Employers must consider multiple tax-related issues when requiring an employee to travel for work. Determining tax residency and jurisdiction,
understanding payroll and withholding tax obligations are just the tip of the iceberg.
Similarly, employees must be aware of these issues. They may be responsible for reporting and paying taxes on
income earned while working in another country, and to do that, they may need to keep track of things their employer cannot monitor.
This guide delves deeper into these tax considerations. While we can give you a basic understanding of the issues,
the reality is often nuanced and complex. If you’re dealing with any of these issues in practice, you must seek
full advice from a qualified tax professional.
Quick Summary
When an employee is required to travel for work, both the employer and the employee must be aware of multiple issues that can impact taxation.
For the employers:
- Determine the tax residency and jurisdiction of the employee
- Understand any payroll and withholding tax obligations
- Consider whether the employee's activities may create a permanent establishment (PE) in the location where they are working (this can come with additional obligations, including the need to pay corporate taxes)
- Comply with any legislation that applies between the country the employee is working in and the country where they are a resident
- An example is the Posted Worker Directive If the employee works in a different country within the European Union (EU)
- Immigration laws, while not obviously tax-related, are also vital to consider. The type of visa someone is on can affect tax rules. Also, it is an immediate block if the employee does not have the right to work in that country
Employees need to understand their tax obligations:
- The need to report and pay taxes on income generated while working in a different country
- The potential for double taxation
- They can (potentially) be taxed on their global income in a higher rate tax jurisdiction
Tax considerations for employers
There are many tax-related issues an employer needs to consider when asking an employee to travel.
Samantha at GlobalTech
Samantha is the CEO of GlobalTech, a rapidly growing tech company specialising in developing software for the financial industry, and she prides herself on
her innovative approach to business. Believing the “work from anywhere" model to be the future of business, she has always encouraged her employee's desires
to work remotely and travel. Many of her employees take advantage of the flexibility of this model and regularly move from one country to another.
As GlobalTech's employee base began to expand, Samantha received reports that some of her employees were being hit with unexpected tax bills. This was
how she learned that her company was not complying with the tax laws of the countries where her employees were working from. She soon discovered the
complexity of international tax laws and the added challenge of keeping track of constantly moving employees, which is critical to know how much tax
to pay to which jurisdiction.
Determining tax residency and tax jurisdiction of employees: The employer must consider where the employee will be a tax resident and be subject to taxation.
This is critical because becoming a tax resident in a new country can result in the traveller paying a percentage of their global income.
Tax residency rules are defined by:
- The number of days spent in the country (during a tax year or multi-year period)
- Owning a permanent home in the country
- Having a “habitual” home in the country
- Being in the country for work (which may vary depending on the industry if industry-specific tax incentives are included in a tax treaty)
- Significant ties – for example, having immediate family in the country
You will often hear about the 183-day rule, which talks about becoming a tax resident in a country after spending 183 days there. This comes from a
clause in a model tax treaty that the OECD publishes. Many countries use this model as the starting point for their tax rules but add many other
clauses and details. This means that relying on 183 days or even using it as a default policy to avoid tax residency is risky at best.
Payroll tax and withholding tax obligations: The employer may be required to withhold certain taxes from the employee's pay depending on the employee's
location and the nature of their work. In many cases, the local jurisdiction can tax workers' wages while in the country. Income tax, social security
contributions (discussed further below), and other payroll taxes are examples of this.
In practice, this often means double payroll withholding and running multiple payrolls to manage each country where staff are operating. This can lead
to process and policy issues that need to be managed.
It’s important to note that these issues can apply from the first day an employee enters a country.
Social security taxation: If an employee spends a significant amount of time abroad, the local authorities
may wish to charge social security taxes because the traveller is utilising local government-provided amenities
(public roads and infrastructure etc.). In many cases, reciprocal tax treaties exist, so these taxes may not
need to be paid, but the details vary depending on the countries involved . These are generally called totalisation
agreements and may give the employee access to some local benefits, but they rarely include medical benefits.
Permanent establishment: Employers must consider whether their activities may create a permanent establishment (PE) in the
country they send employees to. When the criteria set by the local government are met, a PE is formed, effectively creating a local
legal entity (a de-facto subsidiary company). This entails many responsibilities, including paying corporate taxes and employee taxes.
Closely connected with this is the fact that remote work or remote hiring means that companies need to run a remote payroll,
which in most cases requires setting up a local entity, with its own back account, local registrations, licences and so forth.
In some countries (for example, Sweden) the law states that after 60 days, the presence of an employee within that country
creates an legal employer, and that comes with its own set of legal and administrative burdens.
Local & Regional Laws: While not strictly a tax issue, local laws can complicate matters. The Posted Worker
Directive, which applies throughout the European Union (EU), is one example. If an employee works in another EU member
state, the employer may be subject to the Posted Worker Directive. This directive outlines the rights and responsibilities
of posted workers, and employers must understand their responsibilities to comply
XYZ Corp
Mark was a senior manager for XYZ Corporation, a multinational corporation focused on manufacturing and distribution. His engineers
oversaw the installation and maintenance of manufacturing equipment at various client locations. They would visit different countries
for short periods, usually a few months. Mark had always taken pride in leading his team and running the business smoothly.
For several years, Mark sent the same team of engineers to the same client in Brazil, and the team spent a significant amount of
time at the client's facility. Mark had no idea that he had unintentionally created a permanent establishment in Brazil.
Mark was in his office, reviewing the previous quarter's reports when the finance department called. They informed him that
the Brazilian government had issued a tax demand. The corporation was now subject to corporate taxes in Brazil and must
follow all local laws and regulations. Penalties and fines were levied against the company for failing to comply with local
laws and failing to have a proper tax structure.
Mark was heartbroken! He felt guilty for not doing more to prevent the situation and was concerned about his job and the
company's future. He spent sleepless nights reviewing the case's details, wondering why he had made such a blunder.
Tax considerations for employees
Employees need to consider similar things as their employer, but there are some differences.
Determining tax residency and jurisdiction: Determining whether an employee will be a tax resident is not always straightforward.
Some criteria, such as having a habitual home in a country or having extended family who live there, will be unknown to the employer,
so the employee must be aware of them. In many cases, the employer falls back on the 183-day rule, not realising it can be more
complicated, resulting in an unexpected tax bill for the employee.
John @ Acme
John had always wanted to work on a global project. He couldn't believe his luck when Acme Software, a software company, offered him the chance to work on
a project at a client's office in Germany for six months. He was excited and nervous as he packed his belongings and said goodbye to his family and friends.
He couldn't wait to immerse himself in a new culture and collaborate with some of the best people in the industry.
John threw himself into the project as soon as he arrived at the hotel in Germany, working long hours and impressing his colleagues with his
abilities and dedication. But as the days passed, he noticed something strange about his paychecks. He contacted the finance department and
asked for details about the deductions they were making. Nobody had told John they would withhold taxes as required by German tax laws. When
this was explained to John, he was angry and frustrated; he had not realised there would be any changes to his taxation.
Then, out of nowhere, John received a large tax bill and penalties for failing to comply with German tax law. He had lived in Germany long
enough to be considered a tax resident and was required to pay taxes on his worldwide income. It was a large sum of money that severely hurt
his finances, leaving him with difficulty paying his bills, penalties, and mortgage back home. He slept poorly for many nights, worried about
how this would affect his credit score and what it meant for his plans.
Because the company had a culture of "getting the job done," and they didn't want to waste time on bureaucracy, they didn't seek tax advice
before sending John on the international assignment.
Reporting and paying taxes on income generated while in the country: If an employee earns money while working in another country,
they may be required to report and pay taxes in that country. While the employer is often responsible for managing the payment of these
taxes through payroll withholding, the level of taxation will affect employees' take-home pay while in the country.
Reporting and paying taxes on global income: Employees may be required to report and pay taxes on all their worldwide earnings.
If this applies (depending on the countries involved and their tax rules), it will apply even if you receive income independent of your
employer, for example, from renting out a property. Because your employer is unlikely to be aware of any other sources of income you have,
they will be unable to plan for this, nor is it their responsibility to do so.
Claiming foreign tax credits: If an employee pays taxes in another country but is also required to pay taxes in their home country,
they may be able to claim foreign tax credits to avoid double taxation. The employee's home tax jurisdiction agrees not to tax them if
they can show proof that they paid taxes in another country. Employees should understand the foreign tax credit rules in their country
of tax residency and claim any credits to which they are entitled.
Double taxation agreements between countries: To avoid taxing the same income twice, some countries have entered into double
taxation treaties with other countries. The existence (or lack thereof) of such a treaty affects how much tax the employee pays, as
well as many details about what tax returns they must file, where they must file them, and what backup is required . The details
around this can get quite complex, which often results in the employer needing to create policies that employees are required to
follow.
Whose responsibility is it?
Managing tax payments and reporting is a complex set of duties. Because only the employer can do payroll tax withholding and permanent
establishment affects the employer, these issues must fall under the employer's purview.
It is the employee's responsibility to understand tax residency and pay taxes on locally generated income. However, it necessitates
extensive interactions between the employer and the employee, implying that it is a shared responsibility in practice.
When you consider that most employees will only agree to travel if they are confident that the tax implications will not make them worse off, the
employer frequently has to pay more to compensate employees for any increases in taxation.
Finally, the employer is often unaware of the rules on global personal income and the impact that may have on an employee. Employers may
believe that their employees receive no income other than the salary paid by the employer. As a result, the employee must bear sole
responsibility for this.
Fatima’s Story
Fatima's job required her to travel to various countries regularly, working with clients and conducting business on the company's behalf
for several days at a time. After a while, she began receiving notices from tax authorities informing her that she was liable for taxes
on her income earned in those countries.
Fatima was puzzled. She thought the company was responsible for paying these taxes because she was travelling on their behalf, and they
were paying her expenses. On the other hand, the company disagreed, claiming that because Fatima was not a permanent resident of the
countries she was visiting, she was personally liable for paying taxes on her earnings there.
Fatima was frustrated by the disagreement; she felt the company should have made sure she understood her tax obligations before
sending her on these trips. The pressure increased as the deadline for filing taxes approached. Fatima was concerned that she
would face hefty fines or even criminal charges if she didn't pay her taxes.
Finally, a meeting with a tax lawyer clarified the situation. According to the lawyer, as a non-resident, Fatima was liable to pay
taxes on income earned in the country, but it was the employer's responsibility to ensure that the taxes were paid.
Conclusion
There are multiple ways tax considerations can arise. The most common ones are
- Tax residency and tax jurisdiction
- Payroll and tax withholding
- Social security taxes
- Permanent establishment
- Tax on global income
- Foreign tax credits
- Double taxation treaties
It’s important to seek the advice of a qualified tax professional to ensure compliance with local laws.
Employers should do this as soon as they send employees aboard or hire people in remote locations. It’s
worth setting up steps in the travel and hiring approval processes to trigger any actions the company
needs to take to ensure it's meeting its tax obligations.
In many cases, it’s important to know exactly how long an employee has spent in which country in order to
file the appropriate tax returns and pay the correct taxes. So we also recommend that employers invest in
a process or tool for tracking that. Naturally, we recommend the tool we create for exactly that purpose!
Employees need to be aware of their tax obligations, including the need to report and pay taxes on income
generated while working in a different country and the potential for double taxation. They should also find
out what policies and practices their employer already has.
So, there you have it. A not-so-brief but helpful introduction to the world of global tax and how it relates
to business travel, both short trips and longer-term stays.
We’ve covered many topics only in the general sense because the specifics can depend on exactly where
people are going, why they are going, and for how long.
We also run a series of free interactive seminars led by various tax professionals, where you can learn
more about the details of any of these topics, with plenty of time for Q&A where you can ask specific questions.
Find out more about our Free Seminars