During a merger or acquisition, obtaining an understanding of the mobile employee population comes with many considerations including talent management, immigration, and tax. In this month’s newsletter, we provide an overview of the mobility tax considerations for mergers and acquisitions (M&A) in three key areas: people, policy, and process.
People – understanding your mobile employee population
One of the first steps required from a mobility perspective is to understand what types of mobile employees may be involved and how the mobile employees will be impacted. While it is obvious that a review will be required of the current and combined mobile workforce, it will also be important to proactively consider any new and future needs for the organization. Here, an M&A often results in a need to relocate employees for such purposes as training, integration of company culture and practices, changes in employee roles, and applicability of new markets and business locations.
In assessing both the current and future state of a combined mobility program, it will be important to understand the locations and types of scenarios that will be involved.
With four main types of mobile employees (i.e., one-way transfers, assignees, business travelers, and non-traditional mobility scenarios), you will need to understand what your mobility population looks like and what categories the employees fall under. They each come with their own set of unique considerations.
For one-way transfers, a determination of the transfer cases that are in process will be important along with confirmation that there is still a need for that employee to transfer to the intended location due to the M&A.
Assignment cases can get more complex as there are several areas to address. For example, key questions to consider are:
- How many assignees are there?
- What countries are the assignees in? In addition to tax considerations, there may be employment law and immigration considerations, especially related to employees who may be terminated or those switching to a new employment contract.
- For existing cases, how far is the employee(s) into the assignment and will the M&A impact their assignment?
- Will new assignments be required to support the M&A / future business goals and objectives?
- Will current policies and processes support new scenarios or locations? Are my vendors able to handle any new locations or anticipated increase in volume of moves?
Due to difficulties in tracking and lack of documentation, business travelers and non-traditional mobility scenarios can often be difficult to uncover and review. However, these cases have the same types of risk as longer-term assignments, including possible legal, reputational, and financial issues. As such, it will be important to inquire and understand these types of scenarios.
Policy – understanding the policies that apply to your mobile employees
Along with the people considerations of an M&A comes the important step in understanding the policies that apply to those mobile employees. Mobility policies can vary greatly between companies. It will be imperative to review all policies including the benefits provided within each policy. After the M&A is complete, you will need to consider whether you will continue to utilize separate policies for existing mobile employee scenarios or if you will transfer all post-M&A mobile employee to a new policy.
There is unfortunately no one best answer as to which approach to take. If going with a multiple policy approach, be aware that multiple polices can often lead to miscommunications, increased costs, and increased risk if not fully understood. If moving towards a whole new policy, keep in mind that communicating policy changes to mobile employees is extremely important for setting expectations and executing a smooth policy transition.
The following are some important tips to consider:
- Determine what assignment polices exist. As an example, are there different policies for short-term assignments versus long-term assignments?
- Determine how mobility scenarios are defined. The length of time an employee is working in a Host location often defines the policy provided. However, definitions between companies can vary. For example, an employee traveling to a Host location for three months may be considered a short-term assignee under one policy but may be considered a business traveler under another policy. Given employee benefits and provided services often vary between policies, it is important to understand the policy definitions and how they are applied.
- Determine and review existing permanent transfer policies and, as possible, align the polices on a go-forward basis.
- Determine what policies exist for business travelers. Is there a policy around tracking and reporting business travelers? Are there administrative guidelines that are followed related to physical presence thresholds in specific locations? What types of benefits and expenses are allowed for reimbursement for business travelers? If tax obligations arise for business travelers, is there a policy relating to tax gross-up assistance?
- An increasing number of non-traditional mobility scenarios exist with companies as well. As such, it is important to understand those cases and determine where policies exist.
- Review existing tax equalization policies. Do the policies need to be updated for elements such as tax equalized compensation, equity, or personal income?
- Determine whether policies exist and what the company position is on reporting for trailing liabilities arising from equity and deferred compensation.
Process – evaluate processes and implementation
The processes and their implementation are equally as important as evaluating people and policies. With an M&A, there can be implications to previously established processes that will need to be reviewed. This includes many corporate considerations in which it will be important to communicate with different areas within the organization, including corporate tax.
There are corporate tax positions that can impact the individual taxation of your mobile employees. As an example, where an income tax treaty position may have been previously available, it may no longer be the case after an M&A due to changes in the corporate structure or permanent establishment or PE position. As such, it will be extremely important to communicate and share information between the teams.
In addition to the need to review the current policies that are in place, it will also be important to obtain proper legal review of existing or revised policies, changes in benefits (i.e., review from an employment law perspective), and immigration documentation. From a tax perspective, an M&A and possible changes in corporate structure, employment relationships, and employer name may result in a need for updates to such documents as secondment agreements (intercompany agreements) and payroll support (e.g., certificates of coverage, withholding forms/waivers). It will also be important to consider tax planning relating to severance payments, the timing of repatriation, and the provision of incentives such as bonuses and equity income.
From a process perspective, the accounting for relocation expenses and tax costs also needs to be reviewed. For example, many companies have different approaches for accounting for tax costs related to assignments. While accruing for tax costs may be a best practice, not all companies utilize this approach. As such, getting a handle on the assignment population and how the costs are being tracked is extremely important. Some questions to ask are:
- How have tax accruals been established and have they been reviewed and updated as appropriate, such that any outstanding tax costs/tax equalization settlements are properly reflected in the financials?
- What is the status of the tax returns and tax equalizations in the Home/Host country for the assignees?
- Are there risks for surprise tax bills relating to severance or equity income for employees who may be repatriated or severed?
- Have accruals been set up to address “trailing liabilities” for equity income that had been earned for employees who have already repatriated?
- Are there ongoing audits or tax notices that could lead to unexpected tax payments?
With transfer cases, you also need to ensure you understand the tax and relocation expenses. Evaluate what costs, if any, have been accrued from a financial perspective. You should also determine what the status is of any expenses not yet incurred for a recent move or a move that is still in process.
Regarding payroll processes, while previous processes may have been setup for reporting related compensation expenses for assignment and permanent transfer cases, these will need to be reviewed after an M&A. Cross-border payroll processes can be complicated and review of these processes becomes very important to ensure you are alleviating risk from a non-compliance perspective and avoiding interest or penalties that may arise. You may need to look to establish new procedures for both assignment and transfer cases, especially if a new country is involved. As noted, submission of revised certificates of coverage for social tax purposes may be required if the mobile employee is under new employment. If a “shadow payroll” has been setup in a Host location, updates to the entity name, tax ID numbers, or other payroll-related disclosures should be reviewed and addressed.
Finally, from an overall process perspective, an M&A may require a review of your vendors. As the M&A companies will likely be coming with different sets of vendors, a review will ensure that any preexisting vendors and new vendors are working together for a smooth transition and a successful mobility program.
Through proactive consideration of the impact to your people, policies, and processes and by leveraging your mobility vendors, you can help to facilitate a smooth and successful M&A transition for your organization. If you have any questions around the mobility tax considerations for mergers and acquisitions highlighted in this article, schedule a call with our team; we are here to help.
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.
Author: Tracy Novotny
Tracy is a Director in GTN’s West Central region. She has over 14 years of experience in global mobility and is recognized by her clients for her focus on customer experience and an ability to explain complex tax matters in an understandable and actionable manner. She is a frequent writer and speaker on mobility tax topics, including cross-border and domestic payroll, delinquent filings, and business travelers. +1.763.252.0320 | firstname.lastname@example.org