In today’s technological world, it is easier than ever for businesses to participate in the global economy through the use of business travelers, international assignments, remote workers, or permanent transfers. However, international tax compliance for cross-border employees can present unexpected challenges for both the employee and the company. Even a single day of work in a foreign location can trigger complex tax filings for the individual, as well as tax reporting and withholding obligations for the company in both the Home and Host countries. Failing to comply with these obligations can have serious consequences, such as unexpected tax bills, increased audit costs, financial penalties, and legal and reputational risks for the company and the employee.
Tax Compliance in the Employee’s Host Country
An employer with staff working in multiple international locations must be prepared to comply with the local and national tax laws of the employee’s Host location. Most jurisdictions have their own version of income tax and some type of social security tax system that typically mandates employee withholding/tax payments and tax return filings. Failing to comply with a location's reporting and withholding obligations can be a costly mistake, with potentially severe financial repercussions.
Unfortunately, there is no one-size-fits-all solution for taxes levied across jurisdictions. Filing and withholding obligations vary from country to country, presenting unique challenges for businesses with cross-border employees. To ensure compliance with the filing and withholding requirements of employees' Host locations, businesses should consider hiring an in-house mobility tax expert or retaining a firm specializing in mobility taxes. Doing so can help to ensure all obligations are met and that the business is able to take advantage of the benefits of a global workforce.
Cross-Border Employees May Still Have US Tax Obligations
In addition to Host country requirements, having cross-border employees can create additional tax complexities in their Home countries. Employees who remain tax residents in their Home locations may need to address double taxation. Providing allowances or additional benefits, such as housing or relocation expense reimbursements, can result in additional reporting and tax burdens, further complicating the Home country payroll.
These types of Home country tax issues are especially relevant for companies who send US employees to work in other countries. The US is one of the only countries in the world that subjects their citizens and resident aliens to worldwide tax reporting, even if they are not working in the US. To address the possibility of double taxation, it is essential for US employees working abroad to take advantage of any exclusions and credits available on their US tax filings. Furthermore, if the US has a social security agreement with the Host country, it may be possible to continue paying social security in the US and receive a full or partial exemption from social security in the Host location. These measures can result in considerable tax savings for both the company and the employee.
It is essential to recognize that US taxpayers living abroad may have additional filing requirements related to foreign assets and/or foreign financial accounts. For instance, the Foreign Account Tax Compliance Act (FATCA) mandates the disclosure of foreign assets for US taxpayers with foreign assets surpassing certain thresholds based on their filing status and location of residence. For example, a single US resident alien would have a FATCA filing requirement if their specified foreign assets exceeded US $50,000 on the last day of the tax year or more than $75,000 at any time during the year. Furthermore, a Report of Foreign Bank and Financial Accounts (FBAR) may be required for US taxpayers with foreign financial accounts totaling more than $10,000 at any time during a calendar year. Neglecting to comply with FATCA or FBAR reporting can result in significant financial and legal repercussions.
The US has income tax treaties with more than 60 countries allowing business travelers going between the US and these countries to be exempt from Host country income tax under certain conditions. These conditions often include the employer not deducting the related compensation expense in the Host country and the employee not exceeding a physical presence threshold in the Host country (often 183 days during a specified time period). However, despite the potential for a treaty exemption, companies must still adhere to reporting and withholding obligations, as well as employee tax filing obligations.
Navigating the rules for achieving a treaty exemption can be a complex process, varying by location, project, and employee. To ensure compliance, companies should conduct a thorough review of their program, establish processes, and implement planning opportunities prior to any travel.
Employers Need a Plan for Addressing International Tax Issues Related to Their Cross-Border Employees
Businesses that employ cross-border employees must have a plan in place to anticipate and address potential issues that may arise in both the Home and Host countries. A mobility tax professional can help craft a comprehensive plan, including policies and processes tailored to address the unique challenges created by international employees, while taking into account the specific tax regulations for the relevant country combinations.
From a US perspective, the plan should recognize that cross-border employees face a different statutory and regulatory environment than the same employee would face domestically within the US. To ensure employees who relocate to high-tax countries are not unfairly penalized, the company should consider implementing a tax equalization program. This program would ensure that an employee’s tax burden remains the same regardless of their international location, and that they have the necessary incentive to comply with all Home and Host country tax filing requirements.
Moreover, the plan should also ensure that the company’s payroll and accounting software and processes can meet the reporting requirements for both the Home and Host locations. This will help to ensure the company is in compliance with applicable laws and regulations.
What to Look for in a Mobility Tax Specialist
Whether hiring an external firm or recruiting new personnel to tackle mobility tax issues, employers should ensure their mobility solution adequately addresses the distinct employment tax issues that will arise in both Home and Host locations. Other considerations employers should take into account include:
- Does the mobility tax solution possess the necessary expertise to manage the intricate tax complexities of a global workforce?
- Can the mobility tax specialist provide Home and Host payroll support for your cross-border employees?
- Does the mobility tax specialist have the resources and capacity to fulfill both the Home and Host tax filing requirements in all your current and prospective locations?
When it comes to taxation for cross-border employees, it’s always best to take a proactive approach. Organizations can avoid the costly and time-consuming consequences of an audit or financial penalties, as well as unexpected legal and reputational risks, by taking steps to stay ahead of the game. A great first step is to review your current mobility tax program and develop an action plan. Alternatively, if no program is currently in place, mapping out the current needs and consulting a mobility specialist is an excellent way to get started. By taking a proactive approach to mobility tax, organizations can embrace the global economy with confidence.