In the world of constant changes and rapid development of global business, international tax policy becomes a key element of successful management of corporate mobility.
The increase in the number of international assignments and the expansion of business geography put a lot of tax pressure on the shoulders of companies, which can affect the effectiveness of the international assignment program and the satisfaction of employees sent to other countries.
Careful study and development of a global mobility tax policy is a critical aspect for successful business operations in today's world. Those businesses that invest the time and effort in developing this policy, clearly documenting it, and having robust processes in place to implement it, open up opportunities for the smooth operation of international assignment programs. Instead, companies that do not pay attention to this area risk facing unforeseen tax problems and dissatisfaction of workers sent to other countries.
What should an employer consider when deciding on, documenting and implementing a global policy?
Modern trends
During the pandemic, the employers have been actively planning and implementing telecommuting strategies both domestically and internationally. Some companies have reviewed their global mobility tax policy, in particular, adapted it to the new realities and models of international assignments. However, many organizations did not pay attention to this. Moreover, with the cost of living crisis, the shift away from the common practice of tax equalization in global mobility is rapidly gaining momentum, affecting both workers and employers.
Recently, it has become increasingly common for companies to implement tax policies that provide expatriate workers with “tax shelter” or “partial tax shelter” for a variety of benefits such as travel, living and training expenses. Under partial tax shelter, the employer pays host country tax (and, accordingly, home country tax, if applicable), while the employee may be responsible for their own taxes and the taxes of the country where they are located.
In general, current trends show the need to adapt tax and work strategies to the new realities arising in connection with the pandemic and changes in the work environment. The companies that successfully respond to these challenges can gain a competitive advantage and ensure effective management of international resources.
Best practices and pitfalls to avoid
The concepts discussed below are not exhaustive, but cover the main areas:
- Main provisions of tax policy. We have come across situations where some employers mentioned tax equalization or tax shelters in their appointment letters, but there was no document specifying exactly how these tax policies were applied in practice. It is important for employers not only to mention the tax policy in the letter of assignment, but also to make a relevant document about this policy available to employees posted to other countries.
- What is covered and what is not covered. A well-formulated tax policy will include:
- What items of income from work are covered
- Does it apply only to employment income or also to personal income (usually not for the latter)
- What taxes it applies to (typical exclusions would include capital gains tax, real estate taxes and consumer taxes)
- Does this also apply to social security
- Who receives tax benefits for foreign citizens
- How spouse/partner income is treated if spouses/partners file jointly
- Map the policy to the reason for the assignment. For example, a situation where the employee moves to another jurisdiction for personal reasons is unlikely to apply tax equalization or tax protection. Typically, when the employee moves from a low-tax jurisdiction to a high-tax jurisdiction for business reasons, tax equalization or tax sheltering is used. Similarly, if a successor is moving to a low or zero tax jurisdiction from a high tax jurisdiction, there is likely to be no need for tax equalization or tax sheltering.
- Policy management such as payroll and reconciliations. For the employee with equalized tax, you would expect hypothetical tax (and potentially social security) to be deducted from their take home income (SAH) rather than the actual taxes and social security withheld through the host country payroll. It is recommended that you explain to the employee how tax and social security deductions will be applied, for example by providing a sample payment statement. The procedure for how and when reconciliation is done, who is responsible for payments and who will receive reimbursement should be addressed in the policy. Policies will generally state that the employee is liable for penalties and interest unless there are extenuating circumstances.
- Tax support and cooperation with appointed advisers. When the tax equalization or tax shelter is adopted, the company's appointed Global Mobility Tax Consultant will be able to ensure that the appropriate tax benefits for foreign nationals are claimed and reconciled in accordance with the policy. Even if you agree that the employee may use their own tax advisor, the employee must provide the appointed advisor with a copy of the tax return to complete the reconciliation. The employees should be required to cooperate after their employment ends or after they are fired — the company can get a big tax refund!
- Interpretation of the policy. It should be clearly explained that in the event of a dispute between the employer and the employee, the employer's interpretation prevails, and his decision is final.
- Multi-jurisdictional policy. Tax policies are generally written from the perspective of the company (headquarters) from which the employees are sent, and often refer to conditions, time frames and rules specific to that territory. If employees are sent from multiple country organizations within the group, the policy should be worded in a jurisdiction-agnostic manner, or annexes should be added that outline the specific application of the policy for a particular territory. This is typically seen in the U.S. and non-withholding jurisdictions.
- Viewing and updating. Travel patterns change, new taxes/fees may be introduced from time to time (example income surcharges) or tax benefits for foreigners may change. It is recommended that you periodically review the policy and update it as necessary. An overview of the generally accepted tax policy can help to master the key concepts and principles, but it is also important to have an appropriate document that reflects these principles into specific actions and decisions of the company.
Considering these key aspects helps businesses to ensure an efficient and transparent international tax policy that meets the needs of both the company and international employees. Adopting, documenting and implementing this policy ensures the smooth operation of international assignment programs, reducing time spent and avoiding unnecessary clarifications by both parties. Therefore, companies that pay attention to these aspects have the opportunity to use their resources as efficiently as possible and achieve success in global business.
If you have any questions about this topic, please contact us. Our team of experienced specialists is ready to help you solve these complex issues.
Source BDO Global.
