As worldwide taxing authorities more vigorously pursue revenue opportunities, organizations must put processes in place to improve compliance.
Today's global economy requires a fluidness of motion like never before. Employees find themselves jetting across the globe with mounting frequency, sometimes spending mere days in a particular location before moving onto their next destination. Since these workers are usually maintained on their home-country payrolls, they typically don't concern themselves with different tax rates from location to location.
Instead, they trust their employers to cover any additional taxes related to their compensation. Increasingly, that's easier said than done, as taxing authorities around the world are becoming more sophisticated and aggressive in terms of seeking to collect revenue from the organizations that are sending people to work in their jurisdictions.
"Countries have identified the expatriate area as one that represents potential sources of revenue," says Cheryl Spielman, a partner in the human capital practice of Ernst & Young in New York. "They're seeing populations of people coming in and out of their countries, and they want to make sure they're getting their fair share of taxes."
In particular, Spielman says, taxing authorities have zeroed in on so-called "cross-border executives," particularly those who are granted an equity vehicle, such as a stock option. The option may be granted in one country, vested in another country, exercised in a third country and sold in a fourth country.
In the past, Spielman says, regulations were simpler, and withholding typically took place only in the country where the option was exercised. As she points out, however, that's no longer the case: "Many countries are now saying, 'If you're in my country from a grant-to-vest point or a grant-to-exercise point, I want a piece of that taxable gain on the equity.' "
Increasingly, says Spielman, it's not traditional two- to four-year assignees who are triggering such demands from their host country tax authorities. Rather, it's short-term business travelers -- the so-called accidental expatriates: "These are people who may not be on a formal expat policy, but they're going in and out of countries on a project basis and, all of a sudden, you're in a situation where there may be a tax liability surrounding that particular individual."
When viewed on a case-by-case basis, the actual tax liability is relatively small, says Nino Nelissen, a tax lawyer and executive director of Executive Mobility Group, a relocation, immigration and expat tax management service located at Amsterdam's Schiphol Airport. However, it's the penalties, rather than the actual taxes themselves, that pose the greatest economic threat.
According to Kent Klaus, a partner in the global employer services practice of Deloitte Tax LLP in Chicago, some countries impose penalties as great as 200 percent of the underlying tax. For an organization with a significant number of employees traveling in and out of that location, the total liability can be substantial.
All too often, however, companies have no idea they are not in compliance until penalties have already been levied, says Bill Sheridan, vice president of the National Foreign Trade Council in New York. In those instances, Sheridan recommends companies throw themselves on the mercy of the court, in a manner of speaking.
"If you make a good-faith effort to say, 'We really didn't know we were doing something inappropriate here, but going forward, we will follow your rules to the letter,' oftentimes, they will be practical," says Sheridan. "But if they see somebody's being really egregious in trying to avoid taxes, then they'll step all over you."
Caught in the Trap
Granted, some countries are more aggressive than others. While Spielman points to Germany as being "exceptionally aggressive," Nelissen brands Norway the worst. "When it comes to Norway, there are cases where just a few days of presence resulted in taxation," he says.
Meanwhile, Sheridan warns employers to be conscious of tax regulations when sending employees to the United Kingdom where, he says, "Inland Revenue is tracking (foreign workers) in some very, very precise ways."
Regardless of which countries are most diligent about seeking to collect tax revenues, the fact is, a growing number of governments are resorting to a variety of tactics for identifying foreign workers who are spending significant amounts of time in-country.
According to Klaus, such tactics include formal payroll audits of large corporations with operations in their country. During such an audit, they will ask probing questions, such as how often top managers have been there and whether the company has any employees visiting the country on business trips.
"They ask questions that either lead you to lie in order to not get caught or, just by virtue of answering the questions honestly, start to bring to light the fact that you may have some of this activity," says Klaus.
Taxing authorities don't stop there. According to Klaus, they are increasingly being stationed at airports in order to monitor traffic and note travelers' frequency of arrival and departure. Such monitoring may also uncover noncompliance in terms of work permits and other immigration regulations.
Increasingly, Sheridan says, immigration and tax authorities are joining forces, seeking to identify and penalize those who are not in compliance. Not only can such discoveries impact a company's ability to obtain work permits for workers in the future, they may also damage their ability to conduct business there at all.
"If you are planning to open up new operations or conduct business somewhere, but then it's discovered that you are in violation of tax rules or immigration rules, you could jeopardize your whole ability to do business in that particular jurisdiction," says Spielman.
Tracking Place and Time
Currently, experts agree, it's virtually impossible to be 100 percent in compliance in each and every country where employees are stationed around the world. That said, Klaus advocates a two-pronged approach to ensuring that requirements are met and liabilities are paid to the best of the company's ability.
First, the organization must cultivate a thorough understanding of the tax rules of each destination location. "Each country will have its own requirements as to when an individual becomes taxable in that foreign country," he says. "In some countries, as long as you're not there more than six months in a year, you're not going to be taxable. Other countries set the bar much lower, and some countries don't even have a minimum standard."
Being aware of varying tax regulations is just the beginning, however. Klaus also recommends that organizations carefully track all expat and business-travel activity. Unfortunately, that's easier said than done because many companies have no record of who has spent how much time where and when. This is a particular problem with short-term business travelers, who may jet from country to country without making HR aware of their travels.
According to Klaus, numerous parties should be involved in the process -- specifically, HR, Finance and Tax -- with HR directing the process and bearing ultimate responsibility for reviewing it and ensuring its effectiveness. The brunt of the responsibility for actual day-to-day reporting should fall to the employees themselves, however.
Klaus recommends providing workers with a travel calendar on their laptops, thus making it easy to upload entries to the organization as needed. Other options for tracking employee movements include the organization's time-sheet system or its business-expense reimbursement system.
"When there's an equity-comp taxation event, you need to be able to go back and say, 'OK, during that earnings period, where was this individual working and what are the requirements of that country?' " says Clarissa Dougherty, director of the international assignment services group for PricewaterhouseCoopers in New York. "If you have that information ready, it's going to be much easier than trying to recreate the wheel at the end of the year or when there's an audit."
Unfortunately, Nelissen says, employees may not always be as forthcoming as the organization would like in terms of reporting exactly where they were and when. Intentionally or not, they may neglect to include information with regard to how many days were spent on vacation in the work location, for example. Spielman recommends countering that lack of candor by stressing to the entire organization the importance of tracking all movement.
"You need to develop a culture of individual accountability," says Spielman. "It's a good idea to elevate the issue to the business leaders and have it cascade down through the organization that it is important to track your time."
As organizations have begun to recognize that some countries are more stringently enforcing their tax regulations, global mobility professionals have started questioning whether this newly aggressive stance on taxing international business travelers will negatively impact the movement of people around the globe.
According to Spielman, she hasn't seen a reduction in international business travel yet, but organizations are becoming understandably cautious about sending people to certain destinations around the world.
"We actually have seen companies reassess sending large populations into a particular jurisdiction because of the tax consequences," says Spielman.
"I haven't actually heard any companies say, 'We're not going there anymore,' but I have seen companies do a risk assessment around each country. The important thing is to know your exposure, communicate that exposure, and then put an action plan in place for compliance and remediation, so your company is not exposed in the event that a foreign jurisdiction comes at you in this particular area."