Avoiding the banana skins: Employment tax risks for employees on short term assignments
Luc Lamy discusses the various risks associated with assigning staff on a short term basis, specifically employment tax costs.
Short-term assignments are on the rise as global companies try to optimise their international HR
supply chain – in this article, we take a closer look at the employment tax issues which can occur when employees go on short-term assignments and which can trip up in-house global mobility and tax professionals. Luc Lamy explains.
It is easy to become non-compliant when assignees are moving around at short notice and as rules change.
Generally speaking, there are fewer issues with short-term assignments, but there can be nasty surprises and the
creation of ‘accidental expats’ can occur. Problems will indeed often be caused by business visa limitations being exceeded, but there is much more to consider than this and 183 day rules.
Short-term assignees in the cross hairs
We are living in a time of unprecedented cooperation and data exchange between national governments and their tax and immigration authorities - short term assignees have started to come onto their radar with national tax bodies wanting their fair share of income tax and social security contributions.
Risks often arise as short-term assignments can be decided upon at short notice by individual specialist departments and might bypass HR teams. And in the case of global business travel, trips can be ad hoc and there will be no formal assignment.
Generally speaking, the method of taxing employment income is the same everywhere – however, the taxation of employment related benefits does vary. All assignments carry a risk that the activities of the individual may also result in taxes in the foreign country. And the longer the assignment, the greater the likelihood that tax filing obligations will switch from the home to the host country.
So what generally do you need to look out for? The main criterion for tax is usually residence status- residents tend to be taxable on their worldwide income whereas non-residents are generally taxed on income from sources in the country. The source of employment income is generally the place of physical performance of the duties but country rules vary – if an individual is potentially liable to tax in two or more countries under domestic tax rules, then tax treaties need to be reviewed to determine which country has primary taxing rights (‘tie breaker rules’) and how that individual will be taxed.
Most treaties follow the OECD model, but rules vary based on type of income, nature/sector of individual activity, the individual’s nationality and where the individual’s centre of vital interests lies. In the case of most short-term assignments and business travel, the individual will typically meet all the treaty conditions, meaning employment income will be exempt from tax in the host country. However, if shorter assignments do not meet treaty conditions, the treaty article covering double taxation will usually mean that a tax credit/exemption will be allowed in the home country for taxes due in the host country. There are other circumstances that can also cause global mobility teams to slip up, for example:
1. Misapplication of tax residency rules – Some global mobility teams mistakenly only apply the 183 day rule – this should not be considered in isolation as alone it may not determine the right of the country of residence to taxation, especially if the assignee is paid by an employer in the host country or if the employer has (mistakenly) created a permanent establishment in the host country.
If any of these three is triggered, the employee is liable to income tax. Furthermore, the method of counting the 183 days is unreliable – there are different 12-month periods (e.g. calendar, fiscal year or any twelve month period starting or ending in the tax year).
Senior managers such as Managing Directors and Board members are vulnerable to this as some double tax treaties allocate the right of taxation to the country deemed to be the management of the company - this will
override the number of days spent by these employees in their country of residence.
2 - Group executives with multiple functions – those executives who hold, in addition to their primary activities for the company which is their employer from a legal perspective, other functions for one or more group companies in other countries, could become tax liable due to a different interpretation in a jurisdiction of who the employer is from an economic perspective. There is a risk that a group entity outside the home country will qualify as the economic employer, triggering tax liability for the employee and employer. You need to consider how revenue authorities will assess who directs, controls and manages the individual and the impact of any recharges to the home country entity.
3- Permanent establishment rules – it is unfortunately quite easy to accidentally create a permanent establishment in a country if foreign employees are involved in carrying out specific activity types. For example, if you have sales staff that have de facto authority to sign contracts on behalf of the company, that could create a permanent establishment as it would constitute substance and activity that creates profit and value. Having a fixed place of business for your staff is another trigger and something you may not actually realise you are creating – this can often occur in the construction sector.
It gets more complex as the period of time that triggers a PE varies from country to country – in the UK for example, it is 12 months. Once PE is triggered, the 183 day rule will now not apply to the assignee and he/she may become liable to income tax from their first day of work in the country. The first place to look is the definition of PE in the double tax treaty between your country and the host country.
For more information
Contact Luc Lamy at Tax Consult in Belgium.