Employers are increasingly turning to mobile employees to fulfill their international staffing needs, but many companies fail to understand the complexity, costs, and compliance obligations that result from cross-border employment. The following are common mobility tax mistakes we encounter the most that are made by employers with mobile employees and tips for avoiding them.
Employers facing mobility tax issues for the first time will sometimes reach for the most inexpensive and immediate solution for their compliance needs, and fail to take steps to minimize the future tax obligations of both the employer and its employees. Often, a mobility tax specialist can help a company structure its compensation package for mobile employees to minimize the tax bite of a move overseas, especially when the employee is moving from a low-tax to a high-tax location.
Utilizing a mobility tax specialist may result in additional up-front compliance costs, but those costs are usually more than repaid through the savings that result from careful tax planning. For example, the US is one of the few countries in the world that subjects its citizens and resident aliens to tax reporting while they are working overseas. To address the possibility that an overseas employee may be assessed tax in both the US and their Host country, a mobility tax specialist will help the employee utilize potential exclusions and credits on their US tax filings to minimize their US income tax bill.
Another common mistake employers make with their mobile employees is failing to properly track them to ensure they are complying with all of the requisite withholding and reporting requirements in both their Home and Host countries. Failing to do so can lead to audits, which can result in large assessments and significant fines.
Although employers have long known of these reporting and withholding requirements, they have often failed to take steps to address the issue because tracking an employee’s income and benefits across international borders can be expensive and complicated. However, many national governments have begun employing technology to track the comings and goings of foreign individuals who are working within their borders. Additionally, the governments of many countries have begun working together to track individuals as they travel across borders for work purposes.
Sometimes the first time an employer becomes aware that its mobile employees are not in compliance with a Host country’s reporting requirements is when an individual is stopped at the border while traveling home and questioned about their business activities there. There have been instances of employees who have been temporarily detained while attempting to depart their Host country as their tax-related issues are addressed. Often, the detained employee is unaware that he or she had reporting or withholding obligations in the Host country, and the employer had not been paying close enough attention to foresee the problem.
Mobile employees heading overseas fail to realize that the move could potentially complicate their income tax situations. They understand that the compensation they receive from their employers will likely be taxed as income, but rarely put much thought into how other income will be treated by their Host country.
An example may include assignment or fringe benefit-related items paid on behalf of mobile employees by employers, such as housing or children’s education costs. Other examples may include personal items such as interest earned from bank accounts, mutual fund investments, and some life insurance policies.
To address the complexities that employees will be facing with overseas mobility tax, specialists often host counseling sessions to help mobile employees better understand their reporting and filing obligations prior to their move. Mobility tax services have specialists with firsthand experience with a Host country, and these specialists can help guide mobile employees through the common tax and reporting obligations they will face there.
The issues faced by mobile employees operating in a Host country are rarely unique, and an experienced mobility tax specialist can help both employer and employee in developing a plan to minimize their impact. Failing to plan ahead can end up costing an employer through increased assessments, fines, and lost worker productivity if an employee is unable to work while their tax status in the Host country is being resolved.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.