often generate a lot of extra work for those managing the mobility process in an organisation. The taxes aspects of those can result in lots of questions from finance as a result of the issues covered above. A training session to go through assignment costings with finance and other stakeholders can be really valuable and reduce the number of queries and questions. Similarly, linking your tax compliance process (tax returns) to the assignment costing accrual by finance, can mean that finance can quickly understand what costs has the business already paid and which ones are still to pay.

Conclusion

Assignment costings are a critical part of the assignment management process. The tax aspects in them are probably the most complex aspects. Understanding this complexity not only helps the business understand costs better, but also enables mobility professionals to add value by suggesting process improvements and cost reductions.

Context

Compensation management, or compensation accumulation, was a new phrase not so long ago in the world of global mobility.  Over time, the concepts have quickly developed and become a key aspect of managing mobility programmes and related compliance. This article is not about determining compensation - this is in many ways a real art and science in the area of mobility. Here we focus on the compliance aspects. 

Regardless of how large, or small, employee mobility is in an organisation there has to be focus on this area or non-compliance and unnecessary cost is a real risk. As a result, an understanding of this area is really key for those who manage or oversee employee mobility. In some ways it’s all about understanding what is required and ensuring either in-house or external resources are responsible for delivering it. 

What is compensation and why is it complex?

Compensation is the general term given to:

• payments in cash to the employee
• expense reimbursements
• payments made on behalf of employees to third parties
• participation in employer benefits and incentives such as pensions, health insurance, bonuses and share awards 
• payments to fiscal authorities made on behalf employees (taxes and social security).

What makes compensation in the context of employee mobility particularly complex is the number of sources, the different currencies, differing tax treatments and tax years across the world and the multiple process owners and suppliers involved. It’s quite possible that an employee is 'receiving' compensation from 6-8 sources across two countries and in at least currencies in two countries.

Let’s take the relatively straight forward example – the UK employee working in the US for three years. Here are some compensation sources that likely apply:

1.  UK payroll payments 
2.  US payroll payments 
3.  US expense reimbursements
4.  UK expense reimbursements
5.  relocation/ shipping expenses for suppliers engaged by relocation management support provider
6.  tax payments generated by payroll or instructed by tax support provider in the UK
7.  tax payments generated by payroll or instructed by tax support provider in the US
8.  UK pension payments made by the UK employer
9.  private healthcare provided by global healthcare insurers 
10.  accommodation and rent paid by/settled by the US company.

As the above example shows the compensation for this one employee now involves multiple countries, currencies, sources and process and data owners. Add to this the fact that payroll and reporting compliance is likely required in the UK and the US at the same time and they have differing tax years and differing tax and payroll reporting requirements and we quickly see how complex this gets. The compliance around a single employee who is globally mobile can be quite bespoke and is based on the country combination and individual status of the employee so using general country rules aren’t always easy or appropriate.

Local payrolls will be expert in managing the reporting for local payments but will not have the process agility, or resources, to take all the above into account. As a result, additional resources and expertise need to be deployed. 

What risks does this lead to?

There have been a number of drivers in recent years that have made this an important area for review and management.

More and more tax and fiscal authorities are looking to payroll taxes as an area to focus on to protect and grow tax revenues. This very much includes payroll taxes in the international and employee mobility context.

It’s not that unusual that a fiscal authority payroll audit may involve the review of the employee mobility policy and/or assignment letters. Tax and fiscal authorities around the world recognise the complexity that comes with compensation compliance for globally mobile employees and therefore how difficult resultant compliance can be. As a result, it can become the Achilles heel of an organisation where non-compliance can be found and uncovered. Do you know if all benefits and payments your mobility policy entitles employees to are always considered for payroll and expenses reporting? Ensuring payroll compliance is a key priority to prevent exposure to penalties and interest and related risks.

Increasing focus on controls and employee related analytics means that total costs visibility and proactive ongoing management has become a key aspect of most employee mobility programmes. Organisations have to understand the total global costs of an employee and check the costs are as expected and appropriate accruals are made and updated for finance purposes.

From a regulatory perspective the organisation may have officers who are responsible for 'signing off' that payroll compliance is up to date and accurate. This can’t be done without a process in place.

What approaches are there?

As risks have increased in recent years so has the sophistication in the solutions that organisations can deploy. At the most basic level an organisation needs to build or deploy process and expertise that enables the following:

• understands the global compensation of globally mobile employees at an individual level 
• collects the information from all sources on a regular basis
• consolidates the information into a global total pay summary
• reviews the information collected against compensation entitlement to check it is complete and review any variances (payments made that should not have been or made at the wrong level) 
• uses tax and social security expertise or systems to translate the global total pay into local currency and local payroll reporting and compliance instructions 
• local payroll processing is then shared with other locations in case payroll generated 'compensation' such as wage and social security taxes are reportable in other countries involved 
• provides reporting to management, finance and tax preparers.

How this process should be managed depends very much on the resources, technology and expertise an organisation has access to.

In some organisations, this area can be managed in-house and others choose to outsource part, or even all, of the process to tax and accounting firms and other providers of global mobility compliance who have developed the required technology and expertise.  Not having a process is a real risk since without it non-compliance will follow.

What benefits can focus on this lead to?

Whilst a driver to implement a compensation management, or accumulation process, is to improve compliance there are a number of other valuable outputs the process can deliver:

• global payroll compliance – reduced exposure to penalties and interest and enabling adherence to regulatory controls and sign off requirements 
• visibility of the total costs of the globally mobile employee population
• provides a mechanism for variance analysis – checking the compensation delivered is the compensation entitlement signed off by the business 
• enables tracking and reporting over time against strategic goals or targets such as cost modelling and analysis and alignment with diversity and talent programmes
• acceleration of employee tax compliance process – globally mobile employees tax returns and related policy reconciliations are prepared quicker so that employee satisfaction is increased.

Conclusion

Compensation management / accumulation is a key consideration for those involved in or managing employee mobility.

Whether you have 10 mobile employees or 1,000, the core parts of the process that required attention are similar. As a minimum organisations should check their current process, roles and responsibilities in this area with their own teams and suppliers to ensure they don’t inadvertently have a gap that will result in risks and lost opportunities. 

There are many challenges and opportunities involved in managing a global workforce, however there are some common aspects which occur time and again.

Facilitating strategic mobility

For good reasons, the focus of employers is often on tactical matters; deciding who to deploy, where and when. These decisions can be based on several factors, such as how they can best service customers or explore new markets. The challenge is in enabling a more strategic form of mobility that supports, for example, the development of their employees, as the success of these developmental assignments is more difficult to quantify. The extent of employee development cannot be properly gauged at the conclusion of an assignment, rather this can only be determined by observing the foreign assignee’s career and progression for some time after the assignment ends.

Changing global workforce

The world is changing at a rapid pace. Demographic change (ageing workforces in the developed world), the rise of labour workforce protectionism in some major economies, and an increase in artificial intelligence and robotics are major disruptors to the global workforce. Such factors suggest that the future workforce will need different skills and will be in different locations than the workforce of today. Companies that can understand the impact of these changes can proactively plan for them, rather than react to them as they occur.

Getting the compliance done on time

At Crowe, we always tell clients and colleagues that late compliance is costly compliance. Aspects such as immigration, tax, payroll, and social security need to be addressed up front, but businesses are often unprepared for the complexity involved and the lead time that may be required. The only way to overcome these challenges is to be organised, and get the necessary processes underway as soon as possible. Doing so is not easy unless the global mobility team has effective processes in place, and a healthy partnership with the company, so that they are brought in from the early planning stages.

Addressing these challenges

As well as facilitating strategic mobility, planning for the impacts of the changing global workforce, and addressing compliance issues in a timely manner, companies also need to understand what creates value for the business and connect their current global mobility and talent deployment strategies to their future goals. A relatively simple workforce plan shouldn’t need input from lots of different consultants and require months or years to develop. Employers need to understand the skills and experience of their current workforce, look at their future goals to identify what is missing, and focus their talent mobility strategy on addressing and filling these gaps.

Considering welfare and security risks

We live in a somewhat uncertain world, and it is critical that in the face of events such as terrorism, employers can quickly establish contact with their employees, regardless of where they are in the world.

Local knowledge surrounding assignment locations is essential to understanding safety and security risks. However, while some countries may be considered more dangerous than others, safety is often quite a fluid concept. Government guidance is a good starting point, but it is critical that foreign assignees also receive local insights and on-the-ground knowledge.

Employers must also recognise the unique challenges that a foreign assignment presents, with the employee being taken from their familiar surroundings, robust personal support network, and regular routine. This can take a toll on even the most experienced foreign assignees, and employers need to ensure that they provide the necessary support. Wellness aspects, such as socialising opportunities, exercise activities, and leisure time need to be provided for. If these things aren’t addressed, they will have a detrimental impact on both the employee and the company in the long run.

Why some assignments fail

One of the biggest issues when discussing the success of foreign assignments is how we define assignment ‘failure’. A failed assignment is more than just an assignment that didn’t deliver the business case, or one that was terminated early. Companies need to define the expected outcomes of an assignment – both quantitative and qualitative – and determine how these can be measured. It is only then that they can understand whether an assignment can be considered a success or a failure.

Where assignments do fail, the following are common contributing factors:

• lack of a clearly articulated business case for the assignment and buy-in from the home and host locations
• inability of the foreign assignee to integrate into the host location's business culture and ways of working
• an unhappy partner or family impacting on the happiness and productivity of the assignee.

From these contributing factors, assignee selection, preparation, and ongoing support are critical to assignment success.

Addressing failure

The financial implications of a failed assignment are reasonably clear, such as failed customer contracts, a market not being properly exploited, or a development opportunity not being seized.

Less obvious repercussions would be the wasted time and energy spent on a failed assignment. Those that work outside of the global mobility field may be unaware of the complex technical and process-critical success factors behind deploying an individual from one country to another. The enormous amount of time and energy invested into a failed assignment represent valuable resources that could have been deployed elsewhere.

Providing support to ensure success

There are many different support components that employers need to consider when putting together a comprehensive relocation package.

Compliance support – covering aspects such as immigration, payroll, tax, social security, and labour law analysis – is critical to avoid illegal or uncompliant practices. Medical support is equally important, and can be a deal breaker if not appropriately addressed.

Compensation needs to be approached with the bigger picture in mind – is this a long-term local market role or a shorter tactical requirement? How are they compensated in their home country, and what benefits do they receive? Will they be compensated using a home-based or host-based approach? Where will the employee work next? Compensation needs to be determined on an individual level, taking all these factors into consideration.

Foreign assignees normally receive some support to settle into the host country, however most of this is likely to be business-driven. The more practical and personal elements of support – such as assistance to socially integrate, find local information and tips, and build up a support network – are not going to be found in the company handbook. Such aspects are key to making everyday life in the host location work, and can be even more vital for relocating spouses who are often not working and therefore miss out on valuable workplace support.

Looking forward and key trends for global mobility

My personal predictions for the future of global assignments relate somewhat to technology, and I see service intimacy as a big opportunity. The march towards offshoring and automation in the last decade or so has resulted in many efficiencies. But the question remains, how can technology be used to enhance the personal aspects of support? This has huge impact potential, and moving forward I see global mobility teams finding new and innovative ways to use technology to support their employees, ultimately enhancing assignee performance and increasing assignment success.

When I first entered the tax profession at the turn of the millennium, mobility tax was known as expatriate tax. That language has now moved on to mobility tax, but the concept of expatriate or expat tax breaks remains. In short, these are tax exemptions that apply in different countries to globally mobile employees (or expatriates). 

Awareness of these tax breaks is really important for those involved in, and managing mobility. There can be very substantial tax savings, often savings for the employer under tax equalisation, so it is vital they are not missed.

How big can the savings be?

They can be very valuable. This relates in part, to how tax equalisation works. 

Tax equalisation is an approach that seeks to neutralise differences in tax rates between countries to promote employee mobility. The employee usually agrees they will continue to pay the same level of tax as their home country. This may be through a hypothetical taxes deduction. In return, the employer then agrees that they will settle the actual taxes due. 

As the employer is settling the taxes due, the compensation becomes what is known as ‘net.’ Tax rates that apply on net compensation are considerably higher because paying the tax for an employee is in itself a benefit on which tax is then due. As a result, ‘grossed-up’ tax rates apply.

Example: 

The top rate of income tax in the UK is 45%. If this has to be grossed up, then the tax rate becomes 89%. As a result, £89 of tax due by the employer would be saved if £100 of income/compensation can be removed from tax using an expatriate tax break.

If £50,000 of compensation is removed as a result of an expatriate tax break then £45,000 of income tax saved for the employer. If you have 10 employees to which this applied over 5 years, the savings could be £2.25 million! The savings could be even larger if social security was also taken into account.

Who do expatriate tax breaks apply to?

The rules differ from country to country so local tax expertise is a must. There are specific tax breaks that apply to globally mobile employees. There are also other tax breaks that were not designed for globally mobile employees, but they do apply to them. 

The tax breaks could apply to all forms of globally mobile employees including long term assignees, short term assignees, local hire employees, business travellers, Directors, commuters and those with regional or cross border roles. 

What kind of expatriate tax breaks are there? 

The rules and conditions really do vary location by location. Having reviewed the relevant rules across the world, I would suggest they fall into one of the following groups.

1. Expatriate tax concessions. Talent attraction is key to a number of major economies. Expatriate tax concessions provide preferential lower tax rates and/or significant exemptions from tax. China, Spain, Italy, France, Netherlands, Russia, Sweden, Portugal, Ireland are just some examples. 
   
   There are usually specific requirements on the type of employee who can qualify, for how long and there may be procedural rules to consider (an application has to be made by a certain date in a certain way). 
   
   
2. Housing is a large part of the overall cost of a globally mobile employee. Grossed-up for taxes it is even bigger. A number of countries have the concept of a temporary workplace or dual household cost. 
   
   There are tax breaks in a number of countries for accommodation based on short term assignments. UK, Germany, USA are just some examples. Where you see short term assignments, review if the housing, travel and subsistence will be exempt and under what conditions to ensure cost savings are not overlooked.
   
   
3. Pensions are a key part of a globally mobile employee’s compensation. A number of countries provide ‘matching’ rules to exempt foreign pension earnings (employer contributions), if the plans broadly align with the local plans that qualify for local tax advantages.
   
   
4. Non-host workdays/time apportionment calculations. A number of countries will not tax compensation relating to duties not performed in the host location, provided certain conditions are met. 
   
   Depending on the number of non-host workdays, this can be a significant tax saving. Examples include UK, Singapore, China, Hong Kong, France and India. This a key potential cost saving to explore when you know the employee will be working in more countries than just the proposed host location.
   
   
5. Tax efficient benefits delivery. How particular compensation is delivered can change how it is taxed. Allowances generally tend to be less beneficial than reimbursements unless the allowances are paid in accordance with locally set tax-free limits. 
   
   Some benefits in some locations can result in lower taxable values (different to the actual cost) if the employer directly pays for or contracts for the benefit for example, accommodation, education etc. It’s important to check if this applies to the costlier benefits forming part of a globally mobile employee’s assignment package.
   
   
6. Travel and home leave. Travel to and from the host country and home leave can benefit from tax exemptions in a number of countries. Care needs to be taken to understand the local specifics. For example, are there time limits, limitations to the number of trips, or do they have to be reimbursed rather than paid by the employee?
   
   
7. Business traveller exemptions. Some countries will have tax short terms assignees or business travellers, but a number have specific short stay/business travel exemptions. A theme of around 60 days emerges in some locations, Ireland and the UK as two examples. There are also possible exemptions under tax treaties. (See previous Mobility Mondays on Double Tax Treaties).
   
   
8. Relocation expenses. There are often exemptions for key relocation expenditure, shipping, temporary accommodation, replacement furnishings etc. A number of countries provide either specific reimbursement or lump sum allowances to provide these items are tax free or exempt.  

What complications are there?

Local expert tax assistance is vital because although there are overall themes, the rules and process are always country specific. As a result, it’s necessary to understand what procedural steps there are to consider, to ensure the tax breaks apply. There may also be particular claims that have to be made on an employee’s local income tax return.

In short term assignments, there can often be ongoing tax considerations in two countries. As a result, care needs to be taken not to focus exclusively on one location only. What is tax efficient in one country may lead to a worse impact in the other country so it’s important to keep an eye on the overall cross border tax position. 

Conclusion

Taxes due by employers for a globally mobile employee can be a very significant part of the overall cost of the assignment or work arrangement. Utilising expatriate tax breaks is key in optimising the overall costs. 

 
It’s important for mobility professionals to be aware of these tax breaks to ensure the business doesn’t bear unnecessary extra costs. Equally, it’s key to explore early on the requirements and procedural aspects with the support of local tax advisors so key set-up steps are not missed. 

Context

When approaching the end of year holidays New Year and Christmas. It also means the end of the payroll year in many, many locations. Payroll teams will be busy closing their payroll processing and reporting for the year and this activity will continue into January and beyond. Once the work is complete adjustments or late additions to report will generate extra work and can result in non-compliance.

Cross border mobility has rebounded in 2021 and cross border remote working arrangements have continued to grow very strongly again (after very significant growth in 2020). It is important to note that both cases can create potentially unexpected payroll obligations for employers. Not meeting these obligations can expose the employer to significant payroll compliance risks (including penalties and interest) and the approach of the end of the year should focus the mind on what payments and expenses need to be reported before the payroll closes.

In a number of jurisdictions, the fiscal authorities understand the complexity around mobile employees and target this population for review in payroll and compliance audits. Review and action is essential. Having gaps or non-compliance in this area is a red flag to fiscal authorities, which suggest other areas of compliance may also not be correct, leading to more scrutiny overall. Those managing and overseeing employee mobility are often uniquely placed in organisations to spot the issue (as they are aware of where employees are working) and enable compliance (as they will have access to the data and information required).

There is, of course, no substitute for real time compliance. Payroll is usually a monthly or bi-monthly process so the ideal process is to have already reviewed the reporting throughout the year. That said, in some circumstances, this isn’t always possible so a fresh review at year-end is a critical minimum risk management action. Action may be required in more than one country – the home and the host country location or in the case of remote workers, the employment and work locations.

Key issues

What are the key issues?

1. Employee identification: There can often be many sources of globally mobile employees. The employees could be formal assignees, cross border remote workers, project workers, business travellers or even international relocatees. It’s important to pause and think through which internal stakeholders and management would be aware of each type of employee. Despite having different internal triggers, or process owners, the differing types of employees who have been globally mobile will need a consistent core global process to assess the year-end actions in the countries in which they have worked. Missing out a key group can lead to unmanaged risk but also give reason to fiscal authorities to question the robustness of the employee identification process (leading to further scrutiny).
2. US tax payers: One group of employees requiring special attention in the employee identification process are US tax payers. Correct payroll reporting and payroll tax payments are absolutely key from a cross border perspective for US nationals or US tax filers (permanent residents/ green card holders). The issue here is all about double taxation. As the US does not really stop taxing US tax filers, foreign tax credits (which prevent double taxation) are absolutely vital. If the taxes due in the other country involved (not the US) are underpaid then there is a real likelihood that cash flow challenges will arise and more costly and complex tax return compliance is generated. Both these matters usually become a problem for the employer. It’s advisable to check that the payroll taxes for US filers are sufficient and if not then calculate and pay the additional amounts by 31 December.
3. Payroll obligation assessment: It is not always the case that payroll taxes are triggered in every globally mobile employee work arrangement. Depending on the exact nature of the arrangement there may, or may not be, a local payroll obligation. It’s important to review this as it is a key step in terms of establishing the scope of the actions required by the end of the year. One thing to watch carefully is that even if a payroll obligation is not triggered, this does not necessarily mean that no taxes are due. It may be necessary for the employee to file a tax return to settle income taxes that become due.
4. Payroll processing: Payroll systems around the world differ by location and software provider. After all, each country will have different payroll tax rules and regulations. Added to this is some extra processing complexity. It could be that new payroll wage codes or types are required to report compensation or calculate payroll taxes and social security. The key difference is usually that the compensation being reviewed at year-end has already been paid. As a result, the aim of the year-end payroll is no longer about paying employees (which is what payroll usually does) but rather about reporting and accounting for payroll taxes. This may need a new type of payroll wage type/ code/ functionality that may not have been previously used. Checking capability, set-up and testing of the payroll early on is therefore key. 
5. Establishing global compensation: Globally mobile employees will usually be paid (or have expenses borne) from a number of sources. Benefits, relocation, destination services and other support services will have been enabled and these along with any payments made by the employer need careful review. There can often be a misunderstanding that if payments, or expenses, are not made directly by the employer then they do not need to be considered for payroll – this is not true. Collecting global compensation (from all sources) is a critical to enable compliance. Collecting this in a common, easy to use format is also essential.
6. Wage reporting: Once a payroll assessment has been completed and global compensation collected, the next step is to review what compensation should be reported and subject to wage taxes. Most payrolls around the world have a concept of ‘reportable’ wages – this is the way the fiscal authority understands what payments were made to the employee. There is a need to review global compensation and specifically check the compensation types that are subject to wage reporting. It could be that the compensation should be reported in a different way outside of the payroll – for example under separate benefits and expenses reporting (the Form P11D in the UK). 
7. Wage taxes: Wage taxes, or withholding taxes, are taxes generated by the reportable wages. Each country will have their own payroll tax rules and tables that need to be applied. In simple terms it will be necessary to review the global compensation in the context of the employee’s local tax profile and residency to then determine what is reportable and taxable. Special exemptions (expatriate tax concessions, relocation exemptions etc.) may well exist and should be factored in (where allowed) to ensure that taxes are not overpaid.
8. Tax reimbursement approach: A key question to clarify at this stage is who is responsible for the wage taxes – will it be the employee or will it be the employer? Determining this is key to ensuring the right payroll tax calculation is performed and taxes are settled by the right party (employer or employee). This is a tricky area where the employee is already paying taxes in another country (which is often the case in the case of secondees posted from one country to another).
9. Social Security: Life would be more straightforward if payroll and income tax and social security taxes followed the same principles – sadly they do not. With any cross-border work arrangement it is important to understand whether any cross-border social security agreements apply. These agreements often determine which of the two countries involved have the right to levy social security. It can also be the case that social security is due in both countries, although this is rare and clearly costly for the employer. Year-end is a good time to check whether any social security certificates have been obtained or need to be renewed. These certificates provide official confirmation of the applicable social security regime for the work arrangement in question and should be kept and retained by the host payroll.
10. Think two country: To reiterate an earlier point, it’s important to check whether any year end payroll reporting adjustments are required in both the home and host location. Adjustments may be required in one or both locations.

Conclusion

Payroll is a monthly or more regular process but year-end should focus the mind on checking that reporting and payroll taxes are correct before the payroll is closed for the year. The nature of cross border working and their compensation sources means there are often additional reporting and/or payroll taxes to consider. Doing this now will lead to payroll closing in a more compliant manner which will reduce risks and costs.

Dinesh Jangra

My German colleague Martin explores some aspects of taxation that, due to the current economic cycle, are regrettably more common than we would all want. The key take away is that severance/termination payments are not taxed as normal compensation. Where an employee has a cross border employment history, whether it’s mobility or local employments, it is wise to check if taxation occurs in other countries, whether employer payroll obligations arise and whether there is a risk of double taxation or withholdings.

Martin Koester

In today’s Mobility Mondays we will review taxation of severance payments in the context of cross-border assignments and how the economic slowdown has made layoffs topical for HR Departments. The current challenging time due to the global COVID-19 pandemic has already resulted in the lay-offs of millions of workers around the world.

Though legislation of home country is usually applicable for entitlement of severance payment, the local tax law in each country of work is also relevant for taxation of the severance payments, for employees who exercise, or have exercised employment activities in different countries.

In many countries, there is no statutory severance, but in some countries severance payments are required by law. For example, in Germany, employees are only entitled to severance payments under a social plan with the works council. On the other hand, in Brazil, an employee is always entitled for a severance payment if they leave the company. Even if the employee is a cross-border worker, who is just ending their assignment to Brazil and stays within the company in his home country. Various situations can lead to the payment of a severance.

Tax compliance-risks due to severance payments, even years after end of assignments

For many years, severance payments were handled differently from country to country. It has been seen more recently, that more countries are now adopting the OECD (Organization for Economic Co-operation and Development) approach, where severance payments need to be sourced to the state where the work was actively performed before the severance happened.

This leads to severe compliance risks in different countries for employers and employees. Consequences for the employer may be penalties and the employee could be prohibited from leaving the country. This may occur even on a vacation or business trip and even if the assignment occurred years ago, but in between a severance payment has been made that was not correctly taxed.

China has gone even further, and introduced the Corporate Social Credit System (CSCS) in 2020. As violations against Chinese regulations will have a negative impact on the rating, payroll-compliance becomes even more important. This also includes the correct and timely taxation of severance payments, as well as all other employment income, taxable in China.

Employers have obligations such as payroll taxes to meet. These result in the need to identify when a severance payment is made and then correctly allocate the payment to periods of work in different countries.

Example: Multiple assignments Due to impacts from the COVID-19 pandemic on sales, a large German manufacturing company sets up a social plan to reduce headcount by offering severance payments to their employees. Employee A, who worked for the company for five years in China and five years in the United States, takes the offer and is leaving the company after 20 years of service. Following the OECD comments on taxation of severance payments, taxes have to be paid in Germany, China and the US on a pro-rated basis. This means, the company has to withhold and pay taxes on 10/20 of his severance payment in Germany, and for 5/20 each to China and the US. Country specific tax law might exempt severance payments under certain circumstances. Example: Brazilian assignment The company is setting up a sales unit in Brazil to have a more direct contact with their local customers. The company is sending employee B to Brazil for a three-year assignment. At the end of his assignment, the employee is entitled to receive a severance payment, even if the employee continues to work for the company in his home country.

Those examples show, that for the company, a severance payment leads not only to the need to enable correct wage-taxation in all countries of work, but also to the need for an internal process to detect those cases, as well as to ensure the required documentation and reporting. The company also has to address the expectations of their employees. For example, will the employee be allowed to keep the statutory severance payment from an assignment in Brazil or does the employee has to pay the amount back to the company in his home country? If cross-border taxation occurs on severance payments during an assignment will this be covered by tax equalisation or not? 

How employers can avoid tax-compliance risks and disputes with assignees

To avoid compliance risks and negative impacts to employees and employer in foreign countries due to the payment of severances, it is important to have answers to following questions before pay out and departure of the employee:

• Has the employee been globally mobile during their employment and, is a full and accurate history of the employee’s assignments and local employments during the time of employment available?
• Does the employer have any tax obligations in foreign countries due to the severance payment?
• If the employer has no tax obligation, is there an individual tax liability of the employee and if yes, who is taking care of the correct and timely taxation?
• If taxation occurs in more than one country, who will be responsible for taxes? Is there any expectation of the requirement to ‘neutralise’  the employee from the impact of additional taxes arising in other countries?

Though it is crucial to be compliant as a company, managing expectations and needs of employees is also required to avoid disputes or even legal proceedings and negative publicity.

A possible way to resolve those issues is to mitigate with a temporary or partial retention of the severance pay to settle all foreign tax-claims, including tax-consultant services for the employee, as part of the severance package.

As tax obligations are different from country to country, there might be more than one solution to fit all severance payments to (former) cross-border workers.

Conclusion

Laying off cross-border workers and paying severance payments may result in wage-tax obligations for the employer and income tax liabilities for the employee in different countries. Even an assignment in a foreign country that was completed years ago, may still give rise to tax obligations and should be considered when calculating severance payment and related withholding obligations.

Companies with cross-border workers should be aware of those needs and should have, or implement a process to handle cases of severance payments to employees who were on assignments earlier. Not only to avoid penalties or sanctions for the company itself, but also because employees can ask for full tax compliance to avoid personal difficulties in other countries.

If you want to make sure your organisation is prepared, or if you would like to have further advice on this topic, please get in touch with your local Crowe expert or myself.

Martin Koester Crowe RWT

 

Context

Payroll is a key process and deliverable for many HR and global mobility professionals. Employees have to get paid and the employer must keep on top of payment and reporting deadlines and actions. As employees, projects, roles and entities go cross-border -  complexity and risk quickly increases.

This is an area that can take up a lot of time and effort. After all, payroll touches on many areas including labour law, income taxes, wage taxes, social security, currency and differing processes and timelines based on payroll providers, payroll systems and set up. 

What are the key triggers to review of payroll obligations and what are the key areas to then focus on?

Triggers

COVID-19 displaced workers: The pandemic has disrupted local and global workforces in a way that had not even been imagined previously. Many employees that were working outside of their country of employment have either returned home or been in one or more countries during the course of the pandemic.

As the location of these employees has been has been disrupted and changed over time, it is safe to assume that payroll reporting may also have changed. Location of workers, their tax residency and payroll reporting and payment obligations are closely related. If you have had employees whose location has changed but payroll compliance has not been reviewed this should be a key area of focus.

Remote/ virtual workers: Remote and virtual working had been a feature of the workforce before COVID-19. What the pandemic has done is accelerate the normalisation of this way of working. It takes many different forms. You might have employees who now work from home rather than the office. The location of home and office may be in different jurisdictions (for example a different US city or state or a different country in the case of European frontier/ border workers).

As restrictions are lifted, the return to office process in many organisations now involves a sizeable portion of the workforce regularly working from home or in other countries (closer to families). These new normal work arrangements are different to pre-COVID-19.

A number of employers are also dealing with virtual working requests from employees that are going to be working for part of the summer from another country (for example, where they may have strong family and social ties).

Each of these cases requires thoughtful review; the payroll obligations may have changed as remote and virtual working has been adopted.

Virtual assignments: Other examples include cases where employees were scheduled to relocate to undertake an assignment, but the pandemic has resulted in that not happening yet. This means that currently, the assignment has been has been performed in a country that it wasn’t planned to be. Payroll set-up will not usually have taken this into account, so a review is necessary to ensure payroll reporting and compliance is in the right location(s).

Local employees: Hiring and mobilising local employees in different countries remains a key feature of many cross border organisations. In some industries such as Technology and Pharma, the pandemic didn’t really slow this down. Employing people who live and work in other countries usually requires a local payroll to be set up – this is not always a straight forward process when there is no local employing entity, or an employer that is foreign owned or controlled.

Globally mobile employees: Employees are beginning to be re-mobilised across borders. Business travel is slowly and safely starting to return and without doubt, lots of globally mobile employee roles that were put on hold during the pandemic, will be going live in the coming weeks.

Globally mobile employees need special attention as there are likely to be payroll reporting, payment and filing considerations, in both the home and host locations. Without careful analysis and planning, dual payroll obligations can negatively impact cash-flow and non-compliance can arise. Making sure payroll is systematically reviewed as part of new assignments and mobilisations is vital. The same analysis will often highlight viable tax planning to reduce the overall costs of the employee’s arrangement.

Contractors: The fluidity of the labour markets and the growth of the gig economy created an increase in the number of contractors and self-employed consultants.

While organisations generally seem to have a good awareness of the issues relating to tax employment status, (e.g. is the resource subject to payroll or not?) in the country of engagement, the same is not always true in other countries (country of resource location or deployment). It is always necessary to check that a resource in another country that is invoicing you (i.e. not directly employed), is not treated as an employee under local payroll tax rules. They may be giving rise to a payroll obligations and unforeseen costs such as social security. This is an area of close scrutiny in a number of major economies.

What are key focus areas?

Non-compliance with payroll tax rules around the world can result in significant risk and unplanned costs. Some areas to ensure attention is focused on are listed below.

1. Identification: Have a process, and a policy through which cases mentioned above are systematically brought to the attention of the teams with the right expertise in the organisation. Often, global mobility and international HR professionals will have the right experience and awareness of the issues, which make them best placed to manage payroll aspects.

2. Currency: Currency volatility is now a feature of the business world in which we currently operate. In cross border employee scenarios, the country in which the compensation is paid, or denominated, could differ from the currency the employee needs to spend in. Expect issues around foreign exchanges rates to arise. Formulate an approach and a policy, to manage the variations in foreign exchange, so the issue is well thought out before employees raise it.

3. Managing international payments: As the number of countries in which payroll tax payment deadlines arise, increase so does administration complexity. Typically, salaries and payroll taxes have to be paid in local currency and then often from a local bank account (to local bank accounts).

Countries have different payroll months, numbers of payroll months in a year and different monthly payment due dates. This whole area can get very difficult to administer. Careful review to identify common core process and payment approaches (with treasury, payroll providers or international payments providers) can save a lot of time and enable timely payments to employees and avoid non-compliance.

4. Plan, plan and plan: Planning is critical because in the world of payroll, some steps do take time and often more than one might expect – plan for this. It can be frustrating all round when a commitment is made to go live in a location for payroll, but it then transpires the payroll will not be operational in time.

A key area to watch is new registrations. Some countries have quite onerous payroll registration documentation requirements. The process to then review it can take anything from a few weeks to a number of months. The payroll tax registration and social security registration are often separate processes. We are finding that COVID-19 has slowed this process down too. So whether you are setting up a new payroll in a new location, a shadow payroll for assignees or looking to hire and on-board new people in a location in which you already have a presence, do get a clear understanding of the road-map. What information and documentation is required and when, and what is the lead time to go live?

5. Think global and local: Local expertise around payroll is a must. Each country has its own taxation and payroll regime and a working knowledge of the process and experience of working with the authorities is absolutely key. At the same time, in cross border scenarios such as virtual/ remote workers, displaced COVID-19 workers and globally mobile employees, two county payroll systems (at least) are likely to be in play. It’s important to take a holistic global, cross-border view here. For example, tax withholding may be required in two countries and this would be a hardship to the employee and/ or a cashflow disadvantage to the employer. Identifying where this occurs will enable the further detailed review of local speciality rules and exemptions to ease these issues.

Conclusion

There is no escaping the fact that international payroll is a key part of HR and Global Mobility roles. It’s important to be able to identify when changes in compliance arise and then understand the key areas to focus on to ensure that extra cost and risk is carefully managed.

Dinesh Jangra Crowe United Kingdom

 

This week I am not reviewing mobility under the COVID-19 spotlight, and instead, I want to focus on an area that many of my clients are still asking me about. Split payrolls are necessary for practical reasons, but the compliance and process complexity can be missed. What should Mobility professionals be aware of?

Context

Split payrolls are commonly used in employee mobility to meet the practical needs of the business and the employee. They do, however, come with extra housekeeping in the form of compliance and related matters. Given their prevalence in employee mobility scenarios, it’s vital that those managing and overseeing mobility in organisations understand the relevant considerations. They can then help the business to understand what they are really signing up to and how to be compliant.

A split payroll is a situation where the cash compensation entitlement of an employee, is literally split between different payrolls (usually in different countries). For example, a UK employee seconded to work in the US for 3 years may receive 40% of their pay in GBP (via UK payroll) and 60% of their pay in USD (via US payroll).

When do split payrolls occur in mobility and why?

These situations usually occur in secondments or assignments when an employee of one country, is asked by their employer to work in another country for a fixed period of time. A key employee driver for split payrolls are financial obligations in both countries. In the home country they may have an ongoing mortgage, dependents costs (i.e. a child at university) and bill commitments. Of course, they also require cash in the host country to fund daily living and life. 

Pensions and benefits are another reason for split payrolls. There may be a need to continue participation in home country pensions, social security and benefits arrangements. Often, this is simply not possible if the employee is not active on the home country payroll.

Split payrolls are not exclusive to secondments or assignments. They occur in the case of local employments too.

• New roles: They can occur when an employee takes on a ’role’ in another country for which they need to be compensated. For example, an employee is appointed as a Director of a group entity/ company that is outside of their country of residence and they need to be paid for this ’role’.The employee could hold a role in a country that is taxable in that country, it could be due to the nature of the work they do. There is a need to ensure that compensation relating to this is correctly payrolled.
• Currency stability and controls:The currency of the host/ country of employment may not be stable and/ or subject to large fluctuations so agreements are made that a portion of the overall compensation is delivered in a different more stable currency and payment is made through a different country payroll. There may actually be regulatory, or practical complications, to moving certain currencies between countries. In these situations, splitting the pay is necessary so the employee can actually receive and spend their pay where they need to.
• Confidentiality: In certain situations, for confidentiality and related reasons, it may not be appropriate for an employee’s full compensation to be visible in the country in which they are working. In these scenarios, part of the overall compensation is delivered through a different payroll (in another country).
• Tax planning/ immigration: Splitting the pay can also drive tax benefits. Lower taxes or social security are due by the employer and/ or the employee. For example, in the UK, to claim an exemption for non-UK workdays, it is necessary for the related compensation to have been ’paid and retained outside of the UK’. In certain special situations in the EU, if the employee works regularly outside of the EU, then this portion of compensation may not be subject to social security (resulting in cost savings) if a split payroll is used. A country may require as a condition of a local work permit, that a certain amount of compensation is actually paid in that location.

Having considered the above, one thing to reflect on is, do you have an arrangement that should perhaps have a split payroll but doesn’t?

What challenges and opportunities occur?

• Setting up of bank accounts: One of the most common causes for anguish I see, is how long the the setting up of bank accounts can take. The organisation and the employee has agreed how much will be paid in the host location, but the employee doesn’t hold a local account to receive the monies. The documentation and lead time requirements around bank accounts vary by location and sometimes by banks/ provider, but are not always factored into the process. This is a key area to explore early with financial institutions and relocation specialists, as not having a local bank account can result in a number of unplanned extra costs and practical issues such as, not being able to make important payments in the host country.
• Managing currency exchange rate (FX) variations: As the compensation has been split between two currencies, FX rate variation has been introduced and results in uncertainty. It is usually a good idea to agree and communicate in advance an approach on how to handle this with the employee. Not doing so leaves it open and subject to disagreement later on how to handle, and usually results in a lot of employee and employer time then being lost on managing the issue.
• Payroll operation and compliance: Life would be much easier if payroll tax and reporting rules simply followed salary splits,sadly, they do not! This is a vital piece of understanding and drives the needs for extra housekeeping. Where social security and payroll taxes are due will be dependent on a bespoke analysis of the particular employee case and the country combinations. Examples of things to watch:
  • Social security. It is not uncommon that all compensation, regardless of where paid and in what currency, is subject to employer and employee social security in one country. In all cases, the relevant cross-border social security rules and agreements should be reviewed to avoid dual social security costs. It’s also necessary to ensure that the payroll in the country where the social security is due has full visibility of the payments made in the other country/countries. Without this, compliance is not possible.
  • Wage taxes and payroll reporting. Similar to the above, the payroll wage taxes calculations and payroll reporting of compensation may actually need to be based on global compensation, not just the portion delivered by the local payroll.
  • Double taxation. Under the payroll tax laws of one or both countries, payroll wage taxes may be due on the same payments. This results in double taxation. If the employee suffered the taxes due in both countries, they may not have received enough compensation to finance their outgoings. On the other hand, if the right wage tax deductions are not made by the employer, then the employer may be exposed to non-compliance, penalties and interest. There can be special methods to explore through which double taxation can be prevented. If it is not possible to avoid double taxation then a net pay, or tax equalised arrangement, may be the most practical way forward. This is a key area to review.
  • Agreeing the payroll split. Simply put, the employee will have financial needs and obligations in each country that require local payments. These could be personal, but could also be related to benefits. For example, a certain amount is needed to participate in company pension and share schemes. Tax and other regulatory rules may also dictate what portion is paid in which country. It’s important this aspect is reviewed carefully at an employee level rather than using broad general splits that may lead to extra costs or complexity later.
  • Maintenance of the split. An agreed payroll split should be reviewed at least annually, if not more often. Changes in the amount of work performed in a country can drive changes to wage taxes and reporting. Pay review, bonuses, share schemes etc., will result in extra compensation that should be reported. Changes in FX and assignment compensation packages can also lead to changes in the pay split. The key point here is a payroll split absolutely needs to be reviewed on an ongoing basis or there is a real risk of non-compliance. The employee themselves may also need support on how to report the arrangement to the local tax authority on their income tax returns. If this is not done correctly, the wrong tax amounts may be paid and/ or it may invite extra fiscal authority scrutiny at an employer level.
• Internal cross charging: In the context of a secondment or assignment there is a usually agreement that the cost of the role will be borne in a particular country and business unit. Split payrolls, effectively result in different costs being borne initially in different locations. This isn’t just the salary cost; the home payroll may for example also drive home pension contributions and home country social security. A process is needed to ensure that these home ’payroll’ costs are correctly charged to the right country and entity. Leaving the costs where they are can result in additional costs. For example, the costs are not seen as costs that can be deducted in determining the employer’s taxable profits in the home country, and a deduction that would have been available in the host locations is not used, so too much tax is paid there.

When reviewing the above, are you aware that all these aspects have been actively looked at in arrangements you are aware of?

Conclusion

Without doubt, split payrolls are necessary and play a very important role in employee mobility. They also bring with them extra housekeeping that can be managed, if the key issues are identified and managed. Tax Technical and process definition and support, such as a global compensation gathering and reporting, is essential to avoid non-compliance, additional costs and negative impacts on the employee experience.

Shadow payrolls are a key concept for those involved in mobility to become familiar and comfortable with.

They are an essential mechanism through which payroll compliance is delivered. An understanding of why they are used is essential so that those managing mobility can partner with the business to ensure it remains compliant and explain how process will work.

Increasingly, fiscal authorities are very well aware that globally mobile employees receive compensation from a number of sources (which makes compliance more complex) so this is often an area of specific scrutiny in payroll audits.

When might a shadow payroll be required?

The scenario that gives rise to a shadow payroll is usually as follows:

•  An employee is working in, or is assigned to a new country or even state.
• They continue to be paid, ‘on payroll', in their home location. However, a payroll obligation for the employer is triggered in the new country or location.
• A solution is now needed to ensure the employer can meet its obligations in the new location - that solution is usually shadow payroll.

What is a shadow payroll?

Essential to understanding what shadow payrolls are is reflecting upon what role traditional payrolls perform first. A payroll probably performs five key functions:

1. Pays the employee money into their nominated bank account
2. Determines and deducts tax and social security amounts due by the employee
3. Determines the employer payroll taxes due - for example employer social security
4. Reports wages, taxes and social security to the local tax/ fiscal authority - employer then pays these over
5. Provides a mechanism to maintain participation in certain benefits (for example - pension).

A shadow payroll is used in a country where there are payroll obligations (B, C and D above) but either no payment is made locally or only part of the overall payment to the employee is made locally. Often no payment is made so is for this reason the terminology 'shadow' is used, it’s not a real payroll as no payment is made but tax reporting and payroll taxes compliance is delivered. Essentially what has happened is we’ve recognised that the physical payment (A above) and the compliance aspects (B,C,D) can be split.

What should shadow payroll include?

Critical to getting the shadow payroll right is the visibility and flow of global compensation. Globally mobile employees could be being paid by their employer in two countries and often other compensation items are provided by or delivered through third parties (relocation and destination services providers).

The starting point for shadow payroll should be all global compensation (regardless of who paid it and where) and then based on the individual employee tax status some or all of those items may be subject to tax and social security deductions, taxes and reporting.

Shadow payroll delivery can be a highly complex area of mobility support because it requires optimised compensation data flows, cross border tax technical knowledge but also because it is payroll there are often tight deadlines to regularly meet. Often, this support is outsourced by organisations.

The shadow payroll is required only in the host country, right?

I'd love to say it was that simple but the reality is the answer is it is probably required in both locations.

The shadow payroll in the host would be the 'new' payroll but some 'shadow' type adjustments are probably required in the home country too. Let me explain using an example:

• The overall compensation package for a globally mobile employee is usually higher than the normal stay at home compensation. For example extra allowances and benefits may being delivered.
• These allowances and benefits may be being paid elsewhere (so not through the home payroll). However, this extra compensation is still subject to employer and employee social taxes and/or wage taxes.
• If the overall package was say US$200k but only US$120k was being paid through the home payroll then the additional US$80k now needs to be reflected for compliance through the home payroll.

Complications and challenges

To be truly compliant, there is often a need to provide the overall global compensation picture to each country each month to calculate the right payroll taxes due.

The problem is the payroll taxes themselves can actually constitute compensation so there now has to be some method to connect the home and host payrolls. For example the payroll taxes due in host on the shadow payroll are subject to home country social security. This can be a real challenge purely from a data and timing perspective.

Another challenge is the multiple of different sources of compensation -home and host payrolls, home and host expenses and benefits, relocation and destinations services. There has to be a good process to globally accumulate all of this compensation to enable the correct reporting.

Once collated, the compensation has to then be analysed to check what items are subject to tax and social security deductions, taxes and reporting. Often, the answer here is very much dependent on the country combination and the individual tax status of the employee.

I won't go into detail on the next challenge which is grossing up of compensation. This effectively means the shadow payroll has to be operated on basis that the employee is on a net pay scheme so the payroll has to perform net to gross calculations. Often I find this is not a calculation the payroll system was designed for. Therefore, the can be significant complexity at the payroll operational level too. 

Conclusion

Shadow payrolls play a very important role in enabling employers to be globally compliant in respect of mobile employees.

Critical success factors to facilitate a good process that doesn't become overly expensive or burdensome are technical know-how, data and process management. If these areas are not addressed, compliance can be a challenge and the burden in terms of workloads for Mobility, HR and Tax professionals can quickly reach unexpected and undesired levels.

Dinesh Jangra Crowe  United Kingdom

 

Context

Globally mobile employees create changes in payroll obligations for employers. Even if a physical relocation has not taken place, there may be a requirement for payroll taxes and reporting in new locations.

The approach of the end of the year should focus the mind on what payments and expenses need to be reported before the payroll closes. Not doing so can expose the employer to significant payroll compliance risks including penalties and interest.

In a number of jurisdictions, the fiscal authorities understand the complexity around mobile employees and target this population for review in payroll and compliance audits. Review and action is essential. Having gaps or non-compliance in this area is a red flag to fiscal authorities, which suggest other areas of compliance may also not be correct, thus leading to more scrutiny. Those managing and overseeing employee mobility are often uniquely placed in organisations to spot the issue (as they are aware of where employees are working) and enable compliance (as they will have access to the data and information required).

There is, of course, no substitute for real time compliance. Payroll is usually a monthly or bi-monthly process so the ideal process is to have already reviewed the reporting throughout the year. That said, in some circumstances, this isn’t always possible so a fresh review at year-end is a critical minimum risk management action. Action may be required in more than one country – the home and the host country location.

Key issues

What are the key issues and in what order could they be tackled?

1. Employee identification: There can often be many sources of globally mobile employees. The employees could be formal assignees, project workers, business travellers or even international relocatee’s. It’s important to pause and think through which internal stakeholders and management would be aware of each type of employee. Despite having different internal triggers, or process owners, the differing types of employees who have been globally mobile will need a consistent core global process to assess the year-end actions in the countries in which they have worked. Missing out a key group can be lead to unmanaged risk but also give reason to fiscal authorities to question the robustness of the employee identification process.
   
   
2. US tax payers: One group of employees requiring special attention in the employee identification process are US tax payers. Correct payroll reporting and payroll tax payments are absolutely key from a cross border perspective for US nationals or US tax filers (green card holders). The issue here is all about double taxation. As the US does not really stop taxing US tax filers, foreign tax credits (which prevent double taxation) are absolutely vital. If the taxes due in the other country involved (not the US) are underpaid then there is a real likelihood that cash flow challenges will arise and more costly and complex tax return compliance is generated. Both these matters usually become a problem for the employer. It’s essential to check that the payroll taxes for US filers are sufficient and if not then calculate and pay the additional amounts by 31 December.
   
   
3. Payroll obligation assessment: It is not always the case that payroll taxes are triggered in every globally mobile employee work arrangement. Depending on the exact nature of the arrangement there may, or may not be, a local payroll obligation. It’s important to review this as it is a key step in terms of establishing the scope of the actions required by the end of the year. One thing to watch carefully is that even if a payroll obligation is not triggered, this does not necessarily mean that no taxes are due. It may be necessary for the employee to file a tax return to settle income taxes that become due.
   
   
4. Payroll processing: Payroll systems around the world differ by location and software provider. After all, each country will have different payroll tax rules and regulations. Added to this is some extra processing complexity. It could be that new payroll wage codes or types are required to report compensation or calculate payroll taxes and social security. The key difference is usually that the compensation being reviewed at year-end has already been paid. As a result, the payroll this is no longer about paying employees (which is what payroll usually does) but rather about reporting and accounting for payroll taxes. This concept of ‘not paying’ but accounting for reporting and taxes may need a new type of payroll wage type/ code/ functionality that may not have been previously used. Checking capability, set-up and testing of the payroll is key area to focus on early on. 
   
   
5. Establishing global compensation: Globally mobile employees will usually be paid (or have expenses borne) from a number of sources. Benefits, relocation, destination services and other support services will have been enabled and these along with any payments made by the employer need careful review. There can often be a misunderstanding that if payments, or expenses, are not made directly by the employer then they do not need to be considered for payroll – this is not true. Collecting global compensation (from all sources) is a critical to enable compliance. Collecting this is a common, easy to use format is also essential.
   
   
6. Wage reporting: Once a payroll assessment has been completed and global compensation collected the next step is to review what compensation should be reported and subject to wage taxes. Most payrolls around the world have a concept of ‘reportable’ wages – this is the way the fiscal authority understands what payments were made to the employee. There is a need to review global compensation and specifically check the compensation types that are subject to wage reporting. It could be the case that a compensation type has to be included in reportable wages but it could be that they instead reportable in a different way – for example under separate benefits and expenses reporting (the Form P11D in the UK). 
   
   
7. Wage taxes: Wage taxes, or withholding taxes, are taxes generated by the reportable wages. Each country will have their own payroll tax rules and tables that need to be applied. In simple terms it will be necessary to review the global compensation in the context of the employee’s local tax profile and residency to then determine what is reportable and taxable. Special exemptions (expatriate tax concessions, relocation exemptions etc.) may well exist and should be factored in (where allowed) to ensure that taxes are not overpaid.
   
   
8. Tax reimbursement approach: A key question to clarify at this stage is who is responsible for the wage taxes – will it be the employee or will it be the employer? Determining and/or deciding this is key to ensure the right payroll tax calculation is performed and taxes are settled by the right party (employer or employee). This is a tricky area where the employee is actually already paying taxes in another country (as they are on payroll there). There should be a review of each compensation type.
   
   
9. Social Security: Life would be more straightforward if payroll and income tax and social security taxes followed the same principles – sadly they do not. In a globally mobile work arrangement it is necessary to review if cross-border social security rules and agreements require review. These agreements often determine which of the two countries involved should apply social security. This is an important step. It can be the case that social security is due in both countries (although this is rarer and clearly costly for the employer). Year-end is also a good time to check if required the social security certificates of coverage/ Forms A1 in Europe have been applied and obtained. These forms are key in confirming where social security is not due in the host locations and should be kept and retained by the host payroll.
   
   
10.  Think two country: To reiterate an earlier point, it’s important to check whether any year end payroll reporting adjustments are required in both the home and host location. Adjustments may be required in one or both locations.

Conclusion

Payroll is a monthly or more regular process but year-end should focus the mind on checking that reporting and payroll taxes are correct before the payroll is closed for the year. The nature of globally mobile employees and their compensation sources means there are often additional reporting and/or payroll taxes to consider. Doing this now will lead to payroll closing in a more compliant manner which will reduce risks and costs.

Global Mobility and payroll are inextricably linked. For those that support globally mobile employees, payroll is a word they can’t escape. It’s an area that all too often can quickly descend into frustration and unexpected complexity (and lots of it!). Yet payrolls are vital, they deliver currency to the employee and compliance to the organisation.  

Given their potential complexity and critical outputs understanding how payrolls work and the different types that exist is absolutely key for those supporting employee mobility.

Context and purposes

Payroll is a process through which to deliver cash compensation to employees, make deductions and payments for appropriate taxes and provide the required reporting to local tax and fiscal authorities.  

Different types of payroll are required for different situations in employee mobility. The type of payroll required may depend on the organisational set-up in country, the employee mobility category, the employee’s tax and social security status and the countries involved. This is what makes it tricky, there isn’t a one size fits all type of approach even at a country level. Local specialist knowledge is always required. 

I like to think of payrolls as having two key outputs – currency and compliance. 

Currency is about the delivery of cash to an employee into their bank account. This could be any country and any currency. What is required will depend on whether there are any local country rules that dictate whether compensation must be paid in local currency and then the practical considerations around what currency the employee needs and in what amounts. In some countries, tax costs can be minimised or altered directly as a result of where payroll payments are made.

Compliance is about the local country requirements around deductions of taxes from the employee, payment of employer taxes and the reporting of this all to country tax and fiscal authorities. Increasingly around the world there are more and more onerous obligations around payroll reporting. This is a feature of the digitisation of tax authorities around the world who increasingly expect electronic filing of a number of different types of data relating to the employee and compensation. 

Global payroll is an umbrella term often used for a collection of country location payrolls that are part of a standardised process delivered commonly through a system or platform. I won’t be covering this in detail in this article and will focus instead on the technical issues rather than process and systems.

It goes without saying that compliance is not optional. If payroll compliance rules are not met financial penalties, interest and reputational risks follow.

When kind of payrolls may be required in the context of global mobility?

1. Local / domestic

This is the payroll that exists for a domestic employee. Employee is paid via one payroll, in one currency and reporting is required to the local tax /fiscal authority only.

Global mobility professionals would come across these when managing local to local transfers or perhaps when assisting in the localisation of assignees who move to these payrolls. 

2. Shadow 

A shadow payroll is a payroll that doesn’t delivery currency – it delivers the compliance only. From the perspective of the tax authority it’s a real payroll – payroll taxes are accounted for and income is reported to the tax authority.

These types of payroll are used in addition to local/ domestic payrolls to meet compliance gaps. In the case of short term assignees or commuters it may not be necessary for the employee to receive cash in the country in which they are working but a payroll obligation does arise.

3. Hybrid - Local / domestic and shadow

In many cases, there is a requirement to use a payroll to deliver both currency and compliance. 

The starting point here is a local/ domestic payroll that delivers the required country currency to the employee. The compliance requirements are however extended to take account of cross border compliance requirements.  Cross border, globally mobile employees, like assignees usually give rise to compliance obligations in more than one country. 

Payroll taxes, social security and reporting can be due in the country of work but also in the home country. The compensation of globally mobile assignees can also become much more complex, with split payments, new sources and providers involved, meaning that neither the home nor the host payroll delivers and reports the overall global compensation. As a result, shadow payroll type adjustments are required to ensure that all the compensation on which payroll tax payments and reporting are due is correctly captured. These adjustments can be complex and challenging from a technical and systems perspective.

What do you need to watch – some key complications.

Since the pandemic there have been significant changes in working arrangements within organisations around the world. More and more return to work conversations are uncovering cross border elements, which could have potentially far reaching implications for the employer and its employees.

In recent months, employers are seeing a boom in requests from its people to work all or part of their time remotely, and for some from outside the country of their employment and on an extended or permanent basis. Initially much of this remote working was transient and a direct result of the travel restrictions imposed by the pandemic, whereby workers would be displaced due to COVID-19 travel restrictions or return to a country of origin in order to care for family members, but now some degree of permanence is settling in.

What issues could arise?

There are without doubt many positives brought about by remote and virtual work arrangements:

• better work/family life balance for people
• productivity gains for some employers
• potential access to global talent pools outside physical office locations.

However, the regulatory and HR related issues may not be straight forward. Remote and virtual workers potentially gives rise to issues across a number of areas including:

• payroll operation and reporting
• income tax liabilities in differing jurisdictions
• social security entitlement and liabilities in differing jurisdictions
• corporate taxation/permanent establishment risk
• immigration rules and right to work (or not!) in a different jurisdiction
• customer/client viability
• local employment law
• HR risk
• culture, values and impact on teams
• compensation and benefits.

Case study 1 - the remote worker

Mark is an employee of ABC Ltd, a UK company with no presence or offices outside the UK. He is a Dutch national who has lived and worked in the UK.

In March 2020, with the worsening COVID-19 situation, he moved to the Netherlands to be with his parents and started working remotely from his parents’ home in the Netherlands.

Mark did not think it was necessary to make his line manager aware of his change in circumstances.

In August 2021 the company started to have conversations with their people regarding their thoughts on returning to the office.

As a result of this exercise:

• the company discovers that Mark has been working from the Netherlands for over a year already
• Mark requests approval from the company to make this a permanent arrangement under the company’s flexible working policy.

Risk area	What are the issues?
Income tax	Has Mark broken his UK tax resident status? Is Mark now a tax resident in The Netherlands? Is Mark liable to Dutch tax on his earnings?
Payroll	Will the company need to operate Dutch withholding taxes on payments made to Mark?
Social security	Are Dutch social security contributions payable by Mark and the company?
Corporate tax	Has Mark created a branch presence for the company in The Netherlands? Is the company now exposed to Dutch corporate tax liabilities and reporting obligations?
Labour law	Are there any Dutch employment laws that will protect Mark in the future?

Case study 2 - the cross-border commuter

On 1 July 2021, Pierre accepts an offer of employment to join XYZ Ltd, a UK based company with no presence of offices outside the UK.

He is a Belgian national whose partner, children and home are based in Belgium.

As well as being a senior technical adviser, a key part of Pierre’s role will include soliciting new clients and concluding contracts on behalf of the company.

Pierre has negotiated a clause in his employment contract that allows him to work 3 days in the UK office and 2 days in his home in Belgium.

Pierre spends his weekends in his home in Belgium, commuting to the UK to work from Tuesday to Thursday, where he has rented accommodation.

Pierre is on the UK payroll, with PAYE and National Insurance deducted from his salary

Risk area	What are the issues?
Income tax	Is Pierre tax resident in both the UK and Belgium? With his travel pattern, there is a good chance this could be the case. If dual tax resident, both countries will want to tax his earnings, so how do you address double taxation?
Payroll	Will the employer be required to operate withholding taxes in both the UK and Belgium? If so, it may be necessary to operate two payrolls, one in the UK and one in Belgium.
Social security	Is Pierre and his employer liable to UK or Dutch social security contributions?  Paying foreign social security contributions can significantly impact overall employer cost.
Corporate tax	Has Pierre created a branch presence for the UK company in Belgium? The nature of his duties certainly increases the risk of doing so. If a branch presence is created, the employer could be exposed to Belgium corporate tax liabilities and reporting obligations.
Labour law	Are there any Belgian employment laws that will protect Pierre in the future? Due to his work pattern, the employer may be responsible for complying with Belgian labour law obligations that it is not aware of.

Actions to take

First and foremost, employers need to put in place a process to establish where their people are based and for what period. Only then will the employer be able to work out what, if any, actions need to be taken. Employers will be able to take advantage of the positives from their people working remotely, but at the same time manage and minimise the risks. For more information on the issues outlined in this article or to discuss your organisation’s position, get in touch with us today.

OECD issues updated guidance on tax treaties and the impact of COVID-19 pandemic

Dinesh Jangra

While COVID-19 is predominantly a public health issue, there are related impacts in technical areas such as taxation for global mobility professionals to consider. The pandemic has resulted in displaced employees (employees who worked in countries that they were not planned to be in) and now, new ways of working (cross-border remote workers) has resulted in lots of questions on how tax authorities would respond. Will such occurrences result in income tax, payroll, permanent establishments (that give rise to corporate tax implications)? 

Many country tax authorities issue their own guidance on these matters and OECD also does the same. It’s influential in how tax authorities’ approach and, are encouraged to approach the tax issues relating to the pandemic. Here is an overview from my Belgian colleague Mark Verbeek on the last guidance issued.

Marc Verbeek

The 2021 updated guidance revisits the one issued in April 2020 on the impact of the COVID-19 pandemic on tax treaties. It deals with situations where, as a consequence of public health measures imposed or recommended by at least one of the jurisdictions involved, people were stranded in jurisdictions where they might not otherwise be.

This guidance represents the Secretariat’s views on the interpretation of the provisions of tax treaties. It is said to reflect the general approach of jurisdictions and to illustrate how some jurisdictions have addressed the impact of COVID-19 on the tax situations of individuals and employers.

It covers the following issues:

• the creation of permanent establishments (i.e. home office, dependent agent PE) and the interruption of construction sites
• changes in residence for entities and individuals and the application of tie-breaker rules to dual residents
• income from employment i.e. payments under stimulus packages, stranded workers, cross-border (frontier) workers and teleworking from abroad.

We will focus here on residence for individuals and income from employment.

Residence

The OECD considers two main situations where a person is:

• temporarily away from their home and gets stranded in a holiday or temporary work jurisdiction due to the pandemic, and attains domestic law residence there
• working in a jurisdiction (the ‘current home jurisdiction’) and has acquired residence status there, but they temporarily return to their ‘previous home jurisdiction’ because of the pandemic. They may either never have lost their status as resident of their previous home jurisdiction under its domestic legislation, or they may regain residence status on their return.

As a consequence, a person could become dual resident which means they are resident in two jurisdictions according to domestic law. In that case, the tie-breaker rules in the tax treaty are applied in order to determine in which jurisdiction a person is resident for purposes of a tax treaty, which governs the allocation of taxing rights over employment income. There is a hierarchy of tests, including the permanent home, centre of vital interests, and place of habitual abode tests.

The OECD suggests that under these tie-breaker tests, a person’s place of residence is unlikely to change.

A dislocation because a person can’t travel back to their home jurisdiction due to a public health measure of one of the governments of the jurisdictions involved, should not by itself impact the person’s residence status for purposes of the tax treaty.

A different approach may be appropriate however, if the change in circumstances continues when the COVID-19 restrictions are lifted.

Employment income

Article 15 of the OECD Model governs the taxation of employment income, distributing the right to tax between the employee’s jurisdiction of residence and the place where they perform their employment. The source jurisdiction (place where they perform duties of employment) may exercise a taxing right only if the employee is there for more than 183 days or the employer is a resident of the source jurisdiction, or the employer has in the source jurisdiction a permanent establishment that bears the remuneration.

The OECD guidance considers the following situations.

• Wage subsidy - Wage subsidy and similar income received by cross-border workers that cannot perform their work due to restrictions should be attributable to the place where the employment used to be exercised. 
  
  
• Stranded workers - Where an individual resident in one jurisdiction and exercising employment activities in another jurisdiction:

• is prevented from leaving that other jurisdiction by COVID-19 restrictions
• would otherwise have left that other jurisdiction and qualified for the exemption from source taxation.

It would be reasonable for a jurisdiction to disregard the additional days spent in that jurisdiction when asserting a taxing right under the 183-day test.

However, some jurisdictions may take a different approach or may have issued specific guidance outlining their approach to such circumstances.

• Cross-border commuters – Some treaties include provisions that apply special treatment to the employment income of cross-border commuters. The OECD notes that some jurisdictions have agreed to treat the COVID-19 pandemic as an exceptional circumstance and, accordingly, the time spent by the employee working in their home jurisdiction will not be included for this purpose.
• Teleworking from abroad – This concerns workers who work remotely from a jurisdiction for an employer who is resident in another jurisdiction. Changes in the jurisdiction where an employee exercises their employment can impact where their employment income is taxed. New taxing rights over the employee’s income may arise in other jurisdictions. As payroll taxes are often withheld at source, addressing the change will result in compliance and administrative costs for the employer and employee. Some jurisdictions have issued guidance and administrative relief to mitigate the additional burden.

Conclusion and recommendation

The OECD has provided some –very welcome- certainty to taxpayers in relation to applying treaty provisions to the displacement of people as a result of COVID-19 public health measures. Residence will likely not be affected, but taxing rights over employment income may change.

However since many countries have issued their own guidance, taxpayers will need to carefully examine those guidelines in any specific bilateral situation.

Please get in touch with myself or your usual Crowe contact if you would like further advice on this matter.

Marc Verbeek Crowe Spark, Brussels

 

Raphael Gaudin covers the topic of contract staff (also known as staff leasing) and how the EU directive impacts cross-border assignments for these workers.

Background

Businesses may often face situations where their workforce must be assigned to a certain project or place with instant effect due to client’s expectations of immediate solutions and actions. In such situations, businesses can move workers from other projects, hire new workers or engage workers through a temporary workers agency. This article focuses on the concept of contract staff through temporary workers or a contract agency.

Temporary contract workers may be able to provide needed workforce with immediate effect, or at least faster than through an own hire process. Contracting staff may provide the advantage that the temporary work agency takes care of onboarding, payroll administration including migration and terminating the employment. The business has a single point of contact with the temporary workers and agency and compensates them with a commission fee for their efforts.

If a business does not have a legal entity in a specific country, it can be a solution using a temporary workers agency to hire local workers through an agency. This saves the business from local registration duties non-compliance risks. In consequence, the worker will most likely become liable to social security and income tax in that particular country because the worker has a local employment agreement.

The temporary work agency would usually be a third party, but can also be dedicated intra group services company.

To ensure that workers on temporary contracts are given equal labour rights as direct employments, staff leasing is strongly regulated in many countries. In international assignments, the business should keep in mind that restrictions and permit requirements may apply. The compliance will initially be carried out by the temporary work agency but can also fall back to the business (e.g. Switzerland fines businesses engaging leased staff through an agency up to CHF 40’000 in case of non-compliance).

Difference between staff leasing and employment

Temporary agency work is ‘three-way relationship’ between an agency (acting as legal employer), an employee and the business (formal employer).

 

 

Typical elements that characterise staff leasing.

1. A legal employer who places an employee at the disposal of another company, while the other company has substantial powers of instruction towards the employees (e.g. job scheduling and instruction, control of the work performed, etc.).
2. The employee is involved in the work organization of the employing company in personal, organizational, material and temporal respects.
3. The employee carries out the work with tools, materials or equipment of the employing company.
4. The host company bears the risk for the poor performance of the contract.

Depending on jurisdiction, there are possible exemption where no temporary agency work is deemed in any case.

1. Short-time work or redundancies are avoided in the home company.
2. Temporary employment only on occasional basis (not part of the main business activity).
3. In public service.
4. In case of temporary employment with groups of companies.
5. Further exemptions depending on the jurisdiction.

Regulatory background in the European Union

The European Union has adopted the directive 2008/104/EC on temporary agency work, which sets minimum standards for the work conditions of temporary workers throughout the EU.

It includes the principle that the native work and employment conditions of a temporary worker during the period of assignment must be at least equal to those that would apply, the worker had been directly hired by that company for the same job (equal pay, equal treatment).

The EU Member States may allow social partner regulations (e.g. Germany/ Austria: collective labour agreements) which differ from the before mentioned principles. The requirement for a lower payment to temporary workers is that the temporary workers have an unlimited employment relationship and are also paid in the periods between the assignments.

The Directive also regulates access of temporary workers to employment, community facilities and vocational training, the representation of temporary workers in the workplace and the information of workers' representatives.

Cross-border intercompany staff leasing

A driver for sending a worker to another country can be internal or external project work, know-how transfers or a general shortage of high skilled workers. In case of shortage of workers for a specific project, a host country company can increase staff by lending staff from a group company or specialist staff lending company. Also, some companies create intra-group staff lending also called temporary work agent - for global work force planning.

As people management and global mobility professional, we must also consider, that a staff leasing/ contract worker situation could be deemed in certain situation. This leads to additional compliance requirements.

Example 1 – Based on regulatory situation in Switzerland A Swiss construction company A is working on project and has not enough work force to finish the project in time. They engage a team of workers from the parent company B in Germany. The team is instructed by the manager from A and must accept working hours as applied by company A. In this case the contractual basis between A and B is very likely not to be considered as construction contract but staff leasing situation. There might be an exemption from the above, if this is a short-term situation and it helps company A to bridge lack of workers. B is not performing such transfers on regular basis. Example 2 The Swiss company A contracted the German based parent company B with the construction of a building, to extend the own available staff. The parties enter into a construction contract and company B bears the risks and must deliver a specific part of the project. This can be considered as contract situation and not as staff leasing.

Conclusion

Be aware that when staff leasing is applied, make sure your business is complainant with local rules. When setting-up employment contracts and secondments, bear in mind that the contractual basis shall avoid any risk of deemed staff leasing. Therefore, it is important that a contractual basis for an employee shall avoid any risk for being deemed ting an assignment as temporary agency work. This can in particular be a risk in cross border assignments.

Many jurisdictions do have exemptions for intra-group transfers from any staff leasing risk. However, in the example of Switzerland – no such exemption applies. Check local staff leasing/ contract worker regulations. This is especially important in regards to employees from the UK, who now have new regulations, given their departure from the European union.

The staff leasing model can also setup-up as part of the work force planning model by using internal or external staff leasing agencies. In case an intragroup agency shall be set-up, be aware of local restrictions and license requirements. In order to avoid negative financial and legal implications, the respective legal situation must carefully be determined.

Besides, posting of workers is of course also subject to various labour law, migration, social security and tax implications.

Raphael Gaudin Curator & Horwath AG Zurich - St. Gallen

 

Context

The end of the payroll tax year is now on the horizon in many countries. This is a useful trigger to remind us to look at cross border remote and virtual working cases in respect of whom payroll compliance may be required. Payroll deadlines for December through which to make any adjustments of reporting for 2020 are only a few weeks away.

Of course, 2020 has been a year like never before. The pandemic has resulted in huge numbers of employees working outside of their normal country of work and/or the country in which their role is situated. Many tax authorities responded with easements and clarifications around pandemic related temporary presence in their country. However, there hasn’t been a global standard. It is time to take stock and action.

Defining remote and virtual worker

Remote and virtual working is not new. Technology and roles had already evolved so that working from home, or another jurisdiction, was not uncommon in many businesses. The pandemic has, however, vastly accelerated both the adoption and prevalence of these work arrangements. So what are remote and virtual workers in a cross-border context?

• New virtual assignments that have begun during the pandemic, the role is overseas and the employee has begun the role but has not yet relocated.
• Displaced workers, workers who have returned home or moved to another country during the pandemic - they are not working from the location they were set-up to.
• An employee who is employed by an entity in Country A but lives and works in another country (B).
• An employee who lives, works and is employed in country B but does not work for the local business. All of their work is under the control, management and supervision of an entity in country A.
• An employee who before COVID was office based but is now home based, in part or whole, but that that home is now in another country or is regularly in another country.
• A resource who lives and works in Country B but invoices an entity in country A for services rendered.

What are the issues?

There a without doubt many positives brought about by remote and virtual work arrangements. Access to global talent pools outside physical office locations, better work, family life balance for employees and many organisations have even seen productivity gains.

The experiment forced by pandemic has in many way been a success. However, the regulatory and HR related issues are not so straight forward and need review. This is true even where there isn’t a ‘new country’ involved. For example, payroll taxes can be triggered in different cities and states in the USA.

Remote and virtual workers potentially give rise issues across a number of areas including:

• Payroll
• Income tax
• Social security
• Corporate taxation
• Immigration
• Customer - client viability
• Employment law
• HR risk
• Culture, values and impact on teaming
• Compensation & Benefits

Taking action

We at Crowe have developed the following methodical approach to help think through the action required and are providing support across all aspects.

1. Review your operating model

Do you have the right resources to manage these cases? Global mobility and international HR experts within organisations have expertise gained from managing globally mobile employees to reapply to these new types of mobile workers. To correctly and efficiently manage cross-border remote and virtual cases there will also been a need for:

• Resources. Do you have team members who can take on the additional workload of these potentially complex cases?
• Technical expertise.These types of workers require a mix of local and global expertise across taxation, payroll, social security, labour law and HR. Do you have the right expertise in-house or through your advisors and suppliers?
• Process & technology. Standardised process and technology will be key to efficiently manage cases. There are a lot of employee and country specifics to take account of but a robust consistent core approach is required. What systems and process do you use? Will your mobility approach flex to accommodate this new type of ‘assignment’?
• Ownership. The cross border and complex nature of these cases can mean that HR and line management may not be clear on the issues and then who manages them. Where HR is country focused but the employee is not working in that country they may not have the knowledge or remit to manage the cases. Where there is no entity in the country the employee is working, or local HR are not aware or involved then non-compliance could arise. Is it clear in your organisation who is responsible for reviewing these cases? 

2. Frameworks & Policy.

Decisions will need to be made on the types of arrangements your organisation will support and how?  This will largely depend on the nature of the business, the customers and the culture and values.

A framework or policy is key to bring a consistent approach to your organisation so that employee and business interests are balanced. Do you have a framework for this area? Is an update required? Home working polices are not usually focused on cross border aspects.

Putting in place and agreeing an appropriate framework will set the ‘red lines’, what kind of remote and virtual working arrangements will you not sanction? This could be based on a number of things for example, proposed location (how stable and safe is it?), time-zones, employee work permissions (immigration status), employee past and current performance and employee role/job type. Getting this thinking done up front will help in filtering the arrangements and directing time and energy to only those that are viable for both the business and employee alike. 

3. Case viability review

This is applying your framework and/or policy to the proposed or discovered cross border working arrangement. This initial review based on decisions taken at a policy level should determine whether an arrangement should be rejected (the organisation cannot sanction the arrangement) or be approved for further review.

4.Impact assessment

Once a decision has been made to potentially support an arrangement it’s important to properly understand how the working arrangement will practically impact the employee and employer.

A review should be conducted across the different technical areas to understand what obligations and costs are changing and being created (payroll, taxation, social security, labour law etc.).  Aspects such as technology set up, insurances, data protection and even compensation and benefits are amongst other areas that should be reviewed.

5. Modification

Once the impact assessment is complete, there will be areas highlighted that are increasing cost, risk and compliance. The next step is to consider how to mitigate these. Examples may include: modifying the employee role so that a tax presence, permanent establishment is not created, modifying or replacing the current employment contract to avoid or mitigate dual employment rights or changing payroll reporting and taxes to avoid non-compliance.

6. Approval, Monitor and Maintain

Now the work arrangement has been modified it is ready for approval. It is important to document and obtain business approval for the arrangement in order that any additional costs or compliance have been agreed and are expected. A costing at this stage is a good idea. After all no one likes surprises! Once approved, the arrangement can then move into a monitor and maintain status. Payroll, compensation, tax and social security compliance and even immigration etc. being managed as they are for other globally mobile employees.

Conclusion

Cost, risk, compliance and customer delivery can all change with virtual and remote arrangements. To avoid surprises in any of these key areas, a structured review should be conducted to ensure as many of the positives of the arrangements are realised while limiting exposure to the negatives.

Dinesh Jangra Crowe United Kingdom

 

Context/ Big picture

More and more employers now have virtual mobility scenarios. The pandemic has certainly resulted in a surge of these arrangements, and many of them may well be here to stay in some shape or form. 

Significant people and compliance risks exist in these scenarios. There can also be unplanned cost surprises that are very unwelcome in the current environment. We are helping many organisations to tackle this area in a technology enabled, holistic way that focuses on putting in place policies, process and technical expertise to support HR and Global Mobility in reviewing these arrangements. 

As Global Mobility and HR professionals come across these arrangements, what should they help the business think through? 

Definition

Global mobility is skilled at connecting resources across borders to where there are roles. A business need arises for a certain set of skills and experiences in a country and resources are then identified, prepared and deployed. Equally, there may be a development opportunity for an employee to grow their own skills and experience, with the opportunity to do being outside their current country of work. This mobility involves a physical relocation and/ or at least regular business travel to the location of the work.

Virtual mobility sort of does this, all in reverse. The person doesn’t physically move, the work/ role now comes to them – the work/ role is mobile not the person. This creates virtual mobility – reverse assignments, or reverse business travel. 

While virtual mobility has no doubt been a feature of the workforce pre-COVID-19, the pandemic has definitely accelerated and amplified its adoption and occurrence. The result is an increased and more complex compliance and HR risk.

What does virtual mobility look like?

There are many examples of virtual mobility out there right now. Here are a few.

1. COVID Displaced/ remote workers 

Employee was in Country A at the outbreak of the pandemic. As part of the response to COVID they either moved back to their country of origin, or to another country or series of countries. During these movements, they continued to perform their roles remotely. Things may have normalised since, the employee may have gone back to the country where they originally were or they are based in the country of origin now. There is still a need to check that the periods of presence in each country has not triggered compliance.

2. Virtual assignments 

There were employees who were about to relocate to take up a new role in another country but that relocation has been put on hold due to the pandemic. Despite this, they started the new role (in the other location). They have therefore been working in their home country but on a role in the other country. 

Some of these arrangements may be/ have been temporary - a response to the pandemic but a relocation has now happened. Other arrangements like this might become part of the new normal for the time being – ongoing in nature with employee and role in different countries. 

3. Remote working 

Remote working and working from home is nothing new. Over the last decade there has been a huge increase in the size of the workforce that regularly works remotely. The shut-down of most offices in the pandemic resulted in the majority (if not all) workers in organisations working remotely from home. The key point here is working from home in which country? The pandemic meant some employees naturally gravitated to their roots, where their wider families and support networks were. In the rich, highly diverse workforce we all value, this meant people were and still are, working from other countries.

4. Regularised work from home requests 

As lockdowns have been eased, more and more offices have reopened but the mass return to working normally (100% of workers in the office) may never return. After all, for months businesses have been able to function with remote teams – the effectiveness has been proven. As a result, many employers are now actively considering new requests (and with it policies and process) to cover employees who will be fully or partially remote going forward. Being remote could well be working in another country or compliance jurisdiction. 

5. New local employees –  organisational/ entity mobility 

Even during the pandemic, many businesses have been increasing their employee global footprint adding local employees in countries outside of HQ. Some of this has been driven by the temporary difficulties caused by lockdowns that have now lifted, are being lifted. In a number of cases the employee may be in a jurisdiction where the employer has no formal presence or in country where they have a presence but the new employee(s) are not part of that business. Compliance here is a must as labour law, payroll, tax and social security aspects need to be reviewed.

6. Non-resident Directors 

Not new, these types of workers existed pre-COVID too. Where employees live in one country but have statutory (Directorship, formal management roles) in other countries it is important to review how those arrangements should be set up to be locally compliant. It’s not always as simple as keep them on payroll and employed in the country where they reside.

What Virtual mobility considerations need review?

At the heart of the issues is the reality of a disconnect, a disconnect between employment location (where no doubt the employment, employee welfare support, payroll and related compliance is set up) and the employee’s physical location. 

Each case may well be different but some core areas that need action/ review are:

1. Operational viability. It’s important to actually review whether a proposed virtual/ remote working arrangement in another country is actually viable. Time differences/ working hours, data privacy, systems access, employer’s liability insurance, health & safety are amongst the practical areas to review. 

2. Policy: Many organisations will have a home or remote working policy and will probably have some form of global mobility policy. Those policies will not necessarily cover the case of the virtual or remote work in another country. Additional considerations may be necessary – how do you pay and reward these employees (which population do you benchmark their compensation to?) What expenses can they claim for or not – travel, technology etc. Who in your organisation should sign off or approve on a virtual or remote mobility request? There are many areas to think through.

3. Training: Employees may be functioning in a new cultural and work culture without really physically being part of it. What skills and knowledge are needed to assist them in working in virtual teams across cultures and timezones.

Some of these may well be soft issues around culture and communication, others may be hard issues for example, if someone is managing teams in other countries to what extent do they need to be aware of the employment law and labour consideration considerations? Don’t assume employees’ line managers are aware of these areas, after all this could be new to them as well. 

4. Access to Healthcare: An absolutely key issue. If the employee is not physically living or working in the country in which they are legally employed how will they access healthcare. It’s important to check the local state provision and local access criterion. Does the employee qualify? What supplemental healthcare is required and the appropriate private medical insurances set up recognising the employing is a remote or virtual worker? 

5. Payroll: Virtual mobility can drive changes to payroll obligations both in the country of employment/ role and the country in which the employee is physically working. Not addressing these obligations proactively can result in exposure to non-compliance, penalties and interest and result in cash flow difficulties resulting from dual payroll obligations. 

6. Tax and social security: Where will the employee be subject to taxation, what tax returns must the file, what tax registrations are required? Where will social security become due as a result of the virtual or remote work arrangement? These are critical areas to review to ensure that employer and employee non-compliance does not arise. It’s important to note that tax rules in some countries are dependent on states or cities (USA is an example), so virtual mobility and compliance requirements can be created even if the employee is the working in the same country.

7. Immigration: Does the employee have the right to work in the country in which they are physically working? Are any associated work permits or VISAs required and have registration requirements been considered?

8. Labour law: In a virtual mobility situation, an employee may hold a contract of employment in country A. However, they are living in country B. It can be that they are now acquiring rights or giving rise to mandatory employer obligations under the employment law of country B. Has this been assessed? This can be a complex and costly area that needs review.

9. Corporate structure: If you have any employee living and working in a country where you have no formal corporate presence or have the presence of a different business unit a number of intended consequences can arise. The nature of the work the employee is doing can create a permanent establishment (whether or not this was intended) resulting in corporate, sales and VAT tax obligations and compliance. 

10. Tracking: As business travel returns, knowing where your workers are, and have been, is now more important than ever. The role that tracking plays in the ability of an organisation in the post COVID world to manage its duty of care to its employees is really clear. Sadly, we face other risks – an uncertain world brings other reasons to quickly identify where our workers are quickly and efficiently. 

How do you do this with virtual employees? Where does the role of your organisation begin and end versus the role of the state/ healthcare system in the work/ role location and the country of the employees’ residence?

What should organisations do?

The current economic environment means that many HR and Mobility teams are resource constrained. This is happening at the same time there is a surge in new cases of virtual mobility. 

There is no doubt, it’s critically important that Global Mobility expertise is applied to these cases. 

A good sound process to review the cases (so that HR and Line Management are supported) without necessarily increasing workload of the global mobility/ HR team is key. Without a process or framework organisations can expose themselves to potentially significant people, cost and compliance risk.

These are challenges the profession has both embraced and shown exceptional leadership in. Mobility professionals have been right at the forefront of the emergency. No doubt, the profession will play a leading role in the recovery of the global economy that will follow.

For now though a little reflection. This short article provides my perspectives of what we are all dealing with (in many cases have dealt with) and will be dealing with next. It’s about three phases; Respond, Review and Rebound.

Respond

This is a phase that many organisations are now coming out of. COVID-19 caused a global people emergency at a speed unknown to most of us. HR, Mobility and international HR professionals are used to monitoring global events for people risks – political and environmental volatility, warzones and even previous pandemics such as SARS and MERS. COVID-19 was different, it was global and happening everywhere at the same time.

Where are our people and where should they be?

Information about employee welfare and location was business critical. Mobility and HR were at the forefront, becoming the crucial interface between the management of the organisation and their employees. Where are our people and are they well became urgent questions. As country by country lockdowns and travel restrictions then followed the question shifted to where should those people be? Do they need to be evacuated, do they need to be repatriated? Who decides?

In many organisations there was a tension between what the employees wanted to do and what official advice indicated should happen. Where an employee wanted to be, may not have been as safe as the place that they already were in.

Crisis plans and process tested

The speed at which the emergency was unfolding made it a time of high, high uncertainty with constantly changing and at times contradictory official guidance. Which experts and governments were right? Travel capacity was severely disrupted and inconsistent quarantine guidance followed (both enforced and non-enforced versions) all had to be taken into account. Some organisations had their crisis plans, protocols to locate and advise employees and the business severely tested and came through. Other organisations realised that their plans, decision making processes and data sources (internal and external) to locate people were simply not reliable.

Global mobility teams certainly delivered at this hugely challenging time – Increased workload, long hours, high stress and uncertainty was negotiated.

Review

Most organisations are now in this phase. Globally mobile employees are accounted for and their current location is clearer. Week by week, a new interim normal has emerged.

Reflections – what did you learn?

The lockdown has stopped employees moving. At time of writing, lockdown restrictions are starting to and will be eased over time. This will happen in phases, there will be no overnight change. As a result of lockdown and probably for the first time ever, mobility professionals are not inundated with move related workload – there is a temporary pause, use this pause wisely.

The pause in movements is a good time to review how the team and function operate and make it better. The COVID emergency has robustly stress tested many aspects of the function. What worked well? What didn’t work well? Some key questions to address could be:

1. Were you able to quickly and reliably identify where your mobile employees were? How reliable were your systems and data?
2. How did the decision making chain work? Was it clear who makes decisions?
3. How did policies cope? Did they help, hinder? What changes are required?
4. Did insurances and healthcare cover areas you expected they should?
5. How well did your suppliers support you- travel, insurance, evacuation support and many more will have been involved. What feedback do you have for them, how can they do better?
6. What did you learn about your team and the wider stakeholders you work with? What interfaces worked well and which ones did not and why?
7. What has changed, how has the profile and standing of your team been impacted?
8. Which areas, process have frustrated you and your team for a while? How can you use this pause in movements to address and improve those?
9. This has been a challenging and stressful time, how are you and your team recognising that? You support the wellbeing and welfare of your employees, what support do you and your team need?

Reverse and virtual assignments

Global mobility shifts employees or resources across borders to a particular job, role or business outcome. The last decade has resulted in more and more fluidity. We’ve seen an increase in the level of short-term assignments, commuter work arrangements and extensive business travel. Overall fluidity was also increase with uptakes in home and agile working. What we already had were cases where there was a disconnect between country of employment and payroll and the physical location of the employee.

COVID 19 has further accelerated and accentuated this fluidity. Evacuations and repatriations have resulted in employees performing roles in unplanned locations. Planned mobilisations are on hold but in a number of cases the proposed role has not changed. The employee has taken up the role in the other country but continue to do it (for now) in the country of origin. This has a number of compliance considerations that require review – payroll, social security, income tax and permanent establishments. Working from home isn’t new but right now, more than ever, it’s necessary to ask in which country is that home?

Doing more with less and handling cost reductions

As the dust has settled on the immediate emergency, the impact of the resulting economic emergency is becoming clearer. Many organisations have reduced headcount and budget. HR and Global Mobility teams have not been left out of this. The result is doing more with less resources and less budget. 

Putting together cost reduction plans, whether prompted or not, makes a lot of sense. Where does your team or function give rise to costs? Which services or supplies are you purchasing? Are you using the right the providers with the right cost base for your current situation? Can fixed prices be introduced where hourly rates have applied?

Process complexity often leads to higher internal and external costs too. How can you simplify service provision in a way that then reduces internal and external costs? Digital approaches, leveraging systems and technology can be lots of gain – process simplification doesn’t need the same infrastructure, capital spend and can bring advantages. What does thinking relating to Reflections - what did you learn as mentioned above, tell you.

Shifting compliance and state support

We have witnessed measure after measure, country by country issued by fiscal, immigration and other regulatory and public authorities around the world. Keeping up with everything that has been announced is an impossible task.

State support to subsidise and protect employees on payroll, stimulate and support businesses have come into place at break neck speed. Tax and payroll filing and payments deadlines have been and are still being extended. Technical guidance notes about employee tax residency and social security rules are being published by countries and at OECD level.

It’s key for those overseeing employee mobility to understand the impact of this on their globally mobile employee related workload. The tax filing and payment changes are key to understand so cash flow can be improved and the right work can be done at the right time. Although not designed for globally mobile employees – a number of payroll subsidies and stimuli could apply to this population. This all need to be worked through.

Rebound

As lockdowns ease and economies re-open organisations will want to be at the forefront of the global rebound. 7.5 billion people will simply not sit on their hands for very long.

Same driver but different approaches

No doubt, some areas will change. It is commonly accepted wisdom that the great work from home experiment has delivered a real choice to office based Monday to Friday. Mobility professionals will want to understand where the 'home' for cross-border workers is and how connected the compliance is with the reality of cross border work arrangements (see Shifting compliance and state support above).

Some things will not change. Before COVID, there were good business reasons why employee mobility was happening – skills transfer, growing new markets and winning new customers – these underlying drivers remain. The locations of the global talent pool has not suddenly changed. There is indeed an argument to make that those organisations that overcome and negotiate the new complexity of talent deployment faster, quicker than their rivals, will rebound faster. It can be your competitive advantage.

Complexity in this area is primarily connected to the timing, availability and effectiveness of treatments and vaccines. This remains uncertain but the collective brainpower of expertise of the world is focused on this so it can only be a matter of time.

Some key areas to consider now to ensure you are organised for the rebound.

Integrated immigration, relocation and health screening

There is no doubt that this next period will accelerate how the mobility industry integrates across the specialist providers to provide more connected solutions. For the short-term, health screening, digital health passports (showing vaccination status, antibody status etc.) even containment and isolation periods would be expected to be closely synchronised with relocation and immigration. How will relocation consultancies, immigration providers and the health screening industry work closer to provide a single support service?  This is not a new area, some countries pre-COVID insisted on health screening before granting permission to enter –the application of this type of process will no doubt now be much wider.

Duty of care

To date, when we have spoken about Duty of Care we have talked primarily about the mobile employee. What risks do they face? What can we do as employers do mitigate those risks? Risks that could include health, welfare, wellness, compensation and compliance. We are used to this.

COVID-19 fundamentally alters this. The Duty of care now also extends to employees generally - the home and host colleagues of the mobile employee. Our focus has got be around how the mobilisation process now builds protections for the mobile employee and others. Some of this will be locally set in-country. Core global approaches and policies may need to be developed by multinational organisations - health screening, employee tracking but also containment periods could be vital and key. Requirements by location will be different, so country by county process and detail is key.

Employee tracking – has the balance shifted?

Technology to trace and record the location of employees has probably existed for a decade. Business travel compliance systems have offered this functionality. The uptake of this aspect of the systems has in some organisations been a challenge, primarily because of privacy concerns. In these organisations the compliance risk was understood, the duty of care to know where the employee was also understood but the data protection and privacy concerns overrode that.

The world has now changed. As the COVID-19 emergency broke how useful would it have been to businesses to be able to instantly interrogate a system to review the location history of employees? As covered in Duty of care (above), the duty of care is clearly multi-faceted now, we owe that duty to the mobile, traveling employees but also to their home and host colleagues. Governments seem to be adopting tracking and tracing technology as part of the opening up of economies. With these changes, has the balance shifted? Can businesses carry on not tracking their employees?

Global Mobility and HR professionals, thank you for what you have negotiated and thank you in advance for being at the forefront in driving the global rebound.

Our insight on shifting compliance looks at the key actions you need to take during this uncertain period to optimise cashflow, reduce employment cost and compliance risk.

Context

The outbreak of the current pandemic has presented huge challenges to multi-national organisations. Securing the health and welfare of all people has of course been the top priority. Employees are also now working at home at a scale that has never been experienced before. What does this mean for employer and employee compliance?

Income / Wage Taxes

The general rule for international employment scenarios, if a Double Taxation Treaty is in place, is as follows:

If a person who is a (Treaty) tax resident in one state and works in another state the salary is taxable in the other (working) state except all of the following conditions are met:

1. Employee does not stay for more than 183 days in any 12-months-period in the state he works.
2. Employee does not have an employer in the state he works.
3. Employer does not have a permanent establishment in the state the employee works.

The above are, roughly said, rules of the OECD Model Convention. Bilateral Double Taxation Treaties have to be reviewed for country specific details.

Counting of 183 days as above may be influenced in case of illness of an employee or by restrictions beyond their control. Some countries understand this and have made statements to comment on what happens where a stay is exceeded as a result of COVID (UK and Ireland are just two examples). In other countries there are no special rules so general rules continue to apply.

Employers of mobile employees should therefore, consider the following:

• If an employee works in the state where they are a tax resident under the applicable Double Taxation Treaty (in general, the state in which they have as their centre of vital interests, is often the state where the family lives), every single working day is taxable there. This means that if someone in general works 100 % in the state where their employer is seated, now moves back to their home state because of the COVID-19 situation, and works in their home office, the salary is partly taxable in the home country. Withholding and compliance needs should be reviewed.
• In many Double Taxation Treaties there are special rules for commuters/ frontier workers. Some of the Treaties define commuters as the way that a minimum of working days must be performed in the other country, some define a maximum of working days in the host countries. This should be reviewed.

In April 2020, the OECD published general guidance regarding the above, with some general hints, asking member countries to be open to finding solutions to lessen the impact of COVID-19, on companies and individuals engaged in international employment. The OECD also announced that they are currently working with countries to mitigate the unplanned tax implications, and potential new burdens arising due to effects of the COVID-19 crisis.

Types of employees that may be affected

When setting up tax and social security scenarios for employees with international background such as:

• expatriates to other countries
• expatriates from other countries
• employees who live and work in different countries
• employees who work in more than one country
• employees working locally with families abroad
• commuters/ frontier workers.

It is always important to know:

• Where do the employees work (which country/countries – which percentages)?
• In which countries do the employees have a domicile?
• In which country (can only be one) do the employees have their centre of vital interests?
• Which employer pays and bears the salary?

The above defines:

• Which country an employee is liable for social security in principle.
• If an employee can stay in his home country social security system.
• In which country or countries the salary is taxable.

In the current situation with shutdowns in many countries due to COVID-19, many people will be working in home offices. If the home office is located in the same country that the employee works in general, then there should be little change with regards to taxes and social security.

But what if the home office is in another country than where the employee usually works? What happens if, as an example, your expat who usually 100% of the time works in your country and just returns home for the weekend, now goes back to their family, who lives in their home country and works at home?

Social Security

All scenarios in which work in home offices is performed in another country comparing to where the work is usually performed, such as:

• Certificates of coverage from non-EU countries
• A1 for multistate-workers (EU/EEA/Switzerland)
• A1 for secondments (EU/EEA/Switzerland)
• Exemption agreements (EU/EEA/Switzerland)
• Scenarios in countries without social security treaties.

For many mobile employees, an A1 (EU/EEA/Switzerland) or certificate of coverage is applied, which determines the social security system in which they stay. For EU/EEA/Swiss multi-state workers special rules apply which, besides others, refer to the fact that the employee works for more than 25% in their home country or not.

As people are now working in their home offices, in their home countries, the 25% threshold for multi-state workers may be exceeded.

Scenarios which were described within applications for exemption agreements, now may differ because of work in home offices.

Maybe upcoming secondments for which A1’s or certificates of coverage are already applicable for, will start at a later date.

Many EU countries already have announced that working in home offices caused by the COVID-19 situation would not have an impact on the 25% threshold for multi-state workers, and that A1’s for upcoming secondments will stay valid for a limited period of time.

The situation for bilateral social security agreements (outside EU/EEA/Switzerland) up to now, is not clear.

Labour Law, Work Safety and Data Protection

Employers should bear in mind that in many countries labour law requirements for work in home offices exist. Besides this work, safety and data protection should be focused on.

Conclusion

Without doubt, the COVID-19 pandemic has disrupted the way globally mobile employees work. Mobile employees temporarily working in home offices may be affected by tax regulations which have not yet caught up with the situation, and issued clarifications and exemptions.

Employers should ensure they know the location of their home workers and review cases where mobile employees work in home offices, which is not in their usual terms of business. 

For more information about the potential impact COVID-19 may have on your globally mobile staff, please contact me or your usual Crowe Global Mobility expert.

Context

COVID-19 is fundamentally a people issue; it’s about the health and welfare of us all and has significantly impacted the economic activity of all us in some way. Those working in international HR and managing employee mobility have rightly been fully focused on securing the health and welfare of all workers – nothing, absolutely nothing, has been more critical.

The word exponential has become as common as the word COVID since the beginning of 2020. Fiscal authorities and governments all over the world have been active like never before introducing measures to support employers and employees. This is a very fluid situation that is literally changing daily. For those working in businesses with multi-country operations keeping up with the changes is a difficult task, not least because there is also a day job to do.

What is the current cost of our global workforce over the coming months? What country support is out there, and how does it change the cost of our workforce? These are key questions we are seeing from our clients. So if you had kept up with the updates what themes would you see? Here is a summary of some of the main people related measures. We hold all the detail in our Crowe Global COVID-19 employer and employee tool.

Temporary restrictions in people mobility

A number of countries have quarantine measures in place for those coming into and returning back to the country. Others have gone further, China, Malaysia, Norway, Taiwan and the US for example, are now severely restricting people mobility. As a matter of course, it is now necessary to carefully check that any employee you need to bring home, or mobilise, can actually leave their current country and enter the other country. Do not make any assumptions.

Employer subsidies for employees on payroll

There seems to be almost universal agreement that job protection during this crisis is an absolutely top priority. As a result, a number of major economies have enacted measures that subsidise employees being kept on payroll (rather than being made redundant). Countries that have taken action in this area include Austria, Brazil, Canada, China, Croatia, Hong Kong, India, Norway, Poland, South Korea, the UK and the USA.

In some countries, the approach has been for governments to meet part the cost of these employees, and in others it has been to reduce the payroll taxes the employer has to pay.

Managing the cost base for employees is absolutely critical in the short term future, and being able to understand which subsidies are available and make applications for them will be an urgent focus area. International HR and Global mobility teams will have a key role to play especially where there isn’t always expert support on the ground (in country).

Short time working

Some countries have responded to the current situation by bringing more flexibility to employment agreements. Short time working is a concept which allows employers to reduce the hours that an employee works, and therefore also reduce the compensation employees receive. This approach (like payroll subsidies) involves government support and intends to keep the maximum number of employees on payroll throughout the challenging period ahead.

These kind of measures are not entirely new and have been used in the automotive and constructions sectors before. Countries that have announced measures to further support short term working include Austria, Germany and France. Related to this are job share/ work-sharing schemes where roles are split between more than one employee. Again the goal is to reduce hours, but keep employees on payroll (and avoid redundancies), Canada is an example of this.

Where the business is being asked to respond to a reduced cost base request, this is an important area to explore in applicable locations.

Compliance – tax payments and filings

The global emergency impacted the ability of organisations and individuals to meet their tax filing and payment obligations. There are different ways in which different countries have responded.

A number of countries have provided extra time for employers to make their payroll payments. These include Belgium, Canada, France, Germany, Netherlands, Norway, Poland and Spain to name just a few. Wage taxes and social security are significant costs for any business and getting clarity on where payment extensions are possible is critical for managing cash-flow.

Tax filings will be due by globally mobile employees and other employees will need monitoring too. Tax authorities in a number of countries around the world have provided extensions to file tax returns. It’s important to understand and communicate this to employees, as it is at least one thing that can be made easier in this difficult period. USA, Poland, Malaysia, India, Canada and Austria are just a few examples.

Compliance remains a priority, but a large number of easements have been introduced country by country. It's important to understand these, as they may help remove pressure points and stress around payroll process and compliance, as well as tax returns for globally mobile employees.

Compliance – residency and remote working

Employer tax and payroll implications are often closely connected with the amount of time an employee has spent in a country.

A number of employees are, and will have been, in locations in an unplanned way. It could be as a result of borders being closed, countries becoming unsafe or simply that they continue to work from home (rather than the office) in the new normal. Tax authorities are responding to this issue. For example Ireland and the UK has announced that days spent in the country directly as a result of COVID-19 may be disregarded. This will mitigate compliance being triggered.

Similarly, social security authorities (particularly in Europe) have made clarifications that unplanned work in a particular country, or from home, will not alter where the social security liabilities are due. A relaxation of the strict rules that apply has been communicated by The Netherlands, Switzerland and Belgium.

It is important for HR and Mobility teams to monitor where employees have ended working vs. where they were expected to be. Understanding which locations have temporarily eased the rules and where they have not, will give focus to where there may be compliance obligations (payroll, taxation, social security) that need to be tracked.

Conclusion

International HR and mobility professionals are facing unprecedented complexity and challenge. The profession is right at the forefront of managing the huge people impacts that COVID-19 brings. 

The priority remains health and welfare of employees and colleagues and each of playing our part in the welfare of all citizens in our communities and nations. As focus gradually shifts to operations it is important to understand the measures around the world that are being enacted to help employers reduce employment cost, improve cash-flow and temporarily assist with risk and compliance obligations.

Those managing global mobility in organisations are increasingly dealing with gig workers too. What are the issues that have to be front of mind with globally mobile contractors and off payroll workers? This area really matters because the business may be expecting the costs and compliance advantages (no payroll, no reporting, no labour law rights) because a resource is not ‘employed’ but this needs to be factually checked against local rules. Do not assume a contractor in your country is classed as a contractor in other countries!

Context

Over the last decade, the labour market has seen both a spectacular growth, as well as a number of changes in how people work. Employees have become more independent and the demand for flexibility has increased. Self-employment has therefore been the answer to a lot of questions around workforce needs.

Tax and payroll rules have generally not moved along with these developments (and neither has employment law). The way employees are taxed often differs strongly from the way businesses are set-up and taxed. This means that the traditional black and white difference between employees and businesses is still relevant for taxation, but has diffused in the actual economy, creating a grey area in its wake. As there is no international consensus as to what exactly constitutes an employment relationship, the issue becomes even more important in the cross border and employee mobility context.

One important take-away is that governments are putting their foot down on the differences, instead of supporting the new reality, meaning that compliance risks have increased.

Below, I will set out some key aspects to take into account when dealing with differences between employment and self-employment.

Traditionally, there was a distinct difference between employees and employers. Employees were dependent on employers, stayed in service for a long time, were not very mobile and less demanding. The employer was generally the more powerful of the two and the party that controlled the other.

Over time, several developments have taken place. For starters, the effective tax rate on business income has decreased quicker than the effective tax rate on employment income, making it, by comparison, attractive to start a business (and be a contractor). In theory, the reduced tax burden comes in return for taking commercial risks. In practice, governments want to create a business friendly environment that attracts investment and create jobs (that will get taxed more heavily).

Another development is the increased independency of employees. There is less control by an employer over an employee, employees move from jobs much quicker than in the past and can afford to be more demanding when it comes to terms of engagement and freedom.

This means that:

• the traditional difference between employer and employee has decreased
• on average, the net benefits (to the contractor) of working as self-employed are generally higher than working as an employee.

Instead of being employed by an employer, an increasing number of people prefer to be hired as independent service providers.

The former has led to a large grey area that governments are struggling with. On one hand, there is an increased independency of service providers leading to increasing entrepreneurship (but most employees have become more independent as well). On the other hand, the lower tax rates mean that there are budgetary effects on a national level that need to be taken into account.

This means that most governments are responding with the viewpoint that individuals who work in a similar way, should pay broadly the same amount of tax. Creating a level playing field where general tax levels are equalized between employees and businesses would have also solved this, but this is something we are not seeing or expecting in the short term. What we are seeing is that governments are trying to fight what they consider abuse and that what looks like employment must be taxed as employment.

Taxing employment: special considerations

To tax employments clearly and easily, there is a presumption that there must be a set and fixed concept of what constitutes employment. While there is a lot of case law on this in most jurisdictions, case law tends to adhere to a case-by-case approach and is highly fact driven. Assessing what exactly constitutes an employment relationship can therefore be very hard and nuances differ from country to country. These differences must be taken into account as what will be considered employment in one country may not be considered employment in another country.

A couple of elements do stand out in most jurisdictions though. Elements such as ‘control’ and ‘risk’ tend to play an important role, but in themselves do not yet lead to practical criteria. 

Aspects of control and risk

There are several aspects that come up in case law regularly as constituting either control or risk.

The following aspects are generally associated with control.

• The right to be substituted.
• The right to be moved from the original task.
• The right to decide how the work is done.
• The right to determine working hours.
• The right to determine the working location.
• The right to do work for other clients (including competitors). 

The following aspects are generally associated with risk.

• The requirement to buy equipment and materials.
• Who funds vehicle costs?
• The way the payment is determined (fixed price per hour, project or period).
• The requirement to put problems right without getting paid additionally.
• Payment of insurance.

Other criteria are seen regularly as well, but are not strictly connected to either control or risk.

• Involvement in management.
• The provision or paid-for corporate benefits.
• Presentation of the worker to the outside world.

Although we see tax authorities and governments putting these criteria into online tools and similar, it needs to be noted that the criteria derived from case law stem from what can be very different situations and can often not practically be directly applied. For example, cleaners getting hired as self-employed service providers should be assessed on different criteria than IT-programmers or builders or managers.

Frequently asked questions

Here are some of the questions we are often asked in regards to contract and off payroll workers.

• I am considered self-employed by my home state but want to work cross border, how will my status be determined in the source state?
• I want to hire a worker, should I withhold wage taxes from the income I pay out?
• How many clients do I need to have in order to be considered self-employed?
• I am planning to do a full-time project for 12 months, does that make me employed?
• I am going to mobilise a contractor to another country, will the other country also agree they are not employees of mine?

Solutions

Most jurisdictions provide at least some directional guidance in order to determine whether, or not, an employment relationship is deemed present. In the past we have seen very few jurisdictions that provide forms of absolute certainty, but governments seem to be less keen on that, aware of the fact that such certainty may be abused in some cases.

Doing a proper assessment before deploying people to work is absolutely key. Surprises that come up during payroll and tax audits tend to be very costly as income as gross income may need to be grossed up and fines may be very high. In case of great doubt, it is generally good to err on the side of caution. When dealing with multiple countries, assessment of the local law in all jurisdictions involved is necessary.

Conclusion

Several developments in the labour market have led to a grey area when it comes to the differences between employment and self-employment. Despite large amounts of case law, application of the rules remains complicated and mistakes can be very costly. 

As you get involved in deploying resources, consider whether the resource the business may want, will need to be treated as self-employed, or a contractor, and treated as one in the host location. If this not handled correctly payroll non-compliance, unexpected extra costs to the business and labour law exposures can arise.

Always consult with a mobility tax expert to ensure you understand the rules that apply. Get in touch with myself or your local Crowe expert.

Our insight What steps to take if you have globally mobile employees outline the implications and what you need to consider.

Introduction

There are many reasons why employers need to operate in countries that are different to their HQ location. There may be a local entity or may be not.  It’s important to methodically work through the key issues to avoid any cost or compliance surprises later. A very relevant reminder of key issues by my Swiss expert colleague Karin Verheijen given cross-border remote working is also very much in vogue. 
- Dinesh Jangra

Setting the scene

Establishing or expanding operations in a different country is often an important part of a company’s growth strategy. Such a strategy can have many benefits but can also carry several hidden risks and costs, especially when the company is employing local staff in the new country.

Depending on whether the company has a legal presence or entity in the new country, and of so what form, employing staff locally needs careful consideration to ensure the company is operating in compliance with the domestic and international rules and legislation, also from a headquarter location perspective.

What is the issue?

When a company wants to establish or expand into a new country or region, it may initially not wish to establish a branch or incorporate a subsidiary there. Often, the company prefers first to explore the market and business opportunities locally a bit more before taken the step to formally create a legal corporate presence. To achieve this, companies often work either with independent contractors or, alternatively, they employ someone locally in that new country. 

Irrespective of the employment structure or relationship, when a company is employing an individual in foreign country, careful consideration needs to be given to all the local rules and regulation an employer needs to adhere to both in the foreign country, as in the country where the company is established. If such an employment is not structured properly, it may lead to considerable risks for the company and the employee, ranging from financial, legal, security and reputational risks.

There are areas which most commonly will have to be considered and reviewed.

• Labour law: local regulations regarding working time and conditions such as overtime, holidays, working on Sundays and public holidays, minimum salary requirements, etc. Also ensure to be aware of applicable collective labour agreements relevant for the industry sector the company operates in.
• Compensation and benefits: local practices with regards to the payment of specific compensation items (e.g. 13^th month salary) or specific benefits in kind.
• Work authorisation/Immigration: many countries have regulation in place according to which companies must register the employees they employ, especially when they are employed by foreign or overseas companies. In the EU, the Poster Worker Directive needs to be complied with. In Switzerland, when you do not have the Swiss citizenship, the employee always requires a formal work authorisation prior to starting employment activities, in the form of an online registration or a work permit.
• Social security, health insurance and pension: employer and employee will often become subject to the social security regime of the country of employment and social security contributions, as well as potentially contributions to health insurance and pension funds, will need to be paid to the local authorities. Often this requires the foreign employer to register with the local social security authorities in the country when the employee is physically performing his activities and may be a very cumbersome administrative process. Moreover, it may also lead to an unplanned increase in the cost budgeted for the employee.
• (Shadow) Payroll reporting and withholding: Even though the company may pay the employee remotely and operate the payroll in the country where the company is located, very often there is also a requirement in the country of employment to submit payroll or withholding taxes to the local tax authorities. This may then also lead to the requirement of operating a shadow payroll or even an actual payroll in the country when the employee is working.
• Insurances: Many countries have regulations with regards to mandatory insurances that the employer needs to have for its employees, such as occupational accident insurances, medical insurance and sickness or loss of income insurances.
• Security/Duty of care: Lastly but also very important is to be aware of any regulations which may be in place in the country of employment with regards to security and the duty of care of the employer such as ensuring safe and healthy working conditions and environment, office space, provision of working tools and protective gear, etc.

Examples Many companies are attracted by Switzerland and its potential market. Although Switzerland has an open market, especially due to the bilateral agreements it has in place with the EU/EFTA and many other countries, there are still many legal requirements to comply with. We have worked with companies without an entity or legal presence in Switzerland, who had already signed an employment agreement with an individual residing in Switzerland, only to realise at the next stage that the person will be subject to the Swiss social security regime and both employer and employee contributions need to be paid. Such individuals have a special status – the so-called ‘ANobAG’ – and several specific formalities need to be taken care of.  Additionally, there is also a legal requirement for EU/EFTA based employers also to offer a Swiss pension fund to such employees. This, in addition to the mandatory insurances, will increase not only the administrative burden but also the overall employment costs substantially.

Recommendations

It is always recommended to do an upfront review of all employer obligations that a company needs to adhere in a specific country prior to starting to employ staff there to ensure you have a clear overview of all the legal requirements, the risks as well as the costs.

Conclusion

By obtaining a clear overview of the employer obligations timely upfront, the company can avoid unnecessary costs and risks, and even take potentially advantage of some planning to reduce the overall costs. It also ensures that the company operates in a compliant way in the new country and avoid issues with the authorities and potential penalties and reputational damage.

You should always get in consult with a global mobility expert before you act. Get in touch with myself or your local Crowe expert.

Karin Verheijen Managing Partner Exactio AG (Swiss member firm of Crowe Global)

 

Context

VAT isn’t a topic that Mobility, International HR professionals usually have front of mind. In certain circumstances it’s a real issue that needs to be reviewed in collaboration with the tax department. Not catching the issue when it applies can result in lots of complexity, non-compliance and additional costs. Local VAT registrations, payments, new invoicing processes and VAT filings and returns may become necessary.

When is it applicable? My colleague Raphael Gaudin of Crowe Switzerland covers this below.

In what globally mobile employee context could VAT be an issue?

In structured secondments, or assignments, the employee is usually formally seconded to the work for the benefit of the host company. Where this is true and the host company already has registrations and compliance in place for VAT and sales taxes then this isn’t a key issue.

Often, however, employees are working in a new country where there is either no local entity or there is a local entity but the employee is not working for the local entity.  For example, an organisation may have a manufacturing plant in a country but decides it is time to increase sales people in that country too as there is an opportunity to quickly grow the business. The sales person operating in this country now is not really working for the local manufacturing business so VAT and sales taxes needs to considered because the sales person may now be regarded as a seller or supplier of his ‘home’ company.

Employee mobility especially within regions is very fluid these days – business travellers and commuters being more and more prevalent. These type of arrangements are particularly relevant to review for VAT/Sale tax issues.

What is VAT?

VAT or Value-Added-Tax is a transactional tax on sale of goods and services. Its basic principle is that it is charged at each stage of the supply chain. On each stage, VAT will be charged on the value added until the consumer finally pays the VAT on the sale price of the goods or services.

A main characteristic of VAT is that it is levied on the sale and the seller is responsible to collect the VAT by issuing VAT compliant sales invoice. To determine where supplies might be subject to VAT, the specifics of each supply must be considered.  This will include understanding:

• Where is the supplier located?
• Are we supplying goods or services?
• Who is the customer – business or individual and where are they located?
• Is the customer registered for VAT? In which countries?
• What is the physical path the goods take to reach the customer?
• Are any additional goods or services provided? e.g. installation of goods

For mobility professionals, the most common interaction with VAT is around „where“ the supplier is located as a globally mobile employee may in fact become the seller for your organisation.

We must consider two key concepts to determine if an employee is gives rise to VAT/sales tax obligations:

1. What activity is performed by the employees and assignees and where?
2. Do the employees or assignees create a permanent establishment PE in the host country?

Some examples:

1. A supplier based in country A sells and installs machinery in country B. The supplier sends his own workers to country B for a temporary period to carry out the installation activities. In this situation, VAT is due in country B as this is where the installation work takes place and it is likely that the seller will need to VAT register in country B to account for the VAT due.
2. A cleaning agency from country A is engaged to clean an office complex in country B (e.g. Switzerland). Since according to local jurisdiction cleaning is regarded as working on a real estate, the place of delivery is country B. The agency from country A becomes liable to VAT in country B because the staff is carrying out work in this country and this work is considered as rendered at this place.
3. An IT company domiciled in the country A is installing and implementing a new CRM - system at a local bank in country B. Although no hardware is delivered and no goods are moved across borders, this might cause VAT registration obligations because employees have been assigned to another country

Creating a permanent establishment

In addition to the situation as described in the previous examples, also a PE can create a VAT obligation in the country where employees are being assigned to. The concept of a PE for VAT purposes is similar to the rules according to Art. 4 of the OECD Model Tax Convention.

A PE can for example be created if an assignee is working on a construction site for more than 12 months, an office is rented for a unlimited period of time or the assignee has the power to sign contracts while being located in the host country.

In any cases where a PE is created, the VAT obligations must also be reviewed.

What action

As we can see, the key principle of VAT is to determine the place of supply and to verify if a PE is being created. As a rule, we can say that in case of a physical presence of workers, potential VAT liabilities should be considered, although VAT rules may provide some exceptions.

Conclusion

VAT risks are not mainly driven by the period of time of assigning workers to another country but by their type of activity. We can differ two concepts which could lead to a VAT liability: the activity of the workers or the creating a PE – there might be situation where of these concepts apply.

If companies are unaware these risks and the respective registration duties along the whole supply chain, VAT cannot be charged to the consumer retroactively and becomes a cost factor for the supplier or penalties can occur. We recommend therefore not only to track where assignees are located but also what type of work is performed in the host location.

Cost of non-compliance with VAT regulations are most likely to be higher than registration costs. It is therefore strongly recommended to clarify the VAT consequences before posting a worker. You should always seek advice from a specialist, get in touch with myself or your local Crowe expert.

Context

Let’s start with a definition. Global Employments in the context of this article, are scenarios where an organisation has to hire people in a new country and get them operational. This issue is relevant to organisations of all sizes.

For a larger organisation, it could be as a result of regionalisation, a change in management team location, regulatory change or a new investment into a country where there is a new market, or perhaps an opportunity to leverage the local talent pool or resources (shared services, new manufacturing site, mining or energy asset etc.).

For smaller and growing organisations the reasons they consider Global Employments could include:

• introducing products and services to new markets and customers – operationalising local sales and marketing people in countries
• servicing newly won customers or clients – service technicians, operations professionals to service local needs
• growing local capability –business and client base has reached a critical mass and ongoing local presence and local are key to the next stage of growth
• building out a delivery hub, where for example a group of programmers, developers, R&D specialists, or other professionals serving your global business may be based.

In a number of the above scenarios, the organisation may not have a local HR team familiar with the local considerations, requirements and obligations from a people perspective. This is where International HR, reward and mobility professionals can often become key enablers.

So what are the key areas to methodically review?

1. Local employment related regulations - A very important area to work through as early as possible. Local labour law may drive a number of aspects of the relationship between the employer and the employee, despite the employer being overseas and not ‘present’ in the country. Termination rights and process, holiday entitlements, working hours, mandated insurances, employee role titles and designations and the makeup of compensation are just a few examples of what can be specific to a local country. Left un-reviewed, non-compliance can lead to legal exposures, including dual entitlements (in country of residence and country of employment). This is an essential area to review with employment law specialists to establish the right employment structure and agreement for employees. 
   
   
2. Compensation and benefits - Knowing what is market practice for your industry and roles locally is key. To make competitive, but cost effective employment offers, you will need to understand what is customary/ market practice around salary, medical, pensions, cars and other benefits and allowances in the local market. Unless you have HR expertise on the ground, it is not easy to know what is normal, and must be offered to secure the employees and managing pay and benefits negotiations. Understanding this at local level from those with local expertise will ensure you do not create unnecessary extra cost or complexity. Have this worked out in advance for each role. 
   
   
3. Payroll - Getting payrolls set-up and employees paid is not as straight forward as it may initially appear. The main issues revolve around the fact the most fiscal authorities have rules and processes that are set up for local businesses and local employers, which don’t apply so well when the employer is an entity outside of the employees’ location. Some specific areas that need to be carefully worked through are:

   Registrations: Unless a local entity is being set-up, the documentation required to register a payroll employer can be quite extensive. A non-native employer being set up as an employer won’t hold the usual local registrations. Don’t be surprised if extensive documentation of the non-native employing company is required such as, certificates, copies of company registration, Directors information, identity checks etc. This information may also have to be translated and/ or notarised, or apostilled, as well. This can result in the process taking many weeks and even a few months. It is critical to work backwards to when you want to first pay someone in the country and understand the lead time to get the required registrations complete.

   Service providers: Payroll is a very crowded and competitive market around the world. There are a dizzying array of operators around the world. It is very important to check they are experienced in working with overseas employers. If not, they may not fully appreciate and understand the registration process (as it applies to foreign organisations) and the timings around movement of monies across borders. Therefore, the leads times for go-live they communicate, could give a false sense of security. Pick a payroll provider that works extensively with non-local employers.

4. Currency - This relates to payroll and related costs (social security, pensions etc.). Once you have employees in different countries you will need a way of being able to transfer monies to their bank accounts, but also to the fiscal authorities to pay payroll taxes. There are three common ways of doing this:

   i.    You make the payments yourself from HQ or another convenient location. Your treasury or finance team will know if this is possible.

   ii.   You make one payment to a payroll service provider who pays both your employees and the fiscal authorities.

   iii.  You make the payment to the employee bank accounts but transfer the amounts due to the fiscal authorities to your payroll provider.
   
   Care should be taken to understand how money will be transferred across borders and across currencies, as well as who will make what types of payments and when. This is an area to explore early with finance, treasury or international payments partners.
   
   
5. Permanent establishments/ entity requirements - This is a complex area, so seek advice and review as early as possible. In some countries a local employer maybe mandated – there is simply no choice, regulations require that a local entity is set up. Mostly, this aspect is something that needs review and on which commercial views have to be formed, taking into account technical matters.

   The big question is whether it is beneficial to set up a local entity or not? What makes this more complex is that firstly, there are number of different types of entity including a representative office, branch, a subsidiary or another type of entity which is specific and local. Secondly, there are technical considerations around corporate taxes, sales, VAT as well as payroll tax obligations that can be impacted by the nature of the set up to consider too.

   There will be costs, compliance and ongoing administration to setting up a local entity and these have to be compared to the uncertainty that might result in not having one. It is possible for tax authorities in a country to conclude there is a permanent establishment, even if there is no formal entity or branch. The assessment of the best way forward is often based on the nature, activity and size of the local business and the local tax offices’ views. Critically modelling and reviewing different viable options is strongly recommended.

6. Hiring non-locals and quotas - In the early period of a presence overseas, there may be a need to consider supplementing the local team with expats (more experienced or skilled managers from another country). In a number of countries (some in Africa and Latin America as good examples) there can be quota to comply with. This can mean you can hire a non-local if you hire X number of local nationals. In addition, in some countries certain roles such as Directors, may only be available to locals or nationals. Once you have your workforce/ local team plan ready this is worth reviewing.
   
   
7. Business travel - As the local team gets operational there will usually be business trips from HQ into location (interviewing, training) or trips from location to HQ and elsewhere (training, cultural assimilation, business travel etc.). These movements need to be carefully monitored so that immigration and payroll, social security and income taxes obligations can be managed, or mitigated. 
   
   
8. Local business cultures - Understanding how to operate in a new market. As you operate across borders, business cultures and norms will change. How you manage people and local customs requires a thoughtful approach. What awareness training is needed? You may also want to validate local candidates’ backgrounds and/ or qualifications, or it may be normal in one country to work through agents or facilitators, but this could be seen as undesirable in your home HQ norms. Doing business with certain types of customers or organisations may also not meet your HQ corporate social responsibility goals or rules. How will the locals you employ understand this? Understanding where these tensions sit early on and addressing them will save time, and possible bad publicity later. 
   
   
9. Systems and technology - New employees working in new country will, of course, need access to the key enterprise systems and technology. Computers, phones, access to systems (email, CRM, HR systems and network drives etc.). Access to these systems should be planned and tested before employees go live. 
   
   
10. Internal expertise and capability - Global employments are a complex area where a mix of local insight, technical knowledge and experience is required to manage costs, risk and seize the business opportunities. Asses the ability and resources of your own organisation to handle the issues above. In most situations, additional internal resource will need to be allocated to this area and expert external advisors will be required.

Top Tips A bespoke country by country plan, local insight and advice is key to success in global employments. Understanding the order in which key actions have to be dealt with, the interdependencies between them, and the timelines and costs involved are key.

At the time of writing the UK is in the middle of a historic period of uncertainty. The uncertainty surrounds what kind of Brexit will be implemented and when? Brexit has many, many implications across politics, people and businesses of all shapes and sizes. The Prime Minister of the UK has been clear, the UK will leave the EU on 31 October 2019 so the countdown has begun.

Those engaged in deploying talent into and out of the UK have to continue with employee mobilisations but what does Brexit mean to mobility?

This is a high level summary with links to some information that may be good to review. In keeping with the Mobility Mondays series this is not an over detailed nor deeply technical analysis.

Until we know what kind of Brexit we are getting (Deal or No Deal) it won’t be possible to be 100% clear on the impacts and implications. In fact, I doubt even then it will be 100% clear until new rules start being rigorously tested by real human cases! That said, having the key issues front of mind can only be helpful in terms of keeping the business, employees and key stakeholders informed and updated.

What are the key issues for Mobility professionals?

It’s fair to say that Brexit is an incredibly complex and multi-faceted change, the sort the UK has not really had to work through before, at least in my lifetime. The key issues to consider in the context of global mobility are Immigration, Social Security and Tax. There are many other important ancillary issues too, perhaps softer (less legalistic) ones around EU workforce engagement and UK talent attractiveness, but I won’t cover these here.

Immigration

I am not an immigration professional, but here are some key practical things to consider. Immigration advice should be sought before making decisions.

The fundamental change here is around Freedom of Movement. At the moment EU nationals and those from Norway, Lichtenstein, Iceland and Switzerland (EEA states) have the right to live and work in the UK without restriction. This will end as the UK leaves the EU. This is a fundamental change. Going forward, once the UK leaves the EU, EU nationals will be subject to new immigration requirements. In reverse, UK nationals working in the EU are likely to face some sort of immigration requirements and considerations too. The UK has signalled a new immigration system will be introduced in January 2021.

Until then the position could be generally summarised considering:

The rights of Irish nationals will not be impacted by Brexit. They can continue to live and work in the UK as they can now (pre-Brexit)

A No Deal scenario

Freedom of movement will end and EU nationals in the UK should consider making applications by 31 December 2020 to the EU Settlement Scheme.

EU nationals arriving in the UK after Brexit will need to apply for a new temporary immigration status - European Temporary Leave to Remain. Details can be found on gov.uk.

A new future immigration system from January 2021. The government has announced details of a new points based system.  Again, details can be found on gov.uk. 

UK nationals living and working in the EU should consider this guidance. 

A Deal scenario (the deal that has been negotiated but not yet approved by the UK)

If the deal that has been agreed with the EU gets approved (with no changes) by the UK, then in theory, a transition period is available until 31 December 2020. During this transition period EU citizens should be able to live and work in the UK. 

EU Settlement Scheme described above needs consideration and applications will be needed by 31 December 2020.

The new future immigration system will apply from January 2021.

At this uncertain time, it is important to carefully review what immigration requirements there are now, and what immigration requirements there may be in the future (during the remainder of the assignment or employee mobilisation). These considerations do not apply just in the case of assignments and relocations, the same thought process needs to be applied to business travellers and commuters too.

Social Security 

The UK currently participates in a European social security system that includes EU member states, as well as Norway, Liechtenstein, Iceland and Switzerland. This system provides the framework through which dual social security contributions are generally avoided and provides for aggregation of benefits where payments have been made in different countries. That system will cease to exist when the UK leaves the UK (without a deal).

In a no deal scenario

There are potential dual social security contributions to consider. The UK has proposed draft legislation that provides broadly similar treatment as now under the European system, but this has not yet been enacted into law. A bigger issue is that the European countries have not all stated they will also adopt similar rules. As a result, dual contributions could arise. It’s vitally important to be aware of those who are currently subject to the European rules, (you may hold or have applied for Forms A1) and those who will be moving or undertaking cross-border roles after Brexit. For these cases, careful monitoring of the status and applicable rules going forward is a must.

In a deal scenario (the deal that has been negotiated but not yet approved by the UK)

The status quo is generally maintained until the end of the transition period on 31 December 2021. The current system will largely apply as it does now.  New rules would apply from January 2021 either in the form of a new agreement with the EU or country by country (bilateral agreements).

Tax (Employer, employee and payroll taxes)

The headline here is there is no real change whether we have a No Deal or Deal Brexit. The reason for this is that income and payroll taxes are already national systems across the EU. The Double tax treaties that apply in cross border employee scenarios are also not EU agreements so will continue to apply as they do now. 

Before you rejoice, “for once tax is not complex!” I have to stress a key point (sorry). While there is no change to the rules, the rules may in fact apply more often going forward. One impact of Brexit we are seeing for a number of reasons, is an increase in business travel and commuter travel arrangements. Just as employee, employer and payroll taxes needs to be considered for more formal assignments they also need the same attention for these more informal and flexible arrangements.

In fact, commuter and business travel arrangements can often result in more complex arrangements, as two country tax systems have to be constantly considered. Businesses may well be entering into, and agreeing more and more of these arrangements, without consciously undertaking the due diligence they would around a formal assignment. Those involved in supporting employee mobility can play a key role in supporting the business to reduce risks and costs.

Summary

Global mobility experts within organisations are uniquely placed to assist their wider organisations in the coming weeks, with negotiating the people aspects of Brexit. Their expertise and experience will be invaluable in these uncertain times.

Introduction from Dinesh

Global Mobility is a great example of an ecosystem with differing types of expertise working together to deliver a complex global processes. It is always good to learn from other specialists – not least in the area of technology. Introducing Severin Pietri, a Crowe global tax technology leader with experience in developing applications for global mobility. What advice does he have for mobility professionals given data is the clearly the new gold and technology and mobility go hand in hand?

What is your background?

I absolutely understand Global Mobility. I have just completed my 15th international relocation. I have lived in eight countries, worked from five and taken on roles requiring me to work more than 60% of the year from other countries. I have experienced first-hand the complexities and challenges faced by organizations and individuals in respect to Global Mobility.

Combining these real-life experiences with the business knowledge I acquired as Global Head of Tax Transformation for a major UK headquartered bank, and subsequent roles in professional services, gives me deep insight in respect of the technology, data, processes, and compliance challenges and opportunities. All this is supplemented with my expertise in technology, Artificial Intelligence, and direct experience of previously developing and implementing numerous tax technology solutions including those for Global Mobility.

What do you see as the technological challenges facing global mobility?

Technological challenges for global mobility are plentiful. Important areas for consideration include:

• the vast variety of disparate sources of data in different systems that need to be accessed
• conflicting requirements from the different data owners
• regulatory limitations on what can be done to harvest and re-use data
• and the project related difficulties in selecting, implementing, using, and maintaining any new application.

The current environment brings cost and resourcing pressures which means organisations looking to enhance, streamline and modernise their GM processes are likely to face the following challenges.

• Business case prioritisation vs. other IT projects with higher Return on Investment.
• Resistance from IT to have another application deployed (on your servers or in the cloud) since it will increase running costs and number of resources needed.
• Resistance from IT in authorising the deployment of another supported app on the organisation's mobile phones. Any addition of a supported app requires IT to validate it before any pushed update/ changes in policies/ changes in security settings.
• Privacy considerations in using mobile app-based tracking across numerous jurisdictions, and constantly evolving laws that could make the implemented system useless.
• Changes in the organisation's business activities and structure requiring the capture/ monitoring of events not planned in the original deployment, creating change friction and additional costs non-budgeted for.
• Systems are as good as the quality of the data they use, often requiring change to be made in processes and policies across numerous departments, transforming what was seen as a thought technology-based solution into a complex transformation project.

What are your top tips to navigate technological challenges?

It's quite clear that the current environment and the direction of travel in HR and mobility means leveraging technology is businesses critical. Organisations intending to enhance, streamline and re-engineer their global mobility related processes should consider the following to achieve noticeable results, without investing heavily into an end-to-end solution.

1. Dashboards – focus on action generating data: Are your dashboards needs real, or are they a case of the project requirements being driven from nice-to-have/ good-to-have needs that translate into a complex, expensive, friction-generating data-flow? In other words, are you adequately focusing on the operationalisation of your data-flow or on the creation of reports that can become obsolete the moment they are deployed?

Operationalising your data flow, focusing and prioritising data and insight that leads to action, can bring higher benefits and more flexibility than deploying standard report-based solutions.

For example, are your processes and data-flows designed to raise an alert when a specific employee is about to breach a maximum number of days in a country to trigger tax consequences vs reviewing reports after the fact?

2. Harvest and redeploy data rather than maintain new datasets: Have you spent a sufficient amount of time and resources investigating if the data you seek does not already exist in some ways within your organisation? Or if the needed data can be confidently derived from other datasets?

A lot of time and energy can be spent on looking for perfect data sets. Valid datasets are often dismissed if they do not capture 100% of the required data, resulting in the creation of a new complex, time and resource consuming processes to capture, clean, validate, reconcile and report a new dataset.

Example: Rather than building a new data repository and duplicative processes to create the perfect database for capturing payroll information, it may be more efficient and agile to collect the required data as and when needed, from the existing payroll and expense systems and enhance it with exception based reporting from the relocation and other providers to your global mobility team.

3. Consider automation: Can you save time and improve service and risk by applying artificial intelligence and/ or machine based learning?

Using artificial intelligence or machine learning on existing data can bring benefits such as: identifying an increase in staff or project related presence in a new territory, raising flags for Permanent Establishment and other global mobility risks. However, for this to be effective, historical data and tax logic is required to train the models. These aspects need to be carefully reviewed as if the historical data and logic is not available then a much higher investment than originally planned or budgeted is often required.

4. Regulatory and privacy aspects: Are the technological solutions you are looking at legal in all jurisdictions and relatively future proof? Could they be seen as intrusive, ethical or culturally not acceptable by your employees?

Organisations frequently use, among other things, phone based apps to actively track the physical location of staff. While these technologies are sometimes clearly marked as legal in certain jurisdictions, they may be seen as intrusive or unethical by employees, as well as in other jurisdictions. Your organisation will need to weigh these risks and create abundant controls and policies to safeguard the organisation. The answers may well depend on local country and cultures rather than be a specific global standard.

What would be your key message to organisations assessing their global mobility technology?

Technology and data is key to delivering global mobility. It is critical to understand your data universe and focus on achievable-operation oriented goals. Further, avoid the temptations of  ’too good to be true’ promises, and carefully negotiating legal grey areas should underpin your global mobility technology strategy.

A great refresher by my Swiss colleague Raphael Gaudin. What are the cross-border social security rules that apply with cross border work situations across Europe? Social security is a payment generally due by employers and employees, and varies greatly between locations in Europe. The costs vary, the entitlements vary and without effective planning and review, both cost and compliance risks may arise.

Background

Cross-border employments remain an integral part of working life across Europe. To streamline the social security situation determination in respect of persons on cross-border employment activity, the EU 27+ member states, including the European Economic Area (Iceland, Norway, Liechtenstein) as well as Switzerland, signed a social security coordination agreement – the Regulation (EC) 883/2004 and the implementation regulation (EC) 987/2009 (EC Regulation). The regulations coordinate, but do not harmonize the social security systems within the contracting states. Each member state retains its domestic social security system, but double insurance or non-insurance should be avoided. Depending on the domestic social security system, contributions made in one state can be taken into account to determine the social security benefits available in the state in which a person is domiciled.

The Regulations (EC) 883/2004 and implementation Regulation (EC) 987/2009

A key principle of the EC Regulations is the application of place of residence as social security jurisdiction, (instead of place of work) to avoid double or non-social security insurance. Some of the major provisions of the EC Regulation are:

• It generally applies for nationals of a member state, stateless persons, and refugees residing in a Member State who are or have been subject to the legislation of one or more other Member States, as well as to the members of their families and their survivors.
• Family members are usually ‘following’ the same regulations.
• It covers all types of social security benefits in case of sickness, unemployment, retirement, family of the respective member state
• A person working in different states, remains insured under the social security rules in the country of residence, if in that state at least 25% of the work is performed. Special rules may apply for director fees, employment in international transportation, or similar.
• Member states may have different rules for independent contractors.
• With the so-called A1 – certificate, the member state under which social security a person is insured, confirms the local social security registration. When on business travel and cross-border assignments, the A1 should be applied for before travelling.
• Seconded employees can remain insured under the home country social security system for up to 24 months. Longer terms are possible based on bilateral agreements.

EFTA States

The EEA Agreement is binding not only between the EFTA countries on the one hand and the EU countries on the other, but also in the relationship between the individual EFTA countries. In regards to social security, the agreement is just as comprehensive and implies the same obligations as if the EFTA-country in question were a member of the EU. The agreement fully complies with Regulations (EC) 883/2004 and 987/2009.

Third-country nationals are as a main rule not included, but Regulation (EU) No 1231/2010 is extending Regulation (EC) No 883/2004 and Regulation (EC) No 987/2009, to nationals of third countries who are not already covered by these Regulations solely on the ground of their nationality. However, Regulation 1231/2010 is not incorporated into the EEA Agreement and therefore does not apply to the EFTA countries.

Third-country nationals may however have rights under bi-lateral social security agreements between the EFTA-state and the state of Residency.

Switzerland

With Regulations (EC) 883/2004 and 987/2009, the same coordination rules are applicable between Switzerland and the EU Member States on the one hand, and between Switzerland and the EFTA States on the other.

As the Free Movement of Persons Agreement (FMPA) is not linked with the EFTA Convention, the rules each apply only to nationals of the contracting states of the respective agreement. For example, the FMPA does not apply to Liechtenstein nationals who live in Austria and work in Switzerland.

The Agreement between Switzerland and the European Community and its Member States on the free movement of persons has been extended to Croatia. Regulations (EC) No. 883/2004 and No. 987/2009 have therefore been applicable in relations between Switzerland and Croatia since 1 January 2017.

Switzerland does apply special provisions for self-employed persons. The domestic employment contract always goes before foreign self-employment. It may be accepted to exemption if the foreign state issues an A1.

Examples:

1. EU National living in an EU/EFTA Member State and working in Switzerland three days per week, on a Swiss employment contract would be insured in the place of residence, because more than 25% of the time of the work is provided there.
2. US National, living in Switzerland but working in Germany three days per week. The US National would not be covered by the EC Regulation, but the bilateral social security agreements between the USA and Germany, and USA and Switzerland would apply. In consequence, this person would be fully liable to Swiss social security and possibly for the days worked in Germany.

Third countries

The EC regulation does generally not apply to third country nationals. In such cases, the respective social security agreement between the involved states, but not the EC Regulation would apply.

In some cases, local social security authorities will issue an A1 for third-country nationals in case of secondments within EU/EFTA countries. This is to be clarified in the individual situation.

United Kingdom

As of 1 January 2021, The Regulations (EC) 883/2004 and implementation Regulation (EC) 987/2009 no longer apply to relations between EU/EFTA/Switzerland and the UK. It is envisaged that relations regarding the social situation of these parties are now be governed by new coordination rules.

Several countries do apply the old bilateral social security agreements. In the context of cross border worker, these agreements usually do allow seconded workers to stay under their home country social security system for a period up to usually 24 months (this may be different in certain bilateral agreements). This also should allow applying for a certificate of coverage.

The situation shall remain unchanged for situation existing before 1 January 2021, A1 certificates issued before that date remain valid.

For example: In the case of Switzerland, the bilateral social security agreement of 1968 will temporarily apply again for a short transitional period, until future regulations come into force. This agreement allows secondments without creating a social security liability in the host country. However, the bilateral agreement does not cover multi-state workers. That means persons working in two or more countries for one or more employers, may become liable to social security in one or more states.

Outlook

The UK and the EFTA countries are currently negotiating a new social security coordination agreement and a new social security coordination agreement with Switzerland.

The aim is to ensure that a worker is only subject to one country's social security system at a time, as well as to ensure that workers who work temporarily in one country remain insured in their home country.

Until these new agreements are agreed upon and entered into force, existing social security coordination agreements in Norway and Switzerland will apply, including periods when a worker is temporarily working in the United Kingdom or in the other party to the social security coordination agreement.

Conclusion and recommendation

Identify the nationality of the employee and her/his family and domicile of the employer to evaluate whether the EC regulation is applying or not. If not, verify whether the involved states do have a bilateral social security agreement that may apply.

The risk in case of non-compliance is either non-insurance or double insurance for the employee and in the worst case for the family. This only may become of awareness if an insurance case already happened (i.e. unemployment or sickness). When the wrong social security system has been chosen, insurance may refuse to pay any compensation.

For more detailed advice on this area, please contact myself or your usual Crowe contact.

Raphael Gaudin Curator & Horwath AG Zurich - St. Gallen

 

Immigration and social security are two of the biggest direct impacts of Brexit on Global Mobility and International HR teams. A no-deal Brexit is a real possibility. If it does happen, what are the impacts for social security? We will separately share the impacts in the event a deal is concluded between the UK and the EU.

Background

Tax and social security can often be around 30% of the cost of a globally mobile employee. A large portion of that is social security. Social security has a significant impact on cost and the rights and entitlements employees. It’s an area that needs to be methodically reviewed and actioned whenever an employee is mobilised and demobilised.

The current European system is based largely on the provisions of Regulations (EC) 883/2004 and 987/2009 which deal with the coordination of social security systems. These rules apply to EU countries, Norway, Iceland, Liechtenstein and Switzerland and will continue to apply under the Withdrawal Agreement until the end of the transition period on 31 December 2020 and, under certain conditions, even after the end of transition period for mobilisations that had already taken place. As a result, the rules and the procedures for determining the applicable legislation (which State’s social security legislation an individual and their employer is subject to) continue to apply during the transition period and in certain cases beyond this. In the case of a secondment, or assignment, of limited duration the rules usually result in the payment of social security in the home country (where the employee was living and working before the assignment). This provides a great deal of assurance and continuity for the employee and cost certainty for the employer.

What could the position be from January 2021?

Unless some side agreements are concluded, the current system will stop in the event of a no deal Brexit. What does that mean in reality from 1 January 2021? Under what circumstances and what provisions will 883/2004 and 987/2009 continue to apply?

What do we know right now? Moves pre 31 December 2020

The Withdrawal Agreement ensures the application of Regulations (EC) No 883/2004 and (EC) No 987/2009 for as long as the situation concerned remains unchanged or the persons continue to be in a situation involving both the UK and an EU Member State at the same time without interruption.

In other words, A1 certificates can still be applied for from HMRC and current A1 certificates in place will continue to be valid until there is a period of “interruption”. But what is a period of ‘interruption’? There has been no official guidance from HMRC on this meaning but to work out how we could interpret it we can look to other regulation. One such place to look are the transitional arrangements put in place when Regulation 883/2004 was introduced in 2010.

Article 87(3) of Regulation no. 883/2004 stated that where there was a change of applicable legislation under 883/2004, the old regulation 1408/71 could continue to apply where the position remained ‘unchanged’. At that time, HMRC’s view on the meaning of ‘unchanged’ was that the transitional rules would no longer apply if there was a change of habitual residence or a change in employer. This may arguably also apply to the Withdrawal Agreement.

What are the sensible things to have done already and do now?

• Ensure applications for new or extended A1 certificates are submitted prior to 31 December 2020 (but some Member States may only accept certification period up to 31 December 2020)
• Have a mechanism in place to ensure you can assesses and monitor the employee’s personal and employment circumstances. This will be key so that you can ensure that the arrangements are not interrupted (and current rules carry on applying).

Mobilisations on or after 1 January 2021

The reality here is that the UK has set out a position in its own law, but how that position applies is very much dependent on what other countries decide to do. A messy situation with potential for dual liabilities.

The UK Immigration and Social Security Bill received Royal Assent on 11 November 2020 and is now an Act. The Act includes provision on social security co-ordination and the Government’s aim is to have a new agreement signed which mirrors the basics of the existing EU Social Security Coordination Regulations. These are UK rules rather than European. As a result, the rules will require the agreement of the other Member States. The position from 1 January is still unclear at this moment in time.

In the absence of any agreement, the default position would be the social security agreements that are currently in place. The has pre-existing agreements  with France, Germany, Iceland, Italy, Luxembourg, Malta, Norway, Portugal, Republic of Cyprus, Slovenia, Spain, Sweden and Switzerland). However, most are not fit for purpose for the 21^st century and each must be looked at individually on a case by case basis.

The Dutch have said the old agreement between the UK and Netherlands would not apply and the Spanish have taken steps to articulate what the position could be going forward, but this has not been agreed with the UK. On a more positive note, the UK and Ireland has signed a new Social Security Reciprocal Agreement which comes into effect on 1 January 2021.

What is complicated right now?

There is no doubt that COVID-19 has significantly impacted organisations with a globally mobile employees. The mass adoption of work from home arrangement has had a major impact on social security on employees who normally work in two or more Member States (multi-state workers). In determining where the social security liability is due for the cases, a key consideration is whether the employee is working substantially in the country of habitual residence (i.e. 25% or more of working time). If the person does not work substantially in the country of residence then social security is due in the country of the formal employer.

As a result, if a person now has to work substantially at home due to COVID-19, when they were previously subject to the social security legislation of the country where the employer was located, does this mean the social security position could also change? Possibly. Some Member States such as Switzerland, France and Germany have agreed a position where the social security position remains the same but subject to time limits.

However, it was not the intention of the regulations for multi-state workers to have continual changes of applicable legislation between Member States. The objective was to ensure legal stability and that any future situation should be based on the outcome of an assessment of the employment contract in combination with any activity.

Therefore, in principle, the social security position should remain stable for the following 12 calendar months, especially since the new working from home pattern due to COVID-19 was unforeseen. This should be reviewed and confirmed on a case by case basis.

Healthcare

A number of employers will provide private health insurance to employees in cross border situations. That said, it is good to have an awareness of the how healthcare can be accessed where there is no private insurance under the European system and what could change.

Under the Withdrawal Agreement, access to state-provided healthcare may still apply for temporary stays in another EU country, Norway, Iceland, Liechtenstein or Switzerland under the European Health Insurance Card (EHIC) and the portable document S1. That right under the EHIC may cease from 1 January 2021. Some people can get a new UK-issued EHIC which will remain valid for visits that begin from 1 January 2021, but only if they are receiving a UK State Pension or some other ‘exportable benefits’ and are living in the EU before 31 December 2020.

Employers therefore may need to ensure that employees are adequately covered for healthcare from 1 January 2021, which can mean additional costs to the assignment.

Conclusion

A no deal Brexit fundamentally alters the landscape of where and how social security is payable for employees and employers in cross-border situations involving the UK.  All employers should be reviewing next steps very closely.

Dinesh Jangra Crowe United Kingdom

 

In one of our previous Mobility Mondays articles, my Dutch colleague Roeland van Esveld rightly pointed out that social security should be a key consideration for all mobility professionals. He further explained the European coordination rules determining which country’s social security rules and legislation (and therefore social security contributions) apply. This concept of the applicable legislation then drives where social security is paid by the employee and their employer. He also explained the use of the A1 form, a procedural aspect that confirms which country legislation applies.

In this article, we will now look at how COVID-19 has impacted these rules and elaborate on the major social security risks of international assignments and how to manage them.

Impact of COVID-19

A number of European countries have expressed that they do not want the changes in working patterns as a direct result of COVID-19, to lead to a change of the social security system.

Teleworking (remote and virtual working) will in practice, be the cases that most frequently occur/occurred, but other situations might also occur. Another example could be a secondment in which the worker seconded has had to stay in a country much longer than planned. The plan could have been to relocate to another country to do a new role, but that relocation has not yet occurred however the role in the other country has started. In effect, the role in other country is now being done virtually in the country in which the employee is currently resident.

A mixture of country of residence, physical location of duties and the country of employment drive where social security is due. This has all been significantly interrupted by the pandemic. As a result, a number of countries have provided guidance to the effect that the periods of teleworking exercised in their territory by cross-border workers due to the COVID-19 virus will, as an exception, not be taken into account in determining the applicable social security legislation, and should not impact on their affiliation with the social security.

Yet every situation needs to be carefully analysed.

Additionally, even in ‘normal times’ social security risks of international assignments need to be carefully monitored.

Social security risks of international assignments

Social security contributions can be one of the most significant costs that employers will pay if they decide to send an employee on an international assignment. With some exceptions, European countries generally have the highest contribution rates, whereas Asian and North American countries lie somewhere in the middle, with a varying degree of percentage contributions. 

Social security may also be one of the most overlooked aspects of the compensation package. There are major social security issues that concern both employer, and the employee going on an international assignment.

• Will social security contributions be required in the home country, host country, or both?
• What is the cost of these contributions, are these fixed costs (that cannot be refunded or returned) or is there some way of recovering the amounts paid later?
• Will the international assignment result in the employee losing any benefit entitlements? Will the employee accrue any new benefits or rights in another country?

Although these considerations are challenging for the employer, it is important to realise that a number of multi-lateral agreements (EU regulation 883/2004, Iberoamerican Organization Social Security Agreement, etc.) or bilateral totalisation agreements (social security treaties between two countries) currently exist to help address concerns related to contributions and benefit entitlements. As employee mobility is planned, it is important to identify which agreements apply to determine where social security is payable, and the procedure that must be followed under the relevant agreement.

Applying these agreements should result in reduced mismatches, dual contributions, gaps in social security contributions. Overall employer costs should also reduce.

However, a complicating issues for mobility managers in organisations are the multiple combinations of countries that do not have any agreements. The lack of an agreement can potentially result in a significant financial burden on multinational employers. In these scenarios, the local domestic rules that apply to social security must be analysed in both countries.

Major social security risks

Social security risks include financial costs for the employer, operational issues and loss of benefit entitlements.

Contributions may not be paid in the right location. Getting a refund in the country where contributions were paid unduly may be quite a challenge. Regularising the contributions too late in the country where they are due, will likely come with significant additional charges such as interest for late payment and penalties. In some countries, the penalties and consequences for not paying the right social security can be extremely serious. Social security can drive pension entitlement and even access to healthcare, so not getting it right can have major repercussion for both the employer and the employee.

In countries with combinations that do not have applicable agreements, it may be necessary to contribute toward social security in more than one country. Needless to say, dual contributions can be extremely expensive.

Because of the varying degree of levels of contributions in different countries, employers and employees may end up contributing a significantly larger amounts overall, than if the employee had stayed in the home country system.

Local social security contributions also need to be paid on the right compensation base and this needs to be assessed based on local law, as it is not the same in all countries. The Compensation base for social security purposes is not necessarily the same as the one for tax; tax free items may be subject to social security contributions and vice versa, taxable items may not be subject to social security contributions.

An increasing number of countries require employees to have evidence of their social security status in order to enter the country and/or to work.

Failure to maintain contributions in the correct location and calculating the correct remuneration may jeopardise an employee’s entitlement to social security benefits (such as healthcare, unemployment allowances, state pension accrual, etc.) and/or lead to payroll and similar exposures for the employer.

Monitoring social security risks

A structured approach is needed where every mobile employee case is analysed to assess where social security is payable and ensure the related procedural process is followed. This has to be an ongoing process that takes into account and tracks the following areas.

• Number of assignments.
• Country combinations.
• Start and end dates of employee mobilisations.
• Audit history.
• Type of employees (e.g. commuters, business travellers, temporary secondments, permanent transfers).
• Virtual/ real files with the required procedural certification.

Key questions to ask yourself throughout the year, which should not be left till a payroll audit is taking place are:

• Has the treatment applied so far been compliant?
• Have bilateral or multilateral social security agreements been used correctly and the appropriate documentation (A1s, CoC,s etc.) obtained in due time?

Liabilities can exist in the home, host, both or neither, sometimes even with a Certificate of Coverage. Have contributions been paid in the correct country and on the correct remuneration?

If the employee is required to pay social security contributions in more than one country, or must contribute a larger amount overall than if he or she had stayed in the home country, the employer will need to consider whether to cover these additional costs on behalf of the employee.

Reviewing these areas may also uncover some good news for the business, for example, opportunities to reduce social security costs through planning and compensation packages.

When employees lose any benefit entitlements, consider any voluntary or private alternatives to compensate for gaps in an employee’s contributions record.

Brexit is now on the horizon and depending on the outcomes of the ongoing negotiations. It is possible that there will be a very different process and regime for employee movements in and out of the UK for social security. It is key right now that the cases in and out of the UK, and those planned, are reviewed for any changes that Brexit may bring.

Conclusion

Proper planning and permanent monitoring are required to avoid bad and costly surprises when it comes to social security. If you would like further advice on the best methods to monitor social security risks, please get in touch with myself, or your local Crowe global mobility expert.
 

Marc Verbeek Crowe Spark, Brussels

 

When managing and dealing with globally mobile employee there are lots of technical areas to consider - payroll, double taxation, tax equalisation, social security insurances and visas to name only a few. These are commonly in focus in the minds of mobility professionals. Increasingly, knowledge of and compliance with labour law is a very important part of the job too. Non-compliance can lead to penalties or even a ban from working a country. The consequences can be very serious. The posted worker directive is a cross border labour law consideration. As it is a directive, the implementation of it is slightly different at each country level. Local legal and practical knowledge is therefore really key.

Background

Within the EU / EFTA, access to member state markets is a key and fundamental concept. Posting (or sending) of workers from one state to another is major part of this system. If the laws of the country where the work is actually performed would be applicable in every case, company postings to other member states would require knowledge about labour law of many member states. This would in turn hinder companies from realising the benefits of the free market. In order to avoid such difficulties the EU has developed a free movement of workers agreement according to which the regulations of the home country remain applicable in cases of a project/ posting  of limited duration in another member state (including EFTA and Switzerland).

Risk

Generally, we have to separate local employees from posted workers. A local worker/employee  is a mobile worker who enters into an employment agreement in the host country and becomes subject to local labour law and the social security system.

In contrast, a posted worker is an employee sent by his employer to carry out his work in another state for a limited period of time. For example on inter-company assignments or project related work. Based on free movement of workers agreements, posted workers remain under the labour law of the home country and are not governed by the labour law of the host country.

Since member states do have different minimum standards in terms working conditions, this system presents a risk that the posted worker is not on favourable or comparable terms when compared to local workers.  A separate issue is that local companies may not able to be compete with foreign companies operating with posted workers because there are vastly different costs or obligations. For that reason the posted worker directive was adopted in 1996 (96/71/EC). In addition, an enforcement directive has been implemented in 2014 and a revision made 2018.

The posted worker directive

The posted worker directive has the purpose of establishing a legal framework for workers being posted from one state to another state. It contains rules that govern the application of the labour law of the state where the work is carried out. The purpose of the directive is broadly that posted workers are treated comparably when compared to local employees.

The posted worker directive seeks to ensure the local labour market and posted workers’ rights are protected.  In practice, this is achieved by requiring the application of the main labour law standards in the host country to posted workers. It mainly covers the following areas:

1. Working time (hours, holidays, pay)
2. Standards applicable to agency workers
3. Health and safety
4. Pregnancy and maternity protection
5. Discrimination law
6. In the building and construction industry, collective labour/ bargaining agreements have also been confirmed as being applicable

Example A worker is posted from a French employer to carry out installation work in Switzerland. Although the French employment contract remains in place, a salary which is comparable to a Swiss market average comparable salary must be paid to the employee. If the salary in the home country is lower, the employee must be compensated for the difference between the French and the Swiss salary.

Hints and tips

Every member state has its own set of rules and implementation approach. 

To avoid labour law risk, penalties and business disruption, we strongly recommend that businesses take time to review how the posted worked directive has been implemented in the host country. Global Mobility professionals have a key role to play. 

It's important to also be aware the different minimum salary rates in various member states are a potentially significant driver of cost which must be evaluated before the posting of a worker; this must be part of the project calculation.

Global Mobility teams have an important role to apply to support their organisation in understanding and applying local regulations and help to avoid unexpected costs and risks associated with projects carried out in other member states.

Raphael Gaudin Curator & Horwath AG Zurich

 

Social security costs differ across Europe so it is vital that mobility professionals understand the basics of the cross border rules that apply so they can help their organisations stay compliant and avoid unnecessary cost, dual contributions and complexity.

Organisations often request employees to work across borders. In some scenarios the cross-border working arises due to the particulars of the employee rather than at the request of the business. For example, the employee may have relocated themselves to a new country but continued in the same role. In these scenarios employer and employee taxes and related payroll need to be reviewed. Social security is a key consideration. 

This week we will discuss the social security position in the EU area and the use of the so-called A1 Form. Common rules for what is known as social security coordination apply to EU member states, Iceland, Liechtenstein, Norway and Switzerland. Amongst the main purposes of the rules is the concept that social security contributions should be payable only in one country (at any given time). As a result, dual social security liabilities should be avoided.

What is an A1 Form?

The A1 form certifies which country social security rules or legislation (exclusively) apply to the holder of the form. This effectively confirms the country in which social security contributions are due.  The form will generally be needed in situations where a person has a connection with more than one EU-country, Iceland, Liechtenstein, Norway and Switzerland. 

The A1 Form is based on the rules contained within European Directive (883/2004) that provides the cross border social security coordination rules. This Directive not only deals with rules for employees, but amongst others also for self-employed persons, civil servants, benefit recipients, pilots/cabin crew etc. We will focus on the rules for employees.

Coordination rules that determine which country social security rules and legislation (and therefore social security contributions) apply:

The main rule (and starting point) for employees is that the social security legislation of the country where the work is performed is applicable. In special cases or when an employee works in more than one country, there are exceptions to this rule. I will highlight the most common ones.

1. When the employee is sent by the employer to work temporarily in another country on his behalf for a maximum period (initially) of 24 months, the employee will remain subject to the legislation of the country were posted from.
2. When the employee is performing duties in more than one country at the same time, or in alteration, then the employee will be subject to the legislation of the country of their residence provided that the employee works at least 25% of his time in his country of residence. If it is less than 25%, then the employee will be subject to the legislation of the country where the employer is located.
3. As an exception, two or more of the involved countries may by common agreement determine that the employee will be subject to the legislation of the country other than that provided by the normal rules. The A1 form will confirm to which legislation the employee is subject.

Where and when to obtain an A1 form

If the employee goes to work temporarily in another country, the employer will normally apply for the A1 from the relevant authority/institution in the home country (country where sent from). Employees who normally pursue activities in more than one country, apply for the A1 in the country of residence. When an exception to the normal coordination rules is appropriate, the A1 application is made to the authority/institution in the country where the employee would like to be subject to the legislation. View a full list of competent authorities/institutions. Whenever possible, the application should be made before the duties begin in the other country. The legislation determined as being applicable on the Form A1 is normally binding on all countries. The Form should be retained and made available for presentation to the institutions in the countries the employee is working in.;

Payroll consequences

The Form A1 confirms the country in which social security is payable. The same form also acts as confirmation that social security is not therefore due in the country in another country the employee is working in.  This form is therefore a very important document to retain for payroll audits.In some scenarios the social security legislation applies in a country that is different to the country where the employee is employed and on payroll. In these scenarios, the employer will need to be registered and payroll deductions, payments and reporting will apply. It may well be that taxes (wage / payroll taxes) will have also have to paid (and potentially withheld via the payroll). This would mean that a split or shadow payroll may also have to be implemented. This is a topic for another Mobility Mondays write up.

Summary

It’s important for mobility professionals to understand the basic rules that apply in Europe. This understanding will help them ensure payroll compliance and prevent costly dual social security contributions. The rules and how they apply to the UK may change after Brexit.

Roeland Esveld Crowe Foederer Netherlands

 

Context

More and more construction and infrastructure projects are open to bidding by organisations from all over the world. Expertise gained in one project (for example building a data centre) can be readily deployed to a similar project in a different country.

Let’s look at the trend in building data centres. Building data centres requires industry specific knowledge, in order to guarantee as much continuity and security as possible. Aspects like energy consumption, location, cooling and protection against fire and physical access, each create specific requirements.

Such knowledge tends to be scarce and in demand at all levels of people involved in build (from the design to the execution). The local market can often not provide all the necessary workforce.

This will often mean, even more so in comparison to building traditional real estate, that workforces are attracted from abroad. As is with the data centres themselves, continuity and having no downtime is key in building these centres.

As in any construction project, compliance with local law is key, as non-compliance can threaten the continuity of the project.

While every market is different, several aspects will come into play in virtually every relevant jurisdiction.

Points to consider

A large number of questions can and will arise when considering attracting your skilled workforce from abroad.

• Is a work permit required?
• Is there a notification duty when employing foreign workers?
• In how far can a main contractor be held liable for non-compliance by a subcontractor?
• How to mitigate such risks? Does local law provide any facilities for this?
• Who do local authorities view as the employer? The formal legal employer or the party controlling the employees? In such a case, what is the extent of control that is necessary?
• How are taxing rights allocated? I.e. in which state should employees pay their taxes and do the employers need to withhold any foreign taxes or levies?
• Are tax breaks or tax facilities available (a number of countries have these in order to attract foreign labour and thus make investment more attractive)?
• What about social security of the employees? Does coverage shift from the state of residency to the state where the labour is performed?
• Does a collective labour agreement apply? What are the consequences of this (minimum wages, pensions etc.)?

Example A contractor in the Netherlands is assigned to build a data centre in the Netherlands. It plans to assign part a large part of the work to an Irish subcontractor. The contractor will need to be present on the building site as it expects it will need to provide some specific guidance now and then. The contractor worries that it may be held liable for possible wage withholding duties if the Irish subcontractor does not comply with local law. The contractor considers retaining part of the fee in escrow for a period of 24 months.

How to deal with this

As is often the case, learning as you go along is one of the worst things to do when dealing with such matters. Have a plan ready and see to it that everyone on the team is familiar with this.

At the very least, it should provide guidance on how to assess what the situation is and how to ask the right questions, such as:

• are workers attracted from inside the country itself, a larger combination of countries (such as the EU) or from somewhere else?
• Which immigration procedure should then be followed?
• Who needs to be called for a second opinion or assessment and when?
• How should it be determined whether or not there is an actual contracting relationship or merely the provision of labour?
• How is control determined in this country and what risks should then be mitigated?
• When do taxing rights shift to the country in which the labour is performed?

It will often look complicated and confusing when starting such a plan, but as you go along, things will start becoming apparent and logical.

The above provides an overview of things to take into account when hiring subcontractors from abroad. It is by no means meant as a complete overview. 

Conclusion

With any construction project a contractor will need a good sound process to deal with wage taxes and labour law at hand in order to be compliant from day one. Without such a framework, it is exposing itself to time consuming and costly issues following from non-compliance, which can possibly also damage its reputation.

You should always consult with a mobility expert before you take action, get in touch with myself or your local Crowe expert.

Context

Construction is a key industry that has kept going in many countries during the pandemic – our clients have. Mobility of employees and resources has been made more complex, but it’s continued. 

Global mobility remains fundamental to resource and workforce plans for so many construction projects. The talent and resource pool for projects often involves the transfer of skills and expertise across borders, and with that come many challenges and opportunities.

While traditional long term mobility does exist, employee mobility in construction can often be more short term and fluid in nature than other industries, and that brings complexity. The complexity can come from two countries compliance constantly in play.   

More and more construction and infrastructure projects are open to bidding by organisations from all over the world. Expertise gained in one project (for example building a bridge, railway infrastructure or data centre) can be readily deployed to a similar project in a different country.

This article explores the compliance related matters that require focus and considers what’s different about the compliance issues in the COVID-19 environment.

Key issues

Cost reduction focus - redeployments

Without doubt the environment for every organisation makes cost management and reduction a key priority - construction is no different.

COVID resulted in a number of deployed resources being repatriated in March and April. A number of those resources have come back or are being considered to come back. Lots of countries have special rules that lead to tax exemption for travel, accommodation and subsistence, often they are for a fixed duration of time (one year or two years). Those tax exemption mean lower cost for employers. The big question to consider now is how the COVID-19 repatriation impacted those tax exemptions? Has the clock restarted with the redeployment? Is the redeployment a continuation of the previous (cut short) deployment? Can different resources be deployed now to project to maximise the tax exemptions? These are very relevant and real issues that have to be worked through to ensure cost effectiveness is optimised and unforeseen costs are avoided where possible. 

Redeployments are also a good time to critically assess the supplier network that supports you. Are you getting the right support and services at the right cost?

Site engineers and tool operators cannot usually work remotely, but project managers, support and management can. It’s important in the COVID-19 environment to keep a track of which resources are working remotely if the country in which they are working is different to the one in which payroll reporting and compliance is done. If not reviewed and proactively managed, employers may find that social security, payroll and tax obligations can be triggered which can result in additional compliance and costs. As a minimum, have the ability to quickly know which countries your people are working remotely from.

Payrolls

The short-term nature of a number of deployments means that payroll is a two country issue. The employee is probably paid mostly, or wholly, in their home country but is taxable in the host country so triggers payroll for the employer. Payroll taxes become due in both countries, which could be a considerable hardship for the employee, or more usually a cash flow problem for the employer (as the employer picks up new payroll tax). Most countries will allow this double tax (and cost) to eventually be remedied as employees file tax returns. However, the process to get money back this way can often take 12 months and more and in the meantime, the organisation has a cash flow issue to manage. Depending on the volume of employees, the numbers can quickly increase to significant amounts. A strict and robust tax return and tax receivables (proactively tracking refunds from tax authorities) process is an absolute must.

It’s important to check that if dual payroll taxes are triggered, that local payroll tax rules are reviewed to establish if the payroll taxes in one (or both) locations can be adjusted to mitigate dual cost. Care needs to be taken as this is done, as the taxes deductions may change so the employees‘ net compensation can also change.

Payroll (and whether or not it is triggered) can often be very closely related to whether or not a permanent establishment has arisen. COVID-19 has resulted in employees being in countries that were either unplanned or for unplanned periods. This can impact and change payroll reporting and should be reviewed.

Permanent establishment (PE)

In broad terms, this occurs when an organisation is treated as being present for the purposes of corporate taxes. It can result in corporate tax payments and corporate tax filings and related administration. It’s usually obvious when the organisation has a formal presence such as a registered branch or a subsidiary already set up in the host country but this isn’t always the case. People deployment over the course of time may lead also to permanent establishments.

In order to assess this area it is critical to get the commercial detail. Who is the customer, who is the contract for services  between, what revenue is at stake, what resources will be in location, what will they be doing and over what period and whose tools and machinery will be used and where is this located? The commercial or tax department should have this to review on their ‘to do list’ but if it isn’t, assessment is needed to avoid financial and compliance surprises later.

COVID-19 has undoubtedly resulted in more cross-border remote and virtual workers. They should be assessed against their role, duties and the current in-country structure  for the project and the company. Remote workers can create PEs.

Finance and Costings

Margins on construction projects can be tight and one of the primary inputs into costings will be people costs. The compliance related costs of payroll taxes and social security can significantly impact margins and cashflow. Absolutely key is early identification of payroll taxes and understanding if and when they are triggered. Costings should be reviewed at least annually to review if the people cost aspects need to be updated. 

The pandemic has resulted in big changes to certain employees’ tax residency. Those changes will also drive changes in taxes due by employers. It’s critical to review how those changes impact the current estimated project costs.  

Tax exemptions

The short term nature of a number of globally mobile work arrangements in construction means that local tax rules relating to short stays, temporary workplace and even expatriate tax concessions can come into play. Where available, these can bring down the overall cost to the employer through the non-taxability of certain benefits or allowances that are provided to employees. As these benefits and/ or allowances are usually provided on a ‘net’ basis (so tax due on these benefits is paid by the employer) using tax exemptions reduces the taxes payable by the employer. The tax rates (when paid by the employer) can be anything from 80% to 100% and more so this is a critical area to review.

Posted workers

The Posted Workers Directive in Europe is particularly relevant to the construction industry. The basic intent of the directive is to provide a best of home or host approach for employment conditions across minimum rates of pay, maximum work periods, minimum rest periods, health and safety, working conditions where agencies are involved as well as protections against discrimination. Each country has implemented its own rules and laws in this area so there is no one common pan-European set of rules. Each country has its own approach and mandatory notifications may require to local authorities in a particular designated form. Enforcement activity is also increasing with labour authorities and other regulators across Europe checking local compliance with the local rules. More information can be found here.

As workers are mobilised across borders, it’s important to review the local rules around working conditions and check the notification process and documentation retention requirements so that non-compliance does not occur.

Entering new countries

So often, I’ve seen anxiety and additional costs resulting from entering new countries. A project has been won and talent needs to be deployed immediately. The organisation probably doesn’t have an entity. Immigration rules and lead times are complex and getting clear and reliable tax and social security advice is challenging, as local rules were not written with non-resident employers in mind. Those managing global mobility in construction should prepare country deployment blueprints. New locations can be identified by engaging with business leaders on their revenue and project pipelines. These can be reviewed well in advance of the deployments taking place and can used identify grey area, roadblocks and barriers early. When deployment needs to happen, the homework will already have been done so talent can be deployed at speed.

Actions to take

1. Review deployments and ensure you understand how redeployments impacts the availability for tax exemptions that is critical to optimise costs.
2. Payroll: Ensure you have the right social security documentation (A1s in Europe, Certificates of coverage) in place to prevent dual contributions. Carefully review the local domestic social security rules too as these can also provide valuable exemptions. Where dual payroll is triggered quickly assess what local rules exist to alleviate double taxation (and improve your cashflow). Similarly review how you can deliver compensation and benefits without necessarily triggering payroll and expense reporting. Some countries have special rules that apply to construction workers.
3. Costings: Project costings should be reviewed at least annually to assess impact of tax rates and rule changes that alter people costs. COVID has fundamentally altered a lot – the costs may have changed as a result of employee tax residency changes. Careful attention should paid to redeployments and extensions. Employee costs relating to redeployments and extensions can be very different to the initial expected periods (as some tax breaks and exemptions can now no longer be due). Care is needed.
4. Cost effective structures: Planning can enable a number of cost saving techniques and opportunities through income tax, payroll and social security rules. Ensure that people deployment takes place only after these have been reviewed so that crucial savings are not missed through the wrong structure or delivery of compensation.
5. Posted workers compliance: Increasing a hot topic in the construction industry across Europe. Proactively review what compliance and documentation is required for your employees.
6. Employment status: The use of contractors as contingent workforce in construction projects is quite normal in many countries. Ensure you understand how local employment tax status rules work. If you use contractors and subcontractor firms in your projects review if under local tax rules you have any payroll tax or related reporting requirements. Carefully review the contracts with subcontractors to check where liability for these aspects sits and whether you have any payroll tax responsibilities for the resources they supply.
7. Country blue prints: Build a country deployment plan and methodically review new countries you may need to deploy people into, well ahead of schedule. Plan for complexity and delays.

Summary

The construction industry often relies on regional and global talent pools – employee mobility is key to project delivery and success. Despite COVID-19, this continues to remain largely true.

The short-term and fluid nature of employee mobility in the industry brings with it complexity but also cost optimisation opportunities that should not be missed. COVID-19 itself has resulted in changes to employee presence that then alter employers’ compliance obligations. These is a key area to review.

Dinesh Jangra Crowe United Kingdom

 

Context

The internationalisation of supply chains is driver more and more transport of goods by sea and the volume and size of ships is growing. The optimisation of ownership structures, including corporate and private owned ships, is also a key driver to the global nature of the business. People mobility is an integral part of this industry.

For example: when moving goods from state A to state B, the owner of the ship may resides in state C whilst management takes place in state D. The ship’s crew can consist of many nationalities, so global mobility is key to the maritime shipping business and in particular to tax implications, social security, compliance and cost structures.

Global mobility compliance obligations for employers of those working on ships need to be analysed in very different ways to normal employees. We explore some of the key concepts at play.

The concept of the flag state – determining the jurisdiction

One of the very important concepts to understand in maritime shipping, is the concept of the flag state. In open sea - in fact outside 12 miles outside the coastline – a ship is no longer in the jurisdiction of a certain state.

This is one of the reasons why every ship exceeding a certain size must be registered in the flag-register of a country and therefore carries the flag of that state.

The flag state is relevant because a ship operating on the high sea is subject to the jurisdiction of the flag state. The ship and the ship’s crew fall under the jurisdiction of the flag state national maritime law. Depending on bi- or multilateral agreements, the flag of a ship may also influence aspects of Global Mobility such as tax jurisdiction, labour law, and social security.

The concept of flag of convenience (FOC) must also be considered. The concept of FOC refers to national ship registers, allowing ships to be owned by a ship owner domiciled in a state A but enables the registration of the ship in state B. In this situation, state B is the flag state.

This can bring advantages for ship-owners that include:

• easier access to the flag register
• reduced operating costs
• more lenient regulations or inspection regimes
• eligibility for special corporate income tax regimes.

Let's imagine a ship’s crew that consists of seafarers from many different states. This raises questions such as:

1. Which state’s labour and employment rules apply to the individuals?
2. Which state’s income tax jurisdiction is applicable to the individuals?
3. Which state’s social security regulation is applicable?
4. And in consequence, how do I choose my crew to optimise costs and reduce risk?

Labour law

One of the key instruments that helps in determining ship crew labour rights is the Maritime Labour Convention (MLC), which has been ratified by approximately 100 states worldwide. The MLC applies to all ships registered under the respective flag states, and to ships entering a port of a signing country.

With the extension to cover port states, the MLC ensured that ships registered under flags of non-signing states can be held to follow the MLC 2006 standard. Adhering to the standard means that bans from respective state ports can be avoided.

The MLC is important in the context of Global Mobility because it sets international minimum standards for ship crew labour rights in the following areas, although implementation in national law is still the responsibility of each individual state. Some of the key aspects governed:

1. Minimum requirements for seafarers to work on a ship (e.g. age, training and placement services)
2. Conditions of employment (e.g. clear contract, payments and rest hours)
3. Accommodation, recreational facilities, food and catering (quality of life on board)
4. Health protection, medical care, welfare and social security protection (availability of social security coverage and medical care on board and onshore)
5. Compliance and enforcement (must be ensured by flag states and port states).

It should be noted that no binding minimum wages have been agreed upon because the participating countries have very different income standards.

Income tax

A ship may be at sea for months with crews not able to set foot on land, they are therefore not in a specific jurisdiction. This means that the general concepts of international income tax allocation, such as the 183 days (which relies on physical presence in a certain state) can’t be applied.

Many national tax systems in countries where international shipping is a relevant industry also contain special tax regimes for seafaring ship crews.

As most bilateral tax treaties are based on the OECD model tax convention, the following tax allocation principles for seafaring ship crews generally apply. According to Art 15. Paragraph 3 of the current OECD model tax convention income is allocated to the home country of the crewmember. This can of course drive payroll and related employer considerations.

A number of double tax treaties in force are currently still based on the old OECD model tax convention according to which crewmembers have to be taxed at the place where the effective management of the ship operator is domiciled or in some double tax treaties (e.g. Switzerland-Japan) where the ship is operated.

Note that in certain cases the effective management of the ship can take place on board the ship and not on-shore. It depends on the bilateral tax treaty and national law, as to how this situation must be dealt with.

Where no double tax treaty deals with the employment of ship crews or no double tax treaty exist, the applicable national tax regimes must be considered.

It is important to identify the home country of the ship crew, structure of the ship management and ownership of the ship. It is important to be aware that effective ship management might be performed in a state other than where the ship’s owner is domiciled.

Social security coverage

Social security coverage drives employer registration and payroll requirements. Social security coverage for seafarers is part of the MLC, therefore a wide network of bilateral agreements is in place. The social security agreements within the EU/EFTA states include rules EU 883/2004 and EU 987/2009 which provide guidance for social security allocation for ship crews.

Generally, we can separate the following types of situations regarding social security coverage of a ship crew member:

1. Coverage under flag law:

   A ship crew member – if he is a national of a contracting state – is covered under social security in the flag state, unless both the residence of the enterprise or person paying the salary and employee are resident of the same state, in which case, the latter state prevails. This is the concept implemented in Art. 11 para. 4 of EUR VO 883/2004 Regulation No. 883/2004.

   Some examples:

   a. A Swiss national is working on a ship under German flag: the seafarer is subject to German social security law (flag state).

   b. A Swiss national is working on a ship under a German flag but paid through a Swiss ship owner or shipping management company, the seafarer is subject to Swiss social security law (place of management is equal to place of residency).

2. Subordination under flag law:

   The seafarers shall be subject exclusively to social security of the flag state. However, several states only apply social security if the seafarer is also domiciled in this country. This can lead to a non-insurance in certain cases.

   Some of the social security agreements exclusively allocate the social security coverage to the place of residency of the seafarer.

3. No agreement is in place:

Double or non-insurance coverage is technically possible.

Social security agreements generally only apply to nationals of the contracting states although some countries do take third country nationals under their agreements. The individual case details must always be determined.

Actions to take

The identification of the residency of each involved party is key to assess the global mobility risk and obligations, in order to determine the correct jurisdiction for compliance. Determine the following:

• place of management and the residency of the ship owner
• nationality of the ship crew members and their residency.

This leads to the following questions:

• Where are these employees taxed, and under which social security are they covered?
• Does a payroll need to be set up? i.e. is wage tax to be withheld?
• How can we avoid under-, over- or non-insurance?Do any other special tax regimes apply; can it be optimised?

Conclusion and recommendation

There are distinct differences between the ship’s flag and the domicile of the ship owner. This brings both opportunities to optimise cost structures and tax burden, as well as compliance issues. It is important for ship owners and operators to be aware of possible implications in terms of social security, income tax and labour law – these issues should be review by a Global Mobility specialist.

	Raphael Gaudin, Curator & Horwath AG   Zurich - St. Gallen			Peter de Heer, Crowe Peak Netherlands

Context

Global mobility is fundamental to resource and workforce plans for so many construction projects. The talent and resource pool for projects often involves the transfer of skills and expertise across borders, and with that come many challenges and opportunities.

While traditional long term mobility does exist, employee mobility in construction can often be more short term and fluid in nature than other industries and that brings complexity. The complexity can come from two countries compliance constantly in play.   

More and more construction and infrastructure projects are open to bidding by organisations from all over the world. Expertise gained in one project (for example building a bridge) can be readily deployed to a similar project in a different country.

This article explores the compliance related matters that require focus.

Key issues

Entering new countries

So often, I’ve seen anxiety and additional costs resulting from entering new countries. A project has been won and talent needs to be deployed immediately. The organisation probably doesn’t have an entity. Immigration rules and lead times are complex and getting clear and reliable tax and social security advice is challenging, as local rules were not written with non-resident employers in mind. Those managing global mobility in construction should prepare country deployment blueprints. New locations can be identified by engaging with business leaders on their revenue and project pipelines. These can be reviewed well in advance of the deployments taking place and can used identify grey area, roadblocks and barriers early. When deployment needs to happen, the homework will already have been done so talent can be deployed at speed.

Payrolls

The short term nature of a number of deployments means that payroll is a two country issue. The employee is probably paid mostly, or wholly, in their home country but is taxable in the host country so triggers payroll for the employer. Payroll taxes become due in both countries, which could be a considerable hardship for the employee, or more usually a cash flow problem for the employer (as the employer picks up new payroll tax). Most countries will allow this double tax (and cost) to eventually be remedied as employees file tax returns. However, the process to get money back this way can often take 12 months and more and in the meantime the organisation has a cash flow issue to manage. Depending on the volume of employees, the numbers can quickly roll up to significant amounts. A strict and robust tax return and tax receivables (proactively tracking refunds from tax authorities) process is an absolute must.

It’s important to check that if dual payroll taxes are triggered that local payroll tax rules are reviewed to establish if the payroll taxes in one (or both) locations can be adjusted to mitigate dual cost. Care needs to be taken as this is done, as the taxes deductions may change so the employees‘ net compensation can also change.

Payroll (and whether or not it is triggered) can often be very closely related to whether or not a permanent establishment has arisen. 

Permanent establishment

In broad terms, this occurs when an organisation is treated as being present for the purposes of corporate taxes. It can result in corporate tax payments and corporate tax filings and related administration. It’s usually obvious when the organisation has a formal presence such as a registered branch or a subsidiary already set up in the host country but this isn’t always the case. People deployment over the course of time may lead also to permanent establishments.

In order to assess this area it is critical to get the commercial detail. Who is the customer, who is the contract for services  between, what revenue is at stake, what resources will be in location, what will they be doing and over what period and whose tools and machinery will be used and where is this located?  The commercial or tax department should have this to review on their ‘to do list’ but if it isn’t, assessment is needed to avoid financial and compliance surprises later.

Finance and Costings

Margins on construction projects can be tight and one of the primary inputs into costings will be people costs. The compliance related costs of payroll taxes and social security can significantly impact margins and cash flow. Absolutely key is early identification of payroll taxes and understanding if and when they are triggered. Costings should be reviewed at least annually to review if the people cost aspects need to be updated.

Tax exemptions

The short term nature of a number of globally mobile work arrangements in construction means that local tax rules relating to short stays, temporary workplace and even expatriate tax concessions can come into play. Where available, these can bring down the overall cost to the employer through the non-taxability of certain benefits or allowances that are provided to employees. As these benefits and/or allowances are usually provided on a ‘net’ basis (so tax due on these benefits is paid by the employer) using tax exemptions reduces the taxes payable by the employer. The tax rates (when paid by the employer) can be anything from 80% to 100% and more so this is a critical area to review.

Posted workers

The Posted Workers Directive in Europe is particularly relevant to the construction industry. The basic intent of the directive is to provide a best of home or host approach for employment conditions across minimum rates of pay, maximum work periods, minimum rest periods, health and safety, working conditions where agencies are involved as well as protections against discrimination. Each country has implemented its own rules and laws in this area so there is no one common pan-European set of rules. Each country has its own approach and mandatory notifications may require to local authorities in a particular designated form. Enforcement activity is also increasing with labour authorities and other regulators across Europe checking local compliance with the local rules. More information can be found here.

As workers are mobilised across borders, it’s important to review the local rules around working conditions and check the notification process and documentation retention requirements so that non-compliance does not occur.

Actions to take

1. Country blue prints: Build a country deployment plan and methodically review new countries you may need to deploy people into, well ahead of schedule. Plan for complexity and delays.
2. Payroll: Ensure you have the right social security documentation (A1s in Europe, Certificates of coverage) in place to prevent dual contributions. Carefully review the local domestic social security rules too as these can also provide valuable exemptions. Where dual payroll is triggered quickly assess what local rules exist to alleviate double taxation (and improve your cash flow). Similarly review how you can deliver compensation and benefits without necessarily triggering payroll and expense reporting. Some countries have special rules that apply to construction workers.
3. Costings: Project costings should be reviewed at least annually to assess impact of tax rates and rule changes that alter people costs. Careful attention should paid to extensions. Employee costs relating to extensions can be very different to the initial periods (as some tax breaks and exemptions can now no longer be due). Care is needed.
4. Cost effective structures: Planning can enable a number of cost saving techniques and opportunities through income tax, payroll and social security rules. Ensure that people deployment takes place only after these have been reviewed so that crucial savings are not missed through the wrong structure or delivery of compensation.
5. Posted workers compliance: Increasing a hot topic in the construction industry across Europe. Proactively review what compliance and documentation is required for your employees.
6. Employment status:The use of contractors as contingent workforce in construction projects is quite normal in many countries. Ensure you understand how local employment tax status rules work. If you use contractors and subcontractor firms in your projects review if under local tax rules you have any payroll tax or related reporting requirements. Carefully review the contracts with subcontractors to check where liability for these aspects sits and whether you have any payroll tax responsibilities for the resources they supply.

Summary

The construction industry often relies on regional and global talent pools – employee mobility is key to project delivery and success. The short term and fluid nature of employee mobility in the industry brings with it complexity but also cost optimisation opportunities that should not be missed. Some of these cost optimisation opportunities may also be relevant to intra-country domestic employee mobility too.

Cross-border work lies in the heart of the airline business.

Employees of airlines cross borders fly in international airspace and work from outside of their home country across the globe. As a result, airlines and their employees are faced with many complex, special and different regulations in different countries with respect to employee tax, and whether a payroll needs to be set-up. Additionally, social security and cross border social security rules must be reviewed. The same is true for shipping companies which are most often registered under a flag of a country with low regulatory requirements and favourable tax rates.

Global travel restrictions (like the recent COVID-19 Coronavirus), trade and customs barriers as well as political discourse about market protection and climate change do increase regulatory risks and can present challenges.

For example, according to economists from the IMF and World Bank, aviation is currently undertaxed, especially in the EU, compared to other forms of transport. Airlines pay no fuel duty, no VAT is levied on international flights and there is no coordinated aviation/ticket tax. In addition, there are special regulations for airlines in international traffic with respect to income tax; airlines pay it only in their home country even though they fly around the world.

In this area of uncertainty for HR, it is important to focus on the legal framework that currently exists. The regulations in terms of corporate tax, personal income tax, as well as social security implications are in most cases, very clearly regulated.

What is important for special airline regulations for crews?

Airlines must strictly differentiate their employees in ground staff and flying staff and must strictly separate domestic and international flights. Tracking personnel and separating domestic from international flights is key in order to correctly administrate these personnel from an HR perspective.

In tax treaties between states, and in most national tax acts, there are special regulations where the income from employment as a crewmember of an aircraft operated in international traffic shall be taxable, this applies for work performed aboard of the aircraft, for example:

• Since November 2017 Art. 15 paragraph 3 of the OECD model tax convention allocates any income earned by a crewmember to the home country of the crewmember.
• Most double tax treaties in force are currently still based on the old OECD model tax convention, which states that crewmembers have to be taxed in the state where the airline has its effective centre of management.
• According to other double tax treaties, crewmembers have to be taxed in the state where the work is carried out. This is basically the same for crews operating on domestic traffic and for any ground staff.
• Not every double tax treaty deals with the employment of flying staff, and so there is or no double tax treaty in existence. Therefore, various national tax regimes have to be considered.

Most of the time, the determining factor for flight crew and cabin crew is their home base. This is a slightly different concept than applied in double tax treaties: the home base is the place where flight crew and cabin crew usually start and end their service schedule, and where the company is not responsible for the crew’s accommodation.

As we can see, the tax and social security liability may occur in different locations and are very depending on individual situation location of the employee and type of agreement (new or old). At the end, there is a whole network of consequences what must be considered.

Example: 1. An airline with its place of effective management in Germany, employs a pilot with residency in the Netherlands (home country) who is flying on international flights out of airport Amsterdam (home base). According to the double tax treaty between the Netherlands and Germany, the income of the pilot performed aboard an aircraft in international traffic is taxable in the home country of the employee. Therefore, the German based airline must set-up a payroll in the Netherlands, and the Dutch pilot must file a tax return in the Netherlands. Additionally, they must take out social security insurance in the Netherlands. 2. An airline with its place of effective management in Germany, employs a pilot with residency in Switzerland (home country), who is flying on international flights which normally starts and ends at the airport in Zurich (home base). The double tax treaty between Switzerland and Germany still is based on the old OECD model, according to which, the income of the pilot performed aboard an aircraft in international traffic is taxable where the airline has its place of effective management. Therefore, the pilot must declare their global income in Switzerland and they must file a tax return in Germany for their income from the airline, too. Social security will be due in the home base country which is Switzerland. 3. An airline with its place of effective management in Germany, employs a pilot with residency in Switzerland (home country) who is flying on international flights which normally starts and ends at the airport in Paris (home base). According to the double tax treaty between Switzerland and Germany, the income of the pilot performed aboard an aircraft in international traffic is taxable where the airline has its place of effective management. Therefore, the pilot must declare their global income in Switzerland and they must file a tax return in Germany for their income from the airline, too. Additionally, a payroll may have to be set-up in France, because the pilot may take out social security insurance in France.

These three examples demonstrate the various concepts and complexity; example one, where the airline just needs to setup a payroll in a second country, example two where the pilot has a double tax residency and double taxation must be avoided and example three, in which we have double tax residency plus payroll for social security in a third country.

Since a pilot of an international airline may not have a regular place of work, the determination of the applicable labour law is also complex. Possible points of contact are the domicile of the headquarters, of the hiring entity or the home base. The employment agreements shall include contractual terms about the place of jurisdictions. Also, Collective Labour Agreements are in place in many countries and must be considered.

Special consideration is also required for per diem allowances, which are usually paid to air crew members. Depending on the jurisdiction, this may be a taxable or non-taxable benefit for the crew.

Ground staff

Ground staff will not be subject to special tax and social security provisions and local payroll at the place where the work is being performed must be maintained.

However, there are industry specific implications to be considered for ground staff as well. For example, employees of airlines may receive flight tickets at reduced prices or free. Depending on the jurisdictions and restrictions of how a flight ticket can be used, and applied for the different between the market price and grant-price may be subject to income tax and social security. Of course, determining the market value of a flight might be very difficult.

Since flight handling does of course not stop at weekends, it is very common that some of the ground staff extra payments may be required and labour law aspects of Sunday work must be considered.

What action should be taken?

The assessment of global mobility risk and determination of the jurisdiction is key for HR persons in this industry.

Main questions that should be considered are:

• Where is the airline company operating?
• Does any type of special tax regimes and/or industry specific taxes apply?
• What type of functions do have the employees (ground staff, flying staff, expatriates…) have?
• Where are these employees taxed, and do have their social security liability?
• Where does payroll need to be set up?
• Do any other special tax regimes apply, can they be optimised?

Employee taxation is an administrative burden for airlines and employees. Employees would have to be register in more than one country and may have to file income tax returns, too.

Conclusion

Aviation is a strategically important sector of the worldwide economy, employing millions of people directly.. Due to the nature of their work, airlines as well as employees are faced with many different and special tax and social security regulations. If not managed carefully, airlines can fall foul of the law in certain jurisdictions.

Always consult with a global mobility tax expert. Get in touch with your local Crowe expert. They can assist you whether, where and what needs to be considered with respect to payroll and avoiding of double taxation, in this very complex and difficult industry.

	Raphael Gaudin, Curator & Horwath AG Zurich			Arzu Güven, Crowe Frankfurt Germany

People and talent are not always deployed to offices in towns and cities, sometimes the work location is offshore, on the sea or in a wind farm field out at sea. In the oil and gas, wind energy and shipping industries this is a common occurrence. Below, I explore some key technical compliance aspects such as payroll, and explain why compliance is often triggered sooner than onshore work.

Background

Employees working outside their home country and across the globe generally leads to complexities. One of the compliance related aspects that will always need thinking through, is employee taxability and whether a payroll needs to be set-up.

In certain industries works doesn’t take place in an office in a city (onshore), but rather at sea, on an oil rig, at wind farms or similar (offshore) installations. Taxation and payroll requirements for offshore work tend their own set of rules, these can differ quite a bit from the rules regarding onshore work. The key point is to recognise when offshore workers are being deployed and understand the specific rules that apply. Understanding the compliance requirements up front is key to managing the cost and compliance aspects of a project.

Some special technical considerations

In tax treaties between states where working offshore is an important part of the economy, (these are mostly coastal states such as Denmark, the Netherlands, Norway and the UK) specific attention is given to offshore work and the allocation of taxing rights. To clarify taxation, the treaties use concepts like the exploitation of seabed minerals, concepts which have been around for over 70 years.

In such tax treaties, offshore activities are generally defined as ‘activities which are carried on offshore, in connection with the exploration or exploitation of the seabed and its subsoil and their natural resources’.

A key point to note is that employee taxability and payrolls can actually be triggered sooner than when compared to onshore work. We often see this is something that companies realise afterwards, if at all, which makes planning and costings difficult to get right. Natural resources such as oil and gas are limited in supply and can, of course, be taken from a state only once. It follows therefore, that the extraction or exploitation of those resources results in states wanting to levy taxes. From a practical point of view, this means that even very short stays in an offshore location can lead to tax requirements, taxation and payroll can come into play from Day 1.

Renewable energy and wind

It is important to note that many tax treaties and legislation dates back to the time when offshore activities were mostly oil or gas related. Nowadays, a lot of the offshore activities are connected to renewable energy, such as wind farms which are based at sea. Although wind does not meet the above definition or its background (as is not a natural resource contained in the seabed or its subsoil, and is not in limited supply, unlike oil and gas), tax authorities may still take the view that wind farms need to be viewed as offshore activities, as a way of extending their tax jurisdiction.

Not every double tax treaty deals with offshore work separately, so there is a need to always check whether specific offshore rules apply. (Links to some double tax treaties are at the bottom of this article).

One of the practical difficulties relates to payroll. Payroll system set-ups and operations in most jurisdictions are designed for longer periods, whereas offshore work tends to be short term.

It’s key that those supporting people and resources deployment in offshore wind and renewables really spend time to establish exactly where the resources will be working, where they will be living and how then special offshore rules may apply. Payroll and taxation managed up front can significantly reduce the compliance and cash flow burdens.

Here are some examples of common questions I get asked about offshore deployments.

• When working offshore, does the 183-day rule apply? This is a well-known rule in the world of HR. Tax treaties can enable exemptions provided certain conditions are met.

• When our employees work offshore, does the 30-day rule apply? This again relates to rules that are found in tax treaties. What is the connection between a permanent establishment and employer compliance obligations, is there payroll and taxation if the work is for less than 30 days?

• Are activities for wind farms at sea considered offshore work? Do we have operate payroll, do employees need to register for taxation?

• How can we limit tax liability when we hire subcontractors for an offshore project?

Example A UK Ltd. sends a group of people to an offshore oil drilling project on the Dutch seabed. The people work there for 24 days. They assist in installing the pipelines. This would generally meet the definition of offshore work as defined in the UK-NL tax treaty, it is very likely that the Netherlands is entitled to tax the income of the UK employees that relates to this project. A UK company sends a group of people to perform work on a wind farm at sea near Denmark. They work there for 64 days. This will lead to the discussion whether, or not, the activities can be considered offshore work (as wind is not a natural resource contained in the seabed or the subsoil).

Practical solutions

As mentioned already, tax and payroll can be triggered quickly with offshore activities.

Taxation being triggered is also an administrative burden for employees. Employees would have to register in the host country and may have to file income tax returns too. In addition, the employer has to now understand the requirements to operate payroll. We must not lose sight of the fact that the employee is probably also on the payroll of the home country. As a result, double payroll taxes and taxation can be complexities that arise quite quickly. Social security and the application of the cross border social security rules will also need review.

It may not be easy, or practical, to set up payroll for the generally limited amount of time and income of some offshore projects. There are alternative solutions available that require less time and cost, but would still keep the company and its employees compliant. Careful up front planning is absolutely key to assess the compliance obligations and manage the project finances.

Conclusion

Offshore work is a key feature of a number of sectors. Taxation and payroll can be triggered quicker than in normal onshore assignments. Despite the fact employees may not have relocated and spend very minimal in the host country performing offshore work can lead to compliance. Project economics and cash flow can quickly change if taxation and payroll obligations are not assessed.

Always consult with a mobility tax expert to ensure you understand the rules that apply. Get in touch with myself or your local Crowe expert.

Links to some examples of double tax treaties

Article 23 of the DTA between the Netherlands and the UK.

Article 24 of the DTA between Norway and the Netherlands.

Article 28A of the DTA between the UK and Denmark.