Top Tax Issues to Consider Before Sending Employees Abroad

By Roy Maurer June 7, 2013

International assignments are expected to increase in 2013, and companies need to keep up with all of the complex compliance issues associated with cross-border mobility, including taxes.

Sending employees to foreign locations can create both individual and corporate-level tax issues for your business, according to PricewaterhouseCoopers (PwC), a multinational professional services firm.

Managing corporate-level tax liabilities and engaging in upfront planning in order to reduce the organization’s overall effective tax rate are goals of corporate global mobility tax programs.

Listed below are the top 10 global mobility issues that corporate tax programs should consider, according to PwC.

Defining the employment structure. Deciding at the outset how temporary international assignments will be structured is key. Many companies adopt a so-called home-country model that attempts to maintain a “common law” employment relationship with the home-country employer. This allows the employee to continue his or her employment relationship with the home-country employer for continuity of benefits while allowing the host-country employer to execute assignment-related activity such as wage withholding and reporting. Some companies opt for a home/host agreement by which more than one entity delivers salary, making the determination of the ultimate employer a critical factor, PwC said.

Employment relationships should be clearly documented to substantiate the employer relationship, PwC advised. The process starts with asking a variety of questions that should drive the necessary documentation. “Which entity should be treated as the employer of those on assignments, and for what purpose? What is the expected compensation and benefits cost allocation between related entities during the assignment period? What entity will ultimately bear the labor costs and claim the tax deduction?”

Whatever intercompany agreement is put in place, it is not a substitute for the international assignment letter issued directly to the employee. The two should be in harmony and not contain any conflicting statements, PwC said. Typically, an employee receives a letter that documents the length of the assignment and explains the benefits being offered. But the letter does not always elaborate on the employee’s relationship with the host-country entity or even state what organization the individual is ultimately working for.

Permanent establishment risk. An employee’s international relocation may create a permanent establishment risk for the enterprise if companies fail to develop or enforce guidelines to limit the creation of a taxable presence for the home-country employer. The actual presence of the individual in a foreign country may create an unintended taxable presence, thereby requiring the home-country employer to register as a taxpayer, file local-country returns and remit taxes.

Frequent business travel. Many companies employ individuals who reside in one country but travel to others on business. You might assume that if your employee spends less than a specified number of days in a particular tax jurisdiction there are no tax consequences from his activities. “This is often not the case, since the frequent business traveler may not be a resident in a treaty-partner country that contains favorable thresholds for incurring tax. Or, depending on the structure of the assignment, an individual may not be eligible to use the treaty,” PwC said.

This is especially challenging if the organization is not aware of frequent business travel by so-called stealth traveler employees. Companies might consider establishing a monitoring program to document and understand travel patterns and exposures, PwC said.

Equity recharge agreements. Generally, stock-based compensation granted by a parent corporation is not deductible at the foreign affiliate level for corporate tax purposes unless active steps are taken to recharge the cost of the stock award to the foreign affiliate in exchange for a cash payment from the affiliate to the parent, according to PwC.

“As a general rule, equity recharge agreements should be established to ensure that the foreign affiliate that is benefiting from the services of the foreign-based employee bears the cost of the stock-based compensation,” PwC said.

Deferred compensation. U.S.-based deferred compensation arrangements are not necessarily tax-deferred under the laws of foreign jurisdictions. Compensation may become taxable at vesting to employees, even when no cash payment has been made to them to fund the tax. This could result in unforeseen tax costs being passed on to the employer under the terms of a tax equalization or protection agreement, according to PwC.

Foreign pension plans. Many multinationals employ foreign nationals in the United States who remain covered by a corporate retirement program in their home country. Foreign pension plan participants paying U.S. taxes should be identified to determine whether and to what extent they may have U.S. taxable income resulting from retirement plan participation. Form W-2 reporting requirements should also be reviewed.

Payroll compliance. Employers should evaluate whether they are properly fulfilling their global payroll obligations, which can include withholding, social-tax obligations and reporting requirements. Many countries have focused on payroll compliance audits, particularly nations that derive significant revenue from payroll withholding and Social Security-type taxes. “Lack of compliance with these obligations can result in penalties and interest for the company that, for example, should have withheld tax amounts,” PwC said.

Tax equalization costs. The principle behind tax equalization is that employees will not experience financial hardship or a financial windfall while on an international assignment. Tax equalization arrangements put workers in a tax-neutral position during their assignment, so they pay the same amount in taxes as they would in their home country. The employer pays all related worldwide effective taxes for individuals on assignment.

“Because of the complexities in the compensation and benefits offered to employees—and the variable payments to be made either in the form of nonguaranteed bonus awards or stock-based payments—many companies struggle to properly budget and account for tax equalization expense,” PwC said. “Companies should develop a base line cost estimate of their tax equalization expense and formalize an accounting policy to deal with the variable pay components.”

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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