Global mobility's tax challenges

40% of large international companies still lack clear tax and payroll standards to address the issue, despite the growing phenomenon of employee "mobility" and related tax risks.

This data comes from a survey of internal tax directors that was conducted on the 'mobile' workforce phenomenon, which refers to employees who frequently operate outside of their employer's jurisdiction.

Large international groups have traditionally struggled with tax management issues related to global mobility. Lockdowns during the COVID-19 epidemic made this problem even worse. Companies, particularly those in the service sector, showed that employees could be productive while working remotely, which encouraged people to work from other countries out of choice or to take care of their families.

As hybrid working practices are maintained, the phenomenon has turned into a legacy of the pandemic. In the TDN study, more than half of tax directors said that there were more requests to perform work outside of their own countries now than there were before the epidemic.

However, the extent to which this issue affects tax directors will vary depending on the global footprint, business model, corporate culture, and the degree to which cross-border working is necessary or deemed desirable. The associated issues take up an excessive amount of time in in-house tax functions.

The primary tax issue is that businesses are forming a taxable entity when they permit employees to work in other countries. Local tax authorities will take into account several facts and situations, such as the frequency of visits, the duration of each visit, and the cumulative presence, when evaluating whether a permanent establishment (PE) threshold has been met (counting time spent by different employees from the same company).

The type of activity is also crucial; if it is 'preparatory' or 'auxiliary,' PE status may not apply.

Indicators suggesting business premises are available to the company and may support an evaluation that the operations qualify as a PE for tax purposes include whether a business pays employees for using an office at home or whether desks are available to persons in a jurisdiction.

Whether a fixed place of business or an agency structure results in a permanent establishment will depend significantly on interpretation, local legal concerns, and references to tax treaties between relevant jurisdictions.

There are many particulars to take into account, and local practice varies greatly. The best source of guidance is the commentary to the Model Convention of the OECD.

Geographically speaking, the TDN poll found that Asia presented the greatest risks from global mobility. In terms of individual countries, India was thought to present the highest risks, followed by China and the US. Italy was regarded as the country in Europe with the highest risk.

A related topic is the amount of tax that must be withheld from paychecks or the registration requirements for payment and reporting.

At the same time, there are several factors besides taxes to take into account, including the legal status of employees, compensation and benefits, data security for employees working off-site, data privacy for employees booking their own travel, regulatory compliance, and company law-related registration.

The extensive impact emphasizes the requirement for central coordination amongst groups. That entails a clear understanding among the organization's members of who participates in the decision-making process and who bears the final responsibility.

When the costs of preventing risks from crystallizing outweigh the risk in material terms, having systems in place to manage requests is likely to be more cost-effective than referring to consultants on a case-by-case basis.

Accompanying guidelines should address all relevant travel types (business, personal, cross-border etc.). How far will the company go to fulfill requests? How much of a business rationale is necessary?

To account for the majority of scenarios, find consistent rules. Risk cannot ever be entirely eliminated by businesses. Companies would, as is often the case with tax management, balance compliance costs with tax risk responsibilities while also taking the concept of materiality into account.

It is crucial to make sure that there is supportive communication and education throughout the firm once the standards are in place.

Two-thirds of respondents to the TDN study agreed that HR is typically in charge of centralizing management over global mobility. According to respondents, 22%, the tax function held final responsibility.

In any event, the tax function must work closely with non-tax colleagues to address these concerns, including those in the IT, risk, data, legal, and commercial teams in addition to HR colleagues.

Keeping track of numerous requests to work abroad across a large group is a difficult task, especially when you take into account the variety of facts and situations, specifics of applicable treaties and payroll regulations, and requirements imposed as part of corporate policies.

This is an area that is perfect for automation as long as the solutions have the sophistication to allow users to apply their own rules, therefore both large consulting companies and specialized providers are developing software tools to assist with management. Over 70% of respondents stated they intended to automate procedures for handling requests for and monitoring of global mobility.

Monitoring and keeping track of departure and arrival dates may yield extra advantages in the form of business information. A "people" issue that is at the core of most of the global mobility dilemma will need firms to strike a balance between sensitivity and flexibility and consistency and fairness.

In the setting of competitive labor markets, when this is an extra incentive to recruit and retain talent beyond remuneration, there may be tremendous pressure to meet requests for flexible working arrangements, not just at top executive levels but beyond.

By fLEXI tEAM