The Tax Risks of Frequent Business Travel

By Peter Clarke May 19, 2015
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Businesses are going mobile. They are expanding their operations across borders requiring them to get people with the right skills in the right place at the right time. While long-term employee assignments have been the traditional way to accomplish this goal, companies are increasingly using frequent business travel to achieve their business objectives.

Frequent business travel allows businesses to have a highly mobile workforce and in certain circumstances, be more cost effective, making it an attractive alternative. While this sounds appealing, companies should be wary that there are many risks and challenges that can arise.Most notably, frequent business travel can trigger financial risk associated with corporate and personal taxes. And these tax obligations can be difficult to identify and manage because the travelers are typically not part of the traditional mobility program. Identifying who is traveling, at what point they trigger tax obligations, and getting processes in place to pay taxes can be challenging tasks.

Financial Risks

An employee’s presence in the United States or a foreign country can trigger personal income tax obligations as well as withholding and reporting obligations for the employer. Such presence may also trigger both employee and employer obligations to remit social security tax, as well as obligations to file individual tax returns in the host location. Further, corporate level income and value-added taxes may be triggered. The news is not all bad because some of the income tax-related obligations may be mitigated by an income tax treaty between the home and host countries.

If these taxes are not paid, tax authorities can also assess interest and penalties. Any noncompliance with applicable tax and other laws may raise reputational risks for the organization especially if the organization is perceived as knowingly avoiding their tax obligations. These risks are compounded by the fact that tax authorities are more aware now of the explosion of frequent business travel and are increasing their monitoring in an attempt to maximize tax revenue.

Strategies

Aligning policies, processes and stakeholders. Managing risks associated with frequent business travel should be part of the overall mobility strategy and governance framework of the enterprise. HR and tax functions typically do not track these cross-border travelers, their activities, or their resulting compliance obligations so the first step is to identify the scope of travel and associated tax obligations. Policies and processes must then be tailored to satisfy the organization’s goals and risk tolerance.

The organization should assign the mandate of the frequent business traveler program preferably as part of the tax and HR functions that oversee the traditional mobility program. In addition, the “buy-in” of the organization’s senior leadership is essential—ideally, management will view the frequent business travel program as an important investment.

Efficiently gathering the right data. The frequent business travel program must have the means to timely gather accurate information relating to employee travel. This data must include the identification of the specific persons traveling, where they are traveling to, how often they travel, time already spent in foreign locations for work, and what type of activity they are doing.This information is essential for determining the organization’s risk and exposure to foreign taxes, interest and penalties.

Organizations have a variety of means to gather this data that range from manual to automatic.Technology-enabled solutions can provide significant efficiencies for the organization both from a cost, resource and time perspective as compared to manual processes. For example, technology can be deployed on mobile devices so that employees can enter information on a real-time basis that becomes immediately available to the employer. Technology solutions can also compare travel data against the tax rules of the employee’s home and host locations and automatically analyze taxable events such as reaching income tax thresholds.

Using creative ways to reduce burden. When frequent business travel creates obligations to file individual-level tax returns in the host jurisdiction, this can become incredibly burdensome due to a potentially large number of returns that may be required. But there is a growing trend for some tax authorities to eliminate these individual income tax filings as long as taxpayers pay the proper amount of tax owed through the employer’s payroll withholding system. These so-called “cooperative compliance” arrangements can achieve reduced compliance costs and efficiencies due to the better utilization of resources by both taxpayers and tax authorities.

Tax authorities in many countries have implemented, or are taking steps to implement their own customized approach of cooperative compliance. While it can be accomplished by domestic legislation, many countries formalize cooperative compliance arrangements in some kind of written agreement with taxpayers, such as a special ruling or dispensation. A recent survey by PwC of 60 countries found that a significant portion of such jurisdictions had the potential to immediately negotiate an agreement to streamline mobile employee compliance in some way.

Will Frequent Business Travel Increase?

The answer is an unequivocal “yes.” As organizations continue to look for growth opportunities abroad, employees will be increasingly mobile with frequent business travel expected to be a significant mode of movement. Tax authorities are expected to become even more aggressive relating to the potential tax obligations associated with the frequent business travel. And countries are expected to require more transparency surrounding a company’s workforce around the world, potentially shining a spotlight on noncompliance. As the business grows, those HR and tax functions that are not prepared are going to find it more and more difficult to get this issue under control.

The bottom line is that organizations should put frequent business travel and its impact on the agenda to evaluate sooner rather than later. Proactive steps now to manage mobile workforces will go a long way to reduce financial risk, manage costs and align compliance processes with business objectives. An important takeaway is that if the business starts early to formalize a frequent business traveler program, it can start reaping benefits exponentially years down the road.

Peter Clarke is global mobility practice leader at PwC.

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