Global Mobility: Considering Tax Implications
As organisations expand operations across borders, managing a globally mobile population becomes critical and complex.
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Jack Welch said, “Globalisation has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital, the world's best talents and greatest ideas”.
Despite the advent of technology, global mobility is on the rise. As organisations expand operations across borders, managing a globally mobile population becomes critical and complex. With an increasingly mobile population, organisations need to deal with multiple aspects ranging from business needs, immigration, payroll, corporate and personal taxes, labour law, social security, etc. It is thus imperative for global businesses to develop a robust strategy to address these aspects.
While there is a broad spectrum of considerations while planning global mobility, the tax remains one of the most critical aspects, given its inherent complexities. Highlighted here are some of the key tax considerations organisations should consider while drawing a global mobility program.
Key Tax Considerations for a Global Mobility Program
Regardless of an organisation’s scale, industry and quantum of mobile employees, the following areas represent the most significant criteria that impact taxes:
Type of movement
Depending on the business requirement, mobility programs could be structured considering the length of movement (long-term, short-term, business visits, permanent transfer or local hires), nature of the movement (employee/consultant/contractor) and skillset of individuals (highly skilled/semi-skilled).
While developing the structure for global mobility, it is equally important to consider the organisation’s corporate structure. This is a crucial arena as the type of entity set-up in another country may require understanding the entity’s legal structure, local regulations, etc. Additionally, the entity may need to undertake local/global compliances and reporting requirements.
Compensation and benefits
Compensation is always fundamental to internationally mobile employees. The quantum of remuneration not only dictates the overall cost to company projections but also the tax outflow in both jurisdictions for the employer and the employee.
Besides the career growth, employees tend to be drawn to international opportunities offering additional compensation in the form of allowances and benefits. These could be monetary or non-monetary in nature such as housing, transport, schooling, per diems, relocation allowances, stock options, etc.
While devising the compensation package, it is imperative to consider the tax cost on the same.
Employment tax impact in the host country
Global mobility also demands consideration to the complexity of local laws where the tax treatment of certain compensation elements may be different. For instance, accommodation benefit provided by the employer is treated as per the prescribed perquisite valuation rules in India.
It is vital to understand the overall tax impact in both home and host locations. This could be achieved by having a cost estimate prior to the commencement of the employee’s move. Tax cost may also be influenced by the tax residency of the employee in-home and/or host locations. For instance, the short-stay exemption could be claimed by certain individuals subject to fulfilment of certain conditions prescribed by the Indian tax laws.
A variety of tax structures and mechanisms could be implemented by an organisation globally. Depending on the type of movement (i.e. long-term/short-term, business visits, etc.), the organisation may draft an internal tax policy which amalgamates the employee aspirations, organisation’s budget constraints and adhering to the laws of the countries involved.
Employee tax arrangements such as tax equalisation or tax protection are generally followed by organisations to make the movement more lucrative for the employees. Under these arrangements, the tax burden is borne by the employer thereby reducing the tax outflow for the employee. However, employers need to understand the compliance and reporting obligation for such cases. The timing and methodology of the tax reconciliations/settlements need to be set between the employer and employee.
The following aspects need to be addressed:
Location of payroll (home/host)
Currency in which salary/taxes etc needs to be paid and related foreign exchange fluctuations
Each type of payroll (dual/split/shadow) has its own set of requirements viz. tax withholding, reporting and remittance in both jurisdictions
Applicability of any local labour taxes (profession tax, unemployment tax, etc)
Adherence to social security laws of home/host location and compliances through payroll
Corporate and Indirect tax implications
The roles and responsibilities of an employee in the host location may also trigger permanent establishment challenges for the employing entity. A thorough analysis must be undertaken to mitigate this risk, else it could lead to unwarranted tax costs for the organisation. Salary recharge between home and host entities may also trigger transfer pricing, corporate tax and indirect tax implications.
With the advent of exchange of information between authorities globally, it is essential that the documentation pertaining to tax, immigration and labour laws are in sync.
Some countries also mandate the maintenance of appropriate documentation to substantiate expense claim. Failing which tax and penal implications may arise. It may also aid any future audits initiated by tax authorities.
In recent times, in addition to tax compliance, increased focus has shifted on the global asset/information reporting by employer and employee. For instance, reporting obligations relating to Employee Stock Awards, Foreign Assets and bank accounts etc. Inaccurate reporting may have financial and compliance risks associated with it and the onus of correct representation could be placed on both employer and employee. Hence, any misrepresentation could have tax and penal consequences for all parties.
The areas of consideration covered above establish a general framework for tax checks for an organisation’s mobile workforce. Given that global mobility is a constantly evolving process; tax changes, trends and compliances need to be continuously monitored and tracked for an organisation to sustain, grow and thrive internationally.