With paradigms shifting in modern workspaces, global mobility has emerged as a strategic requirement for businesses to leverage cross-border talent. This practice involves relocating employees from one country to another for specific assignments. Employee relocation brings several advantages to the table, such as cultural exchange, talent acquisition, and expanding business. However, the practice isn’t free from tax-related challenges that require businesses to take proactive strategies and carry out meticulous planning to comply with tax regulations.
In this edition, we present you with this complete guide to global mobile strategy, where we have comprehensively discussed various tax-related challenges and recommended the best principles to overcome these legal hurdles.
- Knowing Tax Residency
- Effect of Double Taxation Agreements (DTAs)
- Taxation of Expat Employees
- Levying Tax on Business Travelers
- Tax Equalization Management
- Tax Treatment of Employee Benefits
- Equity-Based Compensation Taxes
- Value-Added Tax (VAT)
- Transfer Pricing Impact
- Navigate the Challenges of Global Mobility
1. Knowing Tax Residency
In global mobility tax management, tax residency serves as a foundational concept. It defines the legal tax status of a business entity or individual in a given country. The criteria for tax residency vary across jurisdictions. For instance, in Germany, people residing in the country continuously for six months face tax residency obligations.
While the responsibility for declaring tax residence primarily lies with the employee, employers can play a pivotal role in supporting their workforce through proactive measures. With tax equalization or tax protection mechanisms, employees can significantly benefit while exploring tax complexities as they work on international assignments.
Tax protection is all about ensuring that an employee on assignment pays either the same or less tax compared to the amount they would have shelled out in their home country. In case, tax obligations in the host country exceed that in the employees’ home country, the additional tax burden is covered by the company.
On the other hand, if the tax burden is lower in the host country, the employee retains the difference, which fosters a fair and balanced tax approach.
The consequences of incorrectly determining tax residency can be severe, including fees and penalties imposed by foreign authorities.
2. Effect of Double Taxation Agreements (DTAs)
Double Taxation Agreements (DTAs) play a pivotal role in facilitating international business by preventing double taxation of income and property between countries. The prime benefits of DTAs include:
- Fostering higher trade volumes between two countries
- Ensuring that taxpayers need to pay tax only in one country
- Streamlining cross-border business
While DTAs can save money for both the employee and the employer, it comes with a few drawbacks. The varying regulations across countries make such agreements complicated. Businesses must adhere to reporting requirements in both their home country and the country of residence.
One effective strategy to mitigate double taxation risks is to structure compensation packages like salaries or bonuses. While these are taxable for employees, they can also be deducted as business expenses.
3. Taxation of Expat Employees
Employers with a global workforce must understand the complexities of local and national tax laws in the host country. These tax laws encompass income tax regulations, social security systems, and compliance requirements for employee withholding, tax payments, and tax return filings.
Non-compliance with tax laws, even if unintentional, can result in significant financial penalties. Forward-thinking businesses seek professional global mobility services, prioritizing their expertise in mobility tax or international payroll services.
Business travel introduces additional tax considerations, including double taxation, establishment of permanent establishments, and tax withholding obligations. In certain cases, the situation amounts to permanent establishment when a company conducts business activities at a fixed place in the host country, triggering tax liabilities in that jurisdiction.
Employers can proactively manage these tax challenges by partnering with third-party experts well-versed in tax regulations. Many companies opt for integrated global payments and payroll systems to centralize documentation and streamline their tax compliance processes.
4. Levying Tax on Business Travelers
Business travelers play a crucial role in driving sales, networking, project implementation, training, and other business-related activities. With business travel, comes the concept of establishing a permanent entity in the host country from where the company carries out its operations. The process invites tax obligations based on the activities of a business traveler.
The host country may require tax to be withheld on certain payments to business travelers who aren’t residents. For instance, these payments include bonuses, salaries, or other types of compensation. Between countries, the rates and requirements of withholding tax tend to vary.
Business travelers are difficult to track as they don’t alter their address in the HRIS system. Here are some processes to track these employees:
- Tracking mobile phones
- Timesheet reporting
- Self-certification
- Expense accounts
- Travel database or vendor reports
5. Tax Equalization Management
Tax equalization ensures that employees facing international assignments pay taxes at the same rate as they would in their home country. If the foreign country has lower taxes, the company retains the savings, while it covers the difference if taxes are higher.
When creating a tax equalization policy, it’s crucial to address factors such as the treatment of spouses or partners, handling of income and capital gains, and considerations regarding property purchases in the host country.
Partnering with global employment and tax experts is recommended when developing a tax equalization policy. Working closely with a professional for global employee benefits solutions, businesses can align their policy with their core values to ensure cost-effectiveness.
6. Tax Treatment of Employee Benefits
Employee benefits include a wide range of offerings beyond salaries as compensations. Some of these are health insurance, paid time off (PTO), shares, retirement benefits, and more. It’s essential to note that benefits provided to employees within a global mobility program are subject to taxation.
Many countries, including Canada, have mandated the reporting of employee benefits. In Europe, a ‘pay where you work’ policy generally applies to benefits. These agreements may exempt employees from social security obligations in the new location, but a Certificate of Coverage may be required.
In the absence of such agreements, social security payment agreements are made jointly by the home and host countries.
7. Equity-Based Compensation Taxes
Equity-based compensation, also known as share-based compensation, presents unique tax considerations in mobility. This form of compensation provides employees with non-cash rewards that grant partial ownership of the company, including stock options, stock appreciation rights (SARs), restricted stock, and Employee Stock Purchase Plans (ESPPs).
One key challenge in managing equity-based compensation across borders is the lack of consistent tax treatment among countries. This disparity can lead to tax risks and consequences for employees.
Important factors to consider include:
- The reporting and withholding rules of the host country
- Country-specific laws that may impose limitations on payroll withholding for departing employees
- Inconsistent regulations between the home and host countries, leading to timing discrepancies in the taxation of income
8. Value-Added Tax (VAT)
Value-Added Tax (VAT) is a consumption tax applicable to goods or services within EU member states. This tax is levied on the final consumer of the product or service.
For instance, if your business sells a product to an EU-VAT registered company operating in another EU country, you do not charge VAT on that sale. However, if the same product is sold to an end consumer within the EU, VAT may be applicable based on the specific rate in their country.
VAT is structured around consumption rather than income. Unlike income tax, which imposes higher taxes on the wealthy, VAT applies uniformly to every purchase.
The tax is calculated on the gross margin throughout the sales process. This includes manufacturing, distribution, and selling stages. VAT is collected at each stage of this process, unlike a sales tax system where the tax is only paid by the consumer at the end of the supply chain.
Non-compliance of businesses with VAT regulations can invite tax evasion charges. Given that each country has its own rules, obligations, and filing requirements, it’s essential to establish a well-structured process to ensure full compliance with VAT obligations.
9. Transfer Pricing Impact
MNCs deploy transfer pricing strategies while shifting profits from high-tax jurisdictions to tax havens. This strategy involves selling goods and services within the company at artificially inflated prices.
For example, a company might purchase office supplies for an employee working abroad to shift profits outside the home country, thereby minimizing or avoiding taxes on profits.
Another scenario involves manufacturing software in a low-cost jurisdiction like China. The company then sells this software to an affiliate in a tax haven for the same amount, effectively shifting profits out of China. Subsequently, the tax haven affiliate resells the software to another affiliate in a different country at a genuine market price.
Transfer pricing not only allows your company to save costs (since the transfer price is typically lower than the market price of the product), but it also ensures product availability. This is because goods are manufactured internally within the company, eliminating the need to rely on external suppliers.
Transfer pricing poses a significant challenge due to its complexity. Unlike market prices, which are primarily determined by supply and demand, transfer prices are influenced by various factors, rendering the process intricate.
This complexity extends to its impact on taxation, both direct and indirect. Cross-border transactions’ pricing serves as the basis for calculating customs duties and distributing profits among involved parties, affecting the allocation of tax bases across jurisdictions.
To maintain compliance, it’s imperative for companies to conduct proactive analyses of their operations and stay abreast of evolving transfer pricing regulations.
Navigate the Challenges of Global Mobility
Global mobility has the potential to affect your company across various tax dimensions. It is crucial to comprehend factors such as tax residency, the impact of taxes on employee benefits, and compliance protocols such as tax equalization and VAT.
This underscores the significance of meticulous planning and adherence to regulations. In the absence of a well-thought-out strategy, a non-compliant business may incur substantial fines and penalties from local authorities, along with associated legal expenses. Moreover, non-compliance can lead to severe consequences, including legal repercussions, contract breaches, revoked licenses, and more.
In summary, having a robust global compliance policy is imperative for successfully conducting business internationally and avoiding compliance errors.
While taxation and compliance seem to be a complex domain, partnering with a reputable and experienced organization like the IMC Group can work for you. As a leading Global Mobility service provider, we provide comprehensive services tailored to meet the complex needs of global businesses.
