With employees working remotely as the norm, many have opted to shift their work location to a place far from the office. This could have tax implications for both the employer and employee. Sabrina Serafin interviews Jonathan Clark and Kristin Popp, tax experts with Frazier & Deeter. Our experts explain what is global mobility and how to comply with tax rules when working remotely.
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Culture of Compliance: Global Mobility: What are the Compliance Risks?
This transcript was assembled by hand and may contain some errors.
It has been edited for readability.
Sabrina Serafin Welcome to Frazier & Deeter’s Culture of Compliance Podcast series, where we discuss compliance as a competitive advantage in today’s marketplace. I’m Sabrina Serafin, Partner and National Leader of Frazier & Deeter’s Process, Risk & Governance Practice.
Today, we are talking about a compliance issue that many employers may face this year for the very first time. With employees working remotely as the norm, many have opted to shift their work location to a place far from the office which could have tax implications.
Today, I have with me two of Frazier & Deeter’s experts in what tax professionals call, “Global Mobility”. Jonathan Clark is with our UK practice and Kristin Popp is part of our tax team in Atlanta, Georgia. Welcome to the podcast.
Kristin Popp Hey Sabrina, I’m excited to be here.
Jonathan Clark Thanks, Sabrina.
Sabrina Thanks, Kristin, hi, Jonny. Jonathan, could you get us started by describing to our audience what the term “global mobility” means to a tax professional?
Jonathan Sure, Global Mobility is all about the movement of people and ensuring your employees are tax compliant in the location where they’re working.
If we look back as little as a couple years, the main types of employee movement that I would typically support my clients with as a global mobility adviser were: Business travelers, where you may be sending employees for a short period of time to visit another country for ad-hoc business meetings; The formal international assignment, where an employee may apply for a visa and be temporary seconded from one country to another for anywhere from 6 months to 3 years plus. You also have the permanent international relocation, where an employee may physically uproot their home and their family and move to take up a new employment contract overseas in a different country.
Now, with the rapid increase and uptake of remote working technology that has come about from COVID-19, with everything from video conferencing software to secure cloud storage, we’ve also seen the emergence of a new type of globally mobile employee, which is commonly referred to as the “remote worker”. This is someone that can perform their day-to-day role from anywhere, including a different country to where their employer is based.
Sabrina Could you tell us more about these “remote workers” and what tax compliance issues employers may need to consider?
Jonathan Yes, of course. Firstly, we should split remote workers into two different types of categories. There are the ‘simple’ remote workers where you have employees working remotely from home, and that home or remote work location, is in the same country or state to where their employer is based. You then have the more complex international remote workers. These are employees who may be working remotely from a different country altogether from where their employer is based. For example, they could have a UK based employer, but may be working remotely from Spain.
For these international remote workers, there are three separate tax compliance areas that need to be considered. Firstly, there’s personal tax implications for the employee as an individual, and this includes tax residence position, which determines where their income is primarily taxed; looking at their social security, and also looking at where they might have an obligation to make or file tax returns.
You then have Employer tax obligations, this is making sure the employer is compliant with their tax reporting and withholding, for that employee working remotely overseas. For example, you could have a situation could be created where an employer has payroll obligations in that overseas country where the employee is remotely working.
Finally, corporate considerations – Less common type of issue we come across, but depending on the role of the employee, they could create what is known as a permanent establishment (or taxable presence) in the overseas country where they’re working and that could create some sort of corporate filing or reporting responsibility. This is most common where you have remote workers who are concluding sales contracts on behalf of their business in an overseas country.
Sabrina Okay, that’s interesting. I know we have some people who have literally worked for months this year from a 2nd home in a different state. Kristin, are there similar tax implications in the United States?
Kristin Yes, so in addition to having the international tax implications, we in the US will also have to look at states and determine if there is a state nexus for the employees which would make the employee taxable on a pin that state and which also may trigger withholding obligations for the employer. For COVID-19 related remote working arrangements on behalf of out-of-state employers, some states have waived the creation of business nexus for state taxes. Those states include Minnesota, Indiana, Ohio, New Jersey, Pennsylvania, North Dakota and Washington D.C. If those employees become residents in the respective states, there may still be a withholding requirement in the resident state. But, there won’t any withholding requirement in the non-resident state.
So, if we take Minnesota as an example and say we have an employee temporarily working remotely in Minnesota due to COVID restrictions, but the employer is located in Iowa, the Minnesota Department of Revenue will not assert business tax nexus against the Iowa business. As a guideline, employers should monitor where the work force is located within the US and on a global level.
Sabrina Okay, so this concept has implications for both global organizations and organizations here in the United States with an employee base that’s shifted around this year. Jonny, could you talk us through some of the questions employers should be asking themselves?
Jonathan Firstly, do they know where their workforce are? Do your staff come to the office each day, do they work from home, do you know if that home in the same state/country as their employer, have they been working from a holiday home in a different country or state during lockdown, or even working somewhere exotic like an AirBnB on the French Riviera?
Secondly, do they have a policy for a remote workforce, and do they need one going forwards? For example, will this be available to all employees or just employees at certain levels within the business or employees performing certain roles within the business? Some remote working arrangements may have been temporary during lockdown, or some may have been so successful that employers intend to turn them permanent arrangements.
Once you’ve taken stock of where your workforce is based and where they could be working going forward, have you considered if they are compliant from a tax perspective. Obviously, the employee is ultimately responsible for any personal tax return filings, but the employer may have to comply with local reporting or withholding or even corporate tax obligations if a permanent establishment has been created. I would recommend they think about setting up some sort of process for flagging and then tracking international remote workers going forward.
Sabrina Okay, so its important employers take stock of where their workforce currently are to see if any current remote working arrangements are temporary or permanent?
Jonathan That’s exactly right. Once you’ve taken stock of where your workforces’ current location is, you then can identify any specific cases which may require retrospective action or subsequent attention. For example, I had a recent client of mine where we did an exercise to identify their remote workforce and if effectively applied a RAG rating so red, amber or green. Green for cases which require no attention. Amber something that might require attention in the immediate future next six months if nothing’s changed, and also red where there might be some employer obligations.
Sabrina Kristin, for employers with a US population, what steps should they take to avoid any kind of tax surprises down the road?
Kristin Besides the state tax implications we talked about, we have two scenarios. Earlier, foreign employers who have employees on assignment in the US we will have to look at the residency rules in the US. Employees who are in the US for certain amounts of days during the current year and also looking back on a 3-year period may become residents because they were unable to leave the US. An eligible individual who intended to leave the U.S. but was unable to do so due to the COVID-19 Emergency Travel Disruptions, may exclude up to 60 calendar days of presence in the U.S.
On the flipside, we have the second scenario where have US employers with employees overseas who had to return from overseas due to COVID and are now working back in the US. We will also have to look at the withholding requirements for employees who would be eligible to claim the foreign earned income exclusion. If employees were required to leave a country between February 1 and July 15, or December 1 and July 15 for China and Hong Kong, those employees may still be eligible to claim the foreign earned income exclusion.
Both of the above scenarios apply to the movement between the US as home or host country and the respective foreign home or host country. What employers also need to look at is employees who left the host country but did not return to their home country. So, if we have an employee who was on assignment from the US to Singapore, and that employee may have chosen to locate to Australia instead of returning to the US. This may not only have implications for the personal tax of the employee but may result in withholding requirements in the foreign country or in some cases, as Jonathan already mentioned, it may even create a permanent establishment for the US employer in that foreign country.
Employers should definitely keep close track on the location of their employees and be aware of the implications those movements between countries may have.
Sabrina Thank you, Kristin. As we record this podcast in late 2020, many parts of the world are once again under orders to shelter in place, so the impact of employee mobility issues will be relevant for next year as well. Do you have any closing thoughts for our audience as we venture into another year of uncertainty with COVID?
Jonathan Well firstly, I would say that unfortunately with global mobility, there is no one-size-fits all solution to an international workforce. Each employee’s personal situation can be unique and may need to be looked at on a case-by-case basis as local tax and reporting rules vary from country to country, such as the US and the UK, and also in the case of the US from state to state.
But to counter that, I would also say to our audience that global mobility and remote workforce isn’t something they should be afraid of. Yes, it can create additional compliance obligations, but the overall positives in terms of employee engagement, attracting talent, expansion and growth opportunities for a business can be huge and really positive.
Finally, I would like to say, and this is from experience, that it’s always best to be pro-active in getting global mobility advice at the start as it allows both the employer and employee to plan efficiently and also avoid any unexpected tax liabilities or surprises down the line.
Sabrina Jonny and Kristin, thank you for joining us again today with some very timely information about a compliance challenge that many people and some organizations may not have yet recognized.
And to our listeners, thank you for listening to Frazier & Deeter’s Culture of Compliance podcast. Please join us for our next episode as we continue to discuss transforming compliance requirements into investments in your business.