Understanding the Tax Risks of Business Travelers

As businesses expand their reach across state and international borders, the tax implications of having employees travel for work becomes increasingly complex. Companies often require employees to travel for work assignments, projects, or meetings, which can inadvertently create tax reporting, withholding, and filing obligations that many organizations overlook. Surprisingly, even a short business trip lasting just a single day can potentially trigger tax compliance requirements in the visited jurisdiction.

And unfortunately, there is a lack of consistency among states and countries regarding the rules that determine when non-resident workers become subject to taxation, and at what point company reporting and withholding obligations begin. This ambiguity poses significant challenges for organizations, as achieving compliance involves administrative costs and unforeseen hurdles.

Failure to address these requirements can expose both the company and its business travelers to financial risks, such as penalty and interest charges, as well as potential legal ramifications. Navigating the complex web of tax regulations for business travelers is crucial to mitigating these risks and ensuring full compliance.

To help you understand and prepare for the tax implications of business travel, we’ve compiled the most frequently asked questions and answers we often receive regarding tax risks associated with business travelers.

While the 183-day rule is often referenced for short-term international assignments, how do income tax treaties determine tax exemptions for employees temporarily working in another country? What key factors and potential pitfalls should be considered?

There is a vast network of income tax treaties globally. For example, the UK has income tax treaties currently in force with more than 100 countries. The US currently has income tax treaties in force with more than 50 countries. An income tax treaty typically includes an article, often referred to as the "183-day rule," which addresses the taxation of employees working temporarily in another country. If an employee and employer meet the requirements of this article, the employee will not be subject to income tax in the Host location.

Under the Organization for Economic Co-operation and Development (OECD) Model Income Tax Treaty, an employee will not be subject to income tax in the Host location if:

• The employee is present in the Host location for no more than 183 days in a twelve-month period commencing or ending in the taxable year concerned; and
• The compensation is not paid by, or on behalf of, an employer resident in the Host location; and
• The compensation is not borne by a permanent establishment or fixed base, which the employer has in the Host location.

Note that certain countries are now considering the “economic employer” of the employee, which refers to the entity that exercises the most control or authority over an employee's work, even if they are not the legal or contractual employer. The treaty would not apply if the Host location entity were deemed to be the economic employer. As a result, the employee would be taxable in the Host location. These rules should be reviewed on a country-by-country basis.

Given that each treaty is unique, we recommend the treaty specific to the Host location be reviewed to avoid potential traps. Some of these traps can include:

• Verifying that there is an income tax treaty between the Home and Host locations. Without a treaty, local tax laws will apply. For example, the US does not have an income tax treaty with Singapore. Thus, under Singapore tax law, a US employee will be taxable in Singapore if present more than 60 days in a calendar year.
• The number of days allowed in the Host location can be based either on a rolling twelve-month period or on a tax year basis. In addition, the number of days allowed per treaty may be less than the 183 days noted in the OECD model treaty.
• Countries may differ on how the “days present” are counted. For example, Sweden includes both the day of arrival and the day of departure as a day present in Sweden for determining the 183 days for income tax treaty purposes.
• The treaty may not apply to local income taxes. For example, several US states, including California and New Jersey, do not follow the US federal individual income tax treaties. Thus, even though the employee is exempt from US federal tax, they still may be required to pay state income tax and file a state income tax return.
• The treaty does not apply to social tax. Therefore, it’s necessary to review whether a totalization agreement is available to help provide relief from the Host country social tax.

Even if an employee qualifies for a tax exemption under an income tax treaty for a short-term assignment, what ongoing compliance obligations may still exist in the Host country?

Even though the employee may be exempt from income tax under the "183-day rule," the Host location may still require the filing of an income tax return or other form to document the treaty exemption. For example:

• A US business traveler to India may be exempt from India tax under the US-India income tax treaty, but must file an income tax return and provide certificate of residency to support treaty exemption, even though no income tax is due.  
• The UK has various reporting requirements for payroll and tax purposes depending on the number of days the individual spends in the UK in a tax year.

As you can see, treaty exemptions and tax reporting requirements vary widely and are dependent on the Home and Host locations. Each assignment should be reviewed to maximize the treaty benefits available on a worldwide basis and to ensure proper income tax reporting in both locations.

How can the number of workdays spent in a location impact an employee's tax obligations, even for short business trips? What are some examples where companies need to look beyond their own travel policies?

Many companies define “business travel” versus “short-term assignment” based on the number of days the employee is expected to travel to a certain location. Although this may be a practical approach, these internal company policy thresholds may not address the technical considerations of the Host location in regard to tax obligations or reporting requirements.

For example, one working day in Canada triggers a payroll reporting and withholding requirement. Waivers are available to exempt the company from these withholding requirements, although the waivers must be filed for all business travelers.

As another example, many US states have an income threshold for non-residents based on the state sourced income attributed to their workdays in the state. Certain high-level employees may exceed the state’s income threshold due to the income they earn in just one workday in the state.

Certain states do not have any income or day thresholds for non-residents to file in the state, which means if the employee works even one workday in the state, (regardless of the amount of income sourced to the state), the employee technically has an obligation to file in that state.

What are the key risks and consequences companies face for failing to properly handle tax obligations related to employees traveling for business?

Over the years, the awareness and enforcement of business traveler tax compliance has grown. With technology advancements and government departments sharing more information, the ability for authorities to track business travelers is an issue that was not a reality years ago. Some risks for noncompliance include:

• In addition to the tax that may be due, additional fines and penalties may be assessed to the company and individual.
• The individual may be stopped at the airport if an unpaid tax liability exists, or the agent may question the individual about their activities in the Host location if there are no filings on record and/or tax payments have been funded.
• The Host location may exclude the company from doing business there.
• Bad press for the company throughout media outlets.

Some of these risks can be mitigated if the company makes a good faith effort to be compliant. If audited, the auditor may be more lenient with the company if they can prove they have policies in place to address their business travelers, rather than if nothing has been created to date.

What are some of the key considerations and potential obstacles companies face when trying to implement an effective compliance process for business traveler taxation?

Addressing business travelers requires collaboration from various departments within the company, such as payroll, tax, finance, HR, and the mobility teams. No single department generally “owns” or can administer the entire business traveler compliance process.

As a first step towards an effective compliance process, a policy should be in place for business travelers. Items that should be addressed within the policy include:

• What is the company’s position on business travel reporting and withholding?
• What are the employee and the employer responsibilities when it comes to business travel?
• Does the company provide tax support (e.g., tax gross up, tax return preparation) due to the added complexity of business travel?

Having a policy in place helps promote fairness and consistency throughout the business traveler population, as well as the employees’ continued willingness to travel on business for the company.

One significant obstacle that HR and mobility managers face when sending employees to work across borders is the varying state income tax laws. Currently forty-two US states assess an income tax on individuals while seven states do not have an individual income tax. If you are sending an employee to a state that assesses an individual income tax, you may be required to implement payroll in that state; your company could also be subject to other business registration or corporate tax requirements.

The ability to obtain accurate travel reports for analysis is another obstacle many companies face.

• How do you obtain travel details for the individuals?
• Did they travel to the Host location for personal reasons?
• Did they book a business trip outside of the company’s travel department?
• Did they actually travel on all the days that are reported in the report received?
• Is the employee listed on the report the one who traveled, or did another employee travel in their place?

Leveraging technology can help overcome some of these data challenges. Travel and workday calendars, smartphone tracking apps, relocation travel reports, and other technological solutions are options often utilized to track business travelers and analyze the data needed to identify compliance risks and outline next steps.

A proactive approach to business traveler tax compliance

In today's global business landscape, companies cannot afford to overlook the tax implications of having employees travel for work. Even short business trips can inadvertently trigger tax obligations, reporting requirements, and potential penalties in the jurisdictions visited.

Partnering with experienced tax and mobility advisors can provide invaluable guidance for organizations looking to get ahead of this issue. With the right policies, procedures, and partner expertise in place, companies can confidently maintain compliance as their operational landscape extends across borders.