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Lockdowns: Expatriate Tax Challenges & Considerations
The unintended stay could mean crossing the threshold limits for tax residency in a country and thereby invoking additional tax liability.
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Over the last few decades, the world has witnessed an explosion in global trade. The Coronavirus (COVID-19) pandemic has put a pause on many aspects of global trade, including free movement of capital, goods, services and talent. The current situation has forced governments to put a temporary halt to free mobility. Various measures are being tried and tested against the fight with COVID-19, ranging from international travel restrictions to extended lockdowns. Most organisations have even implemented ‘Work from Home’ strategies for business continuity with technology at the helm of all this.
While all of us are grappling with these changes, the set of challenges for a globally mobile workforce could be substantially more. These challenges need to be understood and addressed in a planned manner to mitigate any adverse implications.
Global Mobility – Essence
An organisation’s global mobility program for employees reaps various benefits – exchange of knowledge and technology, best practices, business expansion, to name a few. It is equally beneficial for employees as it adds a feather to their personal and career growth. A balanced global mobility program is designed to meet various business needs and keeps in mind the employee’s roles and expectations in the home country (country from where the employee moves for global assignment) and the host country (country where employee moves to).
COVID-19 impact on Global Mobility
The current COVID-19 situation may have far-reaching effects on the global mobility programs. It could adversely impact both, the employer and their globally mobile employees. Some of them are discussed below:
Tax consequences for employees
Tax residency determination is generally based on the physical presence test of an individual. Countries such as the USA, the UK and India have adopted the physical presence test as part of their tax residency determination. The physical presence test checks the stay pattern in the country for the tax year in consideration and may even include the stay days in earlier tax years. A globally mobile employee who had visited the other country must consider his physical presence in both the countries i.e. his home and host countries. Being a tax resident may subject the employee’s income to tax and in some cases could result in double taxation of incomes. This creates an increased tax burden for the individual.
Owing to the COVID-19 situation, most nations had closed their international borders. Employees on international assignments were either forced to continue with their stay in the host country or returned/evacuated back to their home countries. The unintended stay could mean crossing the threshold limits for tax residency in a country and thereby invoking additional tax liability. In certain cases, there may be a need to report the income and tax in the income tax return. Consequentially, additional details such as tax identification numbers, assets held, etc. may also need to be reported in the tax return.
Permanent Establishment risk for employer
As per the bilateral Tax Treaties signed between countries, Permanent Establishment (PE) risk could be created by the employee’s physical presence in the other country or the roles and responsibilities undertaken during an overseas assignment. These vary from country to country and hence, require expert analysis on the subject matter.
While ‘Work from Home’ may be the new norm and could continue for a longer period, the employer needs to understand the PE risk exposure. Thus, overstay of an employee in the other country due to travel restrictions or lockdown situation or working remotely for a country other than the present residing country, could create a fixed place or service PE as per the Tax Treaty. Once a PE is created for an entity in the other country, it could result in additional corporate tax outgo for the employer.
Due to the current scenario, most employees including employees on global assignments are working from home/hotels to meet the business targets. A careful study needs to be undertaken to understand the tax implications inflicted by the change in events.
Global mobility addressed globally
Considering these unprecedented events, some countries have made tweaks to their tax regulations carving out tax implications due to forced stay.
The Organisation for Economic Co-operation and Development (OECD) has released their analysis (OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis issued on 03 April 2020) to recommend some of the measures that could be adopted by member governments in their domestic tax laws and or bilateral Tax Treaties with other countries. The analysis has addressed matters such as residential status of international taxpayers (individual and business) during the COVID-19 restrictions. It has also opined about ‘home office’ or ‘teleworking’ for employees but concludes that it may not create any PE risk for employers due to lack of permanency/continuity of such a situation.
Measures announced by the Indian Government
Back in India, there have been several representations to the Indian Government to announce relief measures in the tax arena so as to reduce hardships of employers and individual taxpayers.
Apart from announcements about extended timelines for tax payments and compliances, the Government has also addressed the concerns in terms of determination of tax residency for individuals owing to the COVID-19 situation.
As per the Circular released by the Indian Ministry of Finance dated 08 May 2020, individuals who have come to India on a visit before 22 March 2020 and have not been able to leave India on or before 31 March 2020 due to travel restrictions or quarantine or departure on an evacuation flight, the period of stay from 22 March 2020 or the quarantine date until the date of departure or 31 March 2020 shall be ignored for the purpose of tax residency determination. Such a residency relaxation measure is announced for the tax year 2019-20 (i.e. period ending 31 March 2020). Subsequently, the Government has also assured that similar measures shall be announced for tax year 2020-21.
These would indeed provide some relief for employers and individual taxpayers, especially the international taxpayers.
Planning it right
In such uncertain times, it is essential to analyse aspects which may impact the business. To begin with, an employer could investigate the following aspects:
Employee’s immigration procedures
During these difficult times, the foremost objective of an organisation is the safety of their employees. Besides tracking of assignments, an employer could use technological tools to track and notify safety of their international travelling employees.
It is also important that the employer is aware of the latest immigration updates which are relevant to countries affecting their globally mobile employees. This is applicable for current employees on assignment as well as the assignments that are lined up by the employer in the near future.
Identify any additional tax impact for employee in home and host countries
An employee’s overstay in a country could dishevel the initial tax cost estimate made at the beginning of the assignment. Employers need to look into the revised cost estimates owing to the change in events.
Taxability of additional allowances or expenses paid to the employee
It is common for employers to provide additional allowances or bear extra cost during such exceptional times to ensure safety of employees. Such additional cost elements (emergency allowance, relocation costs, etc.) may be subject to tax in home and/or host countries.
Payroll administration during the interim period
In this uncertain situation, an important aspect would be to regularise the salary payments to employees to help them with their personal hardships.
Employers need to analyse whether the payroll arrangement for globally mobile employees needs any change. The payroll changes could be initiated due to various reasons such as employees working from home (without the attendance records), employees going back to a different geographical location other than the payroll location, etc. The payroll arrangement could also mean adhering to local labour laws in certain countries.
It also requires appropriate reporting by the employers in their payroll records and filings with the relevant authorities.
Continuity of social security contributions for the employee
Like payroll, social security is another important aspect for globally mobile employees. Discontinuation or delayed social security contributions for the employee could result in an employer as a defaulter in the home/host country and have further ramifications such as additional interest/penal payments. Social security laws, being part of the labour laws, could have profound implications as compared to tax defaults.
Ensure tax compliances for the employer in home and host countries
Some countries have announced extension of tax payments or tax return compliance due dates (such as the USA, the UK, and Canada). A tab on the revised timelines would ensure that the employer and the employees avail the extension benefit and avoid any interest or penal implications for delayed compliances.
Corporate tax and transfer pricing ramifications for the employer
Changes in the payroll structure or payroll elements would also demand a relook at the corporate tax and transfer pricing implications. These if ignored, could have adverse implications too.
Redesigning of the Global Mobility programs
The unanticipated situation has made organisations relook at their global mobility programs to incorporate necessary changes. Like the COVID-19 situation, this is not limited to a single country. A wider horizon for the future, with necessary precautions and in a timely manner is the need of the hour.
Given the situation, some modifications may be required by an organisation to their existing mobility programs, keeping in mind the aspects discussed above. While COVID-19 is a temporary immobile situation, employers could adopt appropriate planning measures to have a more adaptable global mobility program ready for the future.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.