We have considered the 183-day rule and how that is applied, both in relation to domestic income tax legislation in any particular jurisdiction, and as part of the double tax treaty exemption process. We have also looked at how the UK tax authorities (H M Revenue & Customs) view Short Term Business Visitors (STBV) to the UK from overseas and the potential pitfalls (and opportunities) that exist in relation to this population and finally we have outlined the social security implications and obligations that exist when employees are mobilised internationally.
All of these topics interact with, and are intrinsically linked to, the final topic in this series which is the planning required when an employer instigates a seemingly innocuous short term mobilisation to another international jurisdiction.
Income Tax Considerations for Short Term Employee Mobilisations
The most significant challenge an organisation may face when structuring a short term international mobilisation is in relation to income tax.
By its very definition, the key component of a short term mobilisation is the limited duration of the period of presence outside of the home country. The duration of these mobilisations usually range from as little as a few weeks up to 12 months.
Due to the limited duration of the mobilisation it is extremely unlikely that the employee will break tax residence in the home location. Accordingly, an income tax liability, and therefore a withholding obligation (dependant on the home jurisdiction of course) will continue to exist in the home jurisdiction for the duration of the short term mobilisation.
In simple terms, from an income tax perspective in the home jurisdiction, it is as if the employee has never undertaken the overseas mobilisation.
The greater the length of the short term mobilisation, the greater the potential for a short term double income tax liability and/or a double withholding obligation to exist for the employee.
We discussed in our first article in the series the potential for claiming exemption from income tax in the host jurisdiction by virtue of a double tax treaty (DTT). Hopefully some of the readers will recall that a number of conditions must be satisfied before exemption from an income tax liability in the host jurisdiction can be obtained and one of these conditions is ensuring that the employee is physically present in the host location for less than 183 days.
Depending on the DTT in question, the 183 days of presence is measured over a calendar year, a tax year (assuming the tax year is not the calendar year) or any 12 month period beginning or ending in the host country tax year concerned.
The greater the duration of the short term mobilisation, the greater the risk is of the employee spending more than 183 days of presence in the host location during the measurement period. This therefore increases the potential for DTT exemption to be unavailable in the host location.
If DTT exemption cannot be claimed in the host jurisdiction, the only other avenue available is the domestic legislation of the host jurisdiction. Many jurisdictions have clear rules and regulations to determine whether an individual is considered to be a tax resident or a non-resident in that jurisdiction and it is very common for one of the determining factors to be the number of days of presence.
However, what is equally prevalent in domestic tax legislation is the “rule” that earnings relating to duties of employment performed in the jurisdiction are liable to income tax in that jurisdiction (unless of course exemption is available thanks to a DTT) irrespective of the individual’s residence status in the host location.
If earnings for duties performed in the host location are liable to income tax in that location irrespective of the residence status in the host location and equally irrespective of where the individual is paid from and the obligations and implications existing in the home location, it is clear to see that income tax challenges exist in relation to short term mobilisations.
Withholding Challenges for Employers in relation to Short Term Mobilisations
If, as noted above, income tax liabilities exist in both the home and host locations on the same employment income, it follows that there is a significant risk that those income tax liabilities have to be calculated, withheld, reported and remitted to both the home and host country authorities concurrently.
If this is indeed the case, a double withholding obligation can prove extremely difficult, primarily from a cashflow perspective, on the employee. Most employers will consider a variety of options to negate the impact for the employee as far as possible however this may result in cash flow implications and increased administration and complication for the employer.
Many tax authorities recognise the challenges that short term mobilisations bring in terms of double withholding obligations and as a result an array of different, country specific mechanisms are available to minimise or negate the double withholding obligation issue.
These mechanisms include the Net of Tax Credit Relief Scheme (NOTCR) in the UK , the tax waiver system in Canada and the tax card adjustment mechanism in Norway. Any mechanism designed to reduce the impact of a double withholding obligation can be a significant, tax authority offered, ally in the fight against employment tax over-complication.
Social Security Considerations in relation to Short Term Employee Mobilisations
Unlike income tax, there are very few circumstances in which a short term mobilisation will result in a double social security liability or withholding/reporting obligations which is a rare good news story.
As outlined in our earlier article entitled “Social Security – Working in the EU and beyond” the location in which an employee’s social security liability and obligations exist can be relatively easily determined and in the case of short term mobilisations, this is almost always the home location thanks to the Intra-EEA regulations and the many social security reciprocal agreements that exist between jurisdictions around the world.
However, what remains a somewhat grey area is the de-minimis duration of a short term mobilisation before an A-1 or Certificate of Coverage (COC) application requires to be submitted to the home location in order to formally retain the employee (and the employer) in the home country social security regime and therefore provide exemption from any social security liabilities in the host location.
Whilst it could be argued (and it most certainly will have been by some over zealous social security authorities) that any duration of mobilisation should have the appropriate paperwork completed and submitted, the smart money and generally accepted “practise” is to submit A-1 or COC applications for short term mobilisations which are 3 months or greater in duration.
In conclusion, the short term mobilisation of… is a fact of life and an ever increasingly popular mechanism for organisations to transfer knowledge and expertise around the globe without necessarily incurring the costs of a “proper” international assignment.
However, due to the complexities and challenges that exist, particularly from an income tax liability and withholding perspective, more often than not a quick jaunt across the border can be much more problematic than anticipated and professional guidance, support and advice should be sought to ensure all employment tax compliance obligations in both the home and host jurisdictions are met.