While some workplaces have returned to the office full time, others have continued to embrace flexibility trends, such as global mobility. Global mobility—or employee relocation—is when companies transfer employees one country to another.
This policy requires a solid strategy to stay compliant, especially when it comes to taxes. Read on to identity and prepare for the biggest global mobility tax issues.
1. Understanding Tax Residency
Tax residency is an individual’s or entity’s legal tax status in a country. In Germany for instance, anyone with a dwelling who spends six continuous months in the country must adhere to tax residency laws.
Though it’s your employee’s responsibility to declare their tax residence, you can support employees by offering tax equalization or tax protection (scroll down to the tax equalization section for a definition and run-down of its benefits and best-practices).
Tax protection describes an employee on an assignment who pays the same or less tax than they would in their home country. If the taxes are higher, the company pays the remaining amount. If the tax burden is less, the employee keeps the difference.
Incorrectly determining tax residency can result in non-compliancy and lead to unexpected costs to the business, such as fees or penalties imposed by the foreign country.
2. Impact of Double Taxation Agreements (DTAs)
Double Taxation Agreements (DTA) are treaties between two or more countries that prohibit double taxation of income and property. A DTA provides a more conducive environment for increased cross-border business by avoiding double taxation.
A few of the benefits of DTAs include:
- Increased trade or business between two nations
- An assurance that taxpayers do not need to pay tax in two countries
- Steamlined international trade
Double Taxation Benefits (such as the existing law in the UK) open countries up to more trade between countries and save the employer and employee money, but they can also come with limitations.
Double taxation agreements can often be complicated as all countries have their own regulations. Your business must report income in both the home country and country of residence. US expats in the UK must file taxes in both countries despite the double taxation agreement in the UK.
One way to avoid double taxation is by distributing salaries or bonuses as profits instead of dividends. Salaries or bonuses—while taxable for employees— are deductible business expenses.
3. Taxation of Expatriate Employees
As an employer with employees working from several international locations, you’ll need to comply with the local and national tax laws of the hots country. Most juristictions have specific income tax and social security systems that impact employee withholding/taxpayments and tax return filings.
Even if your company unintentionally becomes non-compliant, you’ll still face severe financial consequences. A great solution is to hire experts in mobility tax or international payroll to ensure you’re meeting all obligations and can smoothly run your global business.
When employees travel abroad for business, they can a variety of scenarios such as:
- Double taxation
- Permanent establishment
- Tax withholding
In some cases, business travel can trigger permanent establishment in the host country, which is when a company carries out their activities at a fixed place of business. If the employee’s activities meet the criteria of a permanent establishment, your company can lead to tax obligations in the host country.
As mentioned above, one way to ensure compliance is by bringing on a third party who understands tax requirements inside and out. For a future-proof solution, many companies use one global payments and payroll system to track all necessary forms, movements, and information in one place.
4. Taxation of Business Travelers
A business traveler has a specific purpose, such as raising sales, networking, project work, training, and so on. Leisure travel is when an individual embarks on a vacation and focuses on recreation and sightseeing.
Business travel may trigger the concept of a permanent establishment in the host country. A permanent establishment is a fixed place of business through which a company carries out its business activities. If a business traveller’s activities meet the criteria of a permanent establishment, it can lead to tax obligations in the host country.
The host country may require the withholding of taxes on certain payments made to non-resident business travelers. These payments can include salaries, bonuses, or other forms of compensation. The withholding tax rates and requirements may vary between countries, so it’s important to remain in the know.
In 2023, compliance with the payroll tax requirements for business travelers is more imperative than ever. As some country tax authorities focus more on remote worker taxation, business travelers can easily get involved in a remote worker payroll audit, as the two groups have a few similarities.
As business travelers don’t change their address in the HRIS system, they are difficult to track. Companies use a variety of methods to track them including:
- Time sheet reporting
- Reports from the travel database / travel vendor
- Expense accounts
- Mobile phone tracking
Business travelers also don’t switch to a new payroll location, so income allocation and associated payroll compliance apply to both payroll (salary), equity compensation, other benefits and long-term incentives. This makes business traveler compliance a team effort between the employee, payroll, and the executive C suite department.
5. Managing Tax Equalization
Tax equalization is when employees accept an assignment in another country and pay the ame taxes as they normally would. If the foreign country has lower taxes, the company pockets the savings, but if the taxes are higher, the company pays the difference.
With a practical tax equalization policy, your company takes on responsibility for taxes, helping to ensure your worker files correctly. Tax equalization can also boost your company’s reputation, making the process easier and less costly for the employee.
Lastly with a tax equalization policy, you’re documenting and addressing considerations such as:
- How you treat spouses and partners
- How to treat income and capital gains
- Do you discourage individuals from buying property in the guest country?
- and other important factors
Aside from considering the above, companies also need to address what income and benefits to include and when to file and there isn’t always a clear-cut answer. Additionally, tax equalization can result in additional payroll administration and tax compliance costs.
If your company wants to create a tax equalization policy, it’s often best to work with global employment and tax experts so make sure you’re aware of tax ramifications for both the company and employee. A reputable partner will also help you create a policy that accurately reflects your company’s core values to maintain your reputation.
6. Tax Treatment of Employee Benefits
Benefits you provide for your employees in a global mobility program are taxable. This can include company cars, loans, medical insurance premiums, and/or childcare. Many countries, such as Canada, will also require you to report any benefits.
Europe follows a general ‘pay where you work’ policy, so when considering benefits, check if your country has a bi-lateral agreement with the new location. The agreement could exempt the employee from social security in the new location, but require a Certificate of Coverage.
If there isn’t an agreement in place, the home and host country will decide whether to pay social security and for how long.
7. Taxation of Equity-Based Compensation
Another issue when it comes to mobility is addressing equity compensation, also known as share-based compensation. Equity compensation is non-cash pay a company offers employees, giving them partial ownership of the firm. This can include: stock options, restricted stock, stock appreciation rights (SARs), and ESPPs.
Your home country may not have consistent tax treatment in other countries, which can create tax risk and consequences. The outcome could change the compensation from an incentive to a disincentive for employees.
Take note of:
- The host country’s reporting and withholding rules
- Country laws that can limit payroll withholding for employees departing the country
- Inconsistent rules between your home and host country that can create timing discrepancies for when income is taxable.
US resident that take part in an Israeli-based plan, for instance, could have US reporting and withholding on a transaction that isn’t taxable for Israeli tax purposes.
Ultimately, it’s important to review the individual plans and determine the appropriate tax treatment in the various countries.
8. Understanding Value-Added Tax (VAT)
Value-Added Tax (VAT) is a tax that’s payable goods or services within the territory of EU state members. The tax is payable by the final consumer of the good or service.
For example, if you sell a product to an EU-VAT registered business operating in another EU country, you won’t charge VAT on that sale. If the same product is sold to the final consumer within the EU, you may need to charge VAT at the rate applicable in their country.
VAT is based on consumption not income. In contrast to an income tax, which levies more taxes on the wealthy, VAT is charged the same on every purchase.
VAT is levied on the gross margin of point of the sales process (manufacturing, distributing, selling, and so on). The tax is assessed and collected during each part of the process. This differs from a sales tax system, where tax is assessed and paid by the consumer at the very end of the supply chain.
If your business doesn’t comply with VAT, you may be charged with tax evasion. Because each country has its own rules, obligations, and filing requirements, you’ll need a well-organized and thoughtful process to ensure you meet all compliance obligations.
9. Impact of Transfer Pricing
During transfer pricing, multinational corporations shift profits out of the countries where they operate and into tax havens. The technique involves a company selling itself goods and services at an artificially high price.
A company for instance may buy office supplies for an employee working outside of the home country to move profits outside of the country so they have to pay little or no tax on profit.
Another example: It costs your company $100 to produce a software in China. It then sells that software to an affiliate located in a tax haven for $100, leaving no profits in China. Then, the tax haven affiliate sells that software to an affiliate in Poland for $300, leaving $200 profit in the tax haven. That Polish affiliate sells the software at the genuine market price of $300 to a store, leaving no profits in Poland.
In this scenario, your company won’t pay tax in Ecuador or Poland, and the $200 in profits shifted to the tax haven aren’t taxed.
Not only can transfer pricing save costs for your company (the transfer price is usually lower than the market price of the product), but products are readily available with this process as well (as goods are manufactured in the company itself and do not have to depend on suppliers).
One of the biggest limitations of transfer pricing is that it’s a complicated process. Unlike market price which is determined by supply and demand, transfer price is decided by many other variables, making it more complex.
Transfer pricing influences both direct and indirect taxes governments collect. The price of cross-border transactions is the starting point for measuring customs duties and assigning profits to each party involved and the allocation of tax bases among countries.
Therefore, it’s critical for companies to proactively analyse their operations and ensure they understand the latest transfer pricing regulations to stay compliant.
Avoid the pitfalls of global mobility
Global mobility can impact your company on various tax levels. You’ll want to understand aspects such as tax residency, how taxes impact employee benefits, protocols such as tax equalization, VAT, and so forth.
This is where the importance of proper planning and compliance comes into play. Without a plan, a non-compliant business can accumulate significant local government fines and penalties, which can add up with any necessary legal costs. Additional consequences of non-compliancy can include imprisonment or criminal penalties, breach of contract, rescinded licenses, and more.
Put plainly, a global compliance policy is essential for operating a successful business internationally and preventing compliance mistakes. Schedule a demo to learn more.
What are tax residency rules?
Many countries that collect income taxes have a specific rule to decide who is considered a resident. In the U.S. for instance, if you spend at least 183 days of a year in a state, you are considered a resident of the state for tax purposes.
What is a Double Taxation Agreement (DTA)?
A double taxation agreements (DTA) is a treaty between two or more countries to limit international double taxation of income and property. A DTA could increase business between two nations and result in goodwill for employees who do not need to pay tax in two countries. Not every country abides by double taxation, so it’s important to check local laws and regulations.
What is tax equalization?
Tax equalization describes employees who accept an assignment in another country and pay the same taxes as they normally would. If the host country has lower taxes, the company will take the remaining amount, but if the taxes are higher, the company will pay the difference. It’s best to work with a global employment and tax expert to stay on top of tax ramifications for both the company and employee.
What are the tax implications of equity-based compensation?
You will pay standard income taxes on the difference between the exercise price and the market price when exercising the options. Employees will need to report this amount. As a company, you will likely withhold taxes for full-time employees.
What is Transfer Pricing?
Transfer pricing are the rules tpricing transactions between enterprises under common ownership or control. In this technique, corporations shift profits out of the countries where they operate and into tax havens. This allows companies to save costs.