There's no question that the changing nature of how and where work is getting completed has certainly added new complications to tax compliance. As if global compensation collection and reporting wasn't challenging enough, over the last few years the responsibilities of global mobility teams have expanded beyond traditional expatriates to include assisting with unique short-term assignments, varied cross-border permanent transfers that sometimes include ongoing allowances, business travel, intern programs, commuting, and remote work.
This work environment has created several tax risks for companies with employees working in multiple locations. With the shift towards remote work, many companies have had to quickly adapt their operations to accommodate employees working from home or in different locations. All of this has invited new tax implications and risks. The tax repercussions and challenges come from the changing landscape of how work is being structured.
In a recent article from International Tax Review, "More than half of tax directors in the TDN survey reported higher, or significantly higher, levels of requests to carry out work outside their home countries than before the pandemic." Their survey of in-house tax directors looking at the phenomenon of the ‘mobile’ workforce, shared that employees spent extended periods of time outside the jurisdiction of their employer and that startlingly, "40% of large international companies still do not have formal tax and payroll guidelines in place to manage the challenge."
One major tax risk is that companies may inadvertently create a tax nexus in a new state or country where their employees are working. A tax nexus is the connection between a company and a locality that triggers a tax obligation. When employees work in new locations, companies may be required to register and file tax returns in those jurisdictions.
Another risk is that companies may not be aware of the various tax laws and regulations in the locations where their employees are working. This can lead to noncompliance and potential penalties or fines. The article shares that:
The main tax concern is that, in allowing employees to work in other jurisdictions, companies are creating a taxable entity. When determining whether a permanent establishment (PE) threshold has been reached, local tax authorities will consider a number of facts and circumstances, such as the frequency of visits, the length of time of each visit and the cumulative presence (counting time spent by different employees from the same company).
Additionally, the pandemic has led to an increase in remote audits by tax authorities, which in turn increases the risk of tax assessments and penalties for companies. Tax authorities are scrutinizing companies' compliance with state and local tax laws more closely, and companies that are not properly tracking employee locations or are not properly registering taxes in new states can face penalties and interest charges.
Whether by formal mobility arrangement, remote work, or business travel, when a tax obligation is triggered it is important that companies have a process in place to make timely payment to the taxing authority. Without a defined process, companies can be left scrambling when unexpected liabilities arise and tax deadlines loom. According to Alexcis Perrine, Manager of Global Compensation here at Plus, there has been a noticeable increase in requests for tax payment administration with no other relocation or assignment benefits offered. Requests of this nature have doubled in frequency over the last couple of years and we expect to see continued growth in line with the rise of remote work and other non-traditional arrangements.
Overall, companies with employees working in multiple locations or international remote workers should be aware of the potential tax risks and take steps to ensure compliance with applicable tax laws and regulations. It may be advisable to seek guidance from tax professionals or advisors to ensure that all tax obligations are being met.
Global mobility is a longstanding tax management issue in large international groups made more acute by lockdowns during the COVID-19 pandemic. Businesses, especially those in service industries, demonstrated that it was possible for employees to be effective while working remotely, which provided an impetus for people to choose to work from other countries out of choice or to provide care for their families. The phenomenon has become a legacy of the pandemic as hybrid working patterns are sustained. More than half of tax directors in the TDN survey reported higher, or significantly higher, levels of requests to carry out work outside their home countries than before the pandemic.