International growth and the expansion of an organization’s global footprint, while undoubtedly an opportunity as well as an attractive and alluring proposition, also brings tangible and intangible challenges, although the rewards can be significant.
One of these very tangible challenges is all of the constituent parts that sit under the umbrella entitled “employment taxes.”
Achieving global employment tax compliance for any organization with international interests is a common challenge, whether it is a fledgling company taking its first baby steps into an overseas territory or a well-established organization.
A review, analysis, and subsequent documentation must occur under the employment taxes banner when any business is mobilising employees from their home location to a foreign jurisdiction. These include:
- Immigration - Work permits, residence permits, visas, etc.
- Employment Law - Contracts, assignment letters, local legislation
- Income Tax and Social Security Liabilities and Obligations - Home and host locations
- Relocation and International Logistics - What to provide and how to provide it? Identifying housing and schooling in the host location, etc.
- Pensions - Home and host location requirements or opportunities and interaction between each
- Benefits - As with pensions
- Payroll - Location of payroll, currency of payment, split or shadow payroll requirements, withholding, reporting, and remittance obligations in home and host locations
All of the above are common and real-life challenges that face any organization with an international footprint and a “mobile workforce,” and each is intrinsically linked with all others.
Many organizations may not realize that their employee population includes a mobile workforce; however, the reality is that all of the following scenarios constitute a mobile employee and therefore some or all of the above topics require consideration. These include:
- Permanent transfers to an overseas location
- Long-term assignments or secondments (usually defined as greater than one year duration)
- Short-term assignments or secondments (less than one year duration)
- Business travellers
- Commuters (employees who live in one country but work in another)
Establish a Global Mobility Strategy to Ensure Compliance
The key to ensuring global employment tax compliance is achieved and maintained, irrespective of the nature of an organization’s mobile workforce, the number of mobile employees, or the length and breadth of the global footprint, is developing a global mobility strategy.
Organizations large and small are now beginning to understand and appreciate the importance of creating a robust global mobility strategy, which is specific to an organization and is intrinsically linked to the company’s corporate blueprint, vision, and values.
A proper strategy can and should provide structure, efficiency, consistency, and ultimately compliance in respect of any cross-border employee mobilisations.
The depth, creativity, and complexity of a global mobility strategy is driven by the specific requirements of the organization; however, most successful strategies are underpinned by policies, procedures, or methodologies. These can be global in their application or designed to be region, country, or even location specific. Ultimately, one size does not fit all. Invest the time to map out a strategy and structure that fits the requirements of your organization and your cross-border population. It will prove to be a shrewd business decision over time.
The size of the global footprint, the specifics of the industry sector and overseas locations, and the number of the mobile employee population are all important factors to consider.
Seven Fundamental Topics to Address
Fundamentally, the following topics (among many others) and the success in developing a strategy in relation to these topics, will go a long way to determining whether an organization’s international expansion vision and dreams become a fruitful reality or end up as a recurring nightmare:
- The Legal Structure of Your Overseas Operation - Understanding what kind of overseas presence your business will require (if any) in the new location and therefore what legislative requirements will exist is critical.
The work being undertaken by your employees overseas, the nature of your business, and the overseas location will all be determining factors as to whether a physical entity is required in the overseas territory (and if so, what options exist in terms of the nature of the legal entity required).
- Immigration - Depending on the home and host location combination, the nationality or citizenship of the mobilising employee, and the duration of the mobilisation, work and/or residence permits may be required before an employee is legally permitted to work in the overseas location.
When immigration obligations do exist, an in-country employing sponsor is usually required. This can bring challenges if an organization has no legal entity or physical presence in the host location.
- Overseas Employment Tax Legislation - It is important to consider the personal income tax and social security liabilities and obligations that may or may not exist in the overseas location, including the interaction between those liabilities and obligations and the position in the employee’s “home” country.
An overseas mobilisation can either be an attractive or unattractive proposition (and accordingly an easy or difficult sell by the employer) depending on the host location. Various factors can contribute to the attractiveness (or otherwise) of the host location, including climate and culture; however, in most cases the level of income tax and/or social security rates in the host location is a hugely significant factor.
- Payroll Compliance - Of equal importance is the payroll calculation, withholding, reporting, and remittance obligations for the employer in the home, host, or both jurisdictions. The failure to understand these obligations is the number one reason for employment tax noncompliance with respect to an organization’s internationally mobile workforce.
With the potential for split, shadow, and dual payroll mechanisms, ensuring that an organization’s payroll landscape is globally compliant from an employment tax perspective is crucial.
Compensation Structure - Developing a clear compensation structure within a global mobility strategy is extremely important as the structure must be both an attractive proposition for the mobilising employee and ultimately affordable for the employer. Determining the existence and amount of mobilisation-related compensation items such as housing, schooling, cost-of-living and location allowances, and relocation packages and the eligibility for such items are key components in the success of an international mobilisation.
- Taxation Policy - Having identified and designed an appropriate compensation structure, a robust global mobility strategy must also determine to what extent the mobilising employee is personally responsible for any home- and/or host-country employment tax liabilities that arise on the compensation structure.
Many tax policy structures exist such as tax equalisation, tax protection, and local plus. A successful global mobility strategy may have different tax structures depending on the category of the mobilising employee. For example, a different tax policy structure may be appropriate for a business traveller from that of a long-term assignee.
Employee Satisfaction - Ultimately maintaining employee satisfaction while on an international mobilisation can be the difference between a successful international expansion and a failure to capitalise on an opportunity overseas.
Mobilised employees will have a range of business and personal needs. To maintain employee satisfaction and therefore deliver success with your international expansion, the global mobility strategy should work to address those needs.
Integrating factors that will help employees settle in their new location, such as language lessons, proximity to local amenities and sports facilities, provision (and speed) of internet connection, are example of items that can significantly affect quality of life.
If an employee’s family members are also mobilising, provisions for children’s education might be another priority.
All of the above, and many more aspects, will ultimately define how successful an organization’s international expansion and internationally mobile employee footprint becomes. However, implementing and continually managing and updating your global mobility strategy and structure will be a critical component to delivering success.