The Tax Compliances Challenge for Employees Who are Moving and Not Moving

Global organizations are at a crossroads these days. Some of their employees can’t wait to go to work, others are content to stay at home or work remotely. They have adjusted well to this new normal by having their staff work online or in fewer batches. Either way, though, they face tax compliance challenges. 

Daniel Foster, director, tax & legal, global mobility services at KPMG, points out how global “non-mobility” shows both the greatest risks and opportunities for companies managing an international workforce. 

From managing implications of employees who are moving (Model A), companies now have to figure out the management of employees who are not moving (Model B). He looked into the international tax aspects of this new framework:

For Foster, Model A presents a range of tax compliance challenges, namely:

  • Permanent establishment: The employee may create a permanent establishment (PE) in country A for the employer in country B, requiring an attribution of profits to a branch in country A and triggering corporate tax compliance obligations. The OECD guidance on home office working states that this is a low risk while it is temporary and exceptional, but not necessarily in the long term.
  • Employer obligations: The employer in country B may have wage tax withholding and social security obligations in country A. Some of these requirements in certain countries may be temporarily relaxed during the crisis, but not permanently.
  • Residency: The employee may change tax residence status, which could have an impact on net pay as well as pension and social security status.
  • Indirect Tax: Employer in country B may have VAT exposure in country A.
  • Substance: If the employee is in senior leadership or a board member, the location of decision making may impact corporate residence (place of effective management) and substance of HQ location. This could have knock-on effects for the transfer pricing/value chain model.
  • Immigration: The employee may not have the right to work in country A if they are a foreign national (employer in country B cannot provide a work permit for country A).
  • Labor and industry regulation: The employer in country B is exposed to labor law and other local regulations in country A for which it is not prepared or compliant. 

It is for all of the above reasons that traditional mobility policies have entailed transfer or assignment of employment to the location of physical work. This aligns with current international tax rules which are generally based on employees paying tax where they live and work, which is withheld by an employer in the same country, which claims a tax deduction for their cost against the revenue they have generated. These principles are unlikely to change in the medium term.

Model B, on the other hand, has occurred over the past few months where employees have needed to begin roles at foreign affiliates but have been unable to physically move to that location. Many organizations have canceled or postponed any international transfer or assignment of employment between group entities unless and until borders reopen. 

Business units have, however, needed these people to begin their roles, wherever they happen to be in the world. Understandably, the business did not care whether they worked from home in country A or country B, provided they got the job done. In some cases, these employees have had their titles, reporting lines and compensation changed, even if their legal employer and location did not.

This model has always existed to a small extent, certainly for specific projects and regional/global roles, and, as Foster suggests, is more likely to survive the current crises than Model A. Indeed it seems likely to become the go-to “work around”. But there’s more in this KPMG piece that global mobility managers should know about.