Across the globe, the spread of the COVID-19 is having a significant humanitarian impact and increasingly, an economic impact from stock markets to global supply chains. As governments move rapidly to contain the spread of the virus, global employers are also working to address how to manage employees in affected areas while continuing business operations.
The daily developments in the spread of the virus have prompted the Center for Disease Control to note that the need to contain its advance could cause serious disruptions in work for employees. For U.S. companies with global operations, the increased potential for employees to relocate across international borders, whether as part of business continuity strategies or for personal reasons, presents a range of unexpected tax issues to also address.
By reviewing how governments are responding relating to individual tax compliance, employers can understand and address the tax risk areas they should consider as they formulate policies for working arrangements during the coming months.
The initial tax response
A “wait-and-see” approach is being taken by most governments in response to the impact on individual annual tax filings and tax changes in response to the economic effects of the COVID-19. While a handful of countries have extended tax filing deadlines to ease the compliance burden for taxpayers during this challenging time, many more have yet to announce changes. Taxpayers should, therefore, continue to take steps to meet their normal tax compliance obligations. For internationally mobile employees who may have tax return filings in more than one country, normal compliance obligations should be assumed for each country. Where there are significant obstacles to obtaining information required to complete a tax return, it may be possible to extend the filing deadline by application or, alternatively, to review whether there is reasonable cause for a late filing and request the appropriate tax authorities abate possible penalties.
One exception is Hong Kong, which addressed the impact of COVID-19 (and the aftermath of the 2019 protests) in its 2020 Budget by putting forward a range of measures intended to simulate the local economy. The Budget proposes a reduction in tax on employment income, capped at HK $20,000 (about $2,550 U.S.) and one-time cash payout to Hong Kong permanent residents aged 18 and above of HK $10,000 (about $1,250 U.S.).
For U.S. companies with internationally mobile employees in Hong Kong and other countries, it will be important to identify how such incentives are handled as part of assignment and tax policies. Will the benefits accrue to the individual or the company? How is this being communicated to internationally mobile employees? Additionally, for employees caught up in affected areas, what support is being provided to manage their taxes and mitigate the impact of potential late-filing penalties?
The mobility landscape during COVID-19
Many employers have or are likely to announce changes in working arrangements over the coming months. Initiatives being deployed by U.S. multinationals include allowing employees to work remotely from home, limiting business travel domestically and internationally, cancelling events and relocating employees to new international locations. The increased flexibility has the potential to create new challenges for mobility professionals, expanding their responsibilities and increasing the complexity of managing tax risks during the COVID-19 response.
Finding and managing ‘stealth expats’
Outside a company’s formal employee mobility program, U.S. companies had already seen that employees will sometimes choose to relocate themselves and their families in “response-based” events. Not surprisingly, employees in both China and in other Asia-Pacific nations have moved out ahead of the virus to less-affected countries. Taking the “work-from-home” policy beyond its intended result, employees may take precautions with little or no visibility to their employers, particularly where travel is arranged outside corporate travel booking systems.
Mobility professionals will need to work closely with human resources business partners and business units to find and manage employees who move without authorization to a new country to work. While businesses are responding to the virus with their own travel guidelines, employees may move without formal approval. :
- Risk of a Permanent Establishment: Where employees work from a country remotely or in a country in which the company does not have an existing corporate entity, they put the business at risk of creating a corporate taxable presence in that country. This may result in the profits of the employing company being pulled into corporate taxes in the country where that employee relocates. The facts and circumstances of each situation should be reviewed in turn, but where an employee is located in a country outside where he or she is employed for a long-term period may create a permanent establishment there as a de facto fixed place of business or based on the role they are performing in the country.
While many double-tax treaties provide protection, where there is no treaty or there are longer-term relocations, it will be important to review whether these “stealth expats” are creating corporate tax risks and, if so, to determine how business should prepare to take appropriate mitigating action. This may involve relocating the employee or even requiring a leave of absence in some cases.
- Individual tax: When employees relocate to a new country in response to the spread of the virus, they may also trigger personal income tax liabilities. Employees will need to understand the individual tax implications of their presence in a new country, whether they can plan travel to mitigate taxation under a double-tax treaty. For stealth expats, U.S. companies may want to extend tax assistance to these new expats where it helps manage tax compliance.
- Payroll withholding and reporting: U.S. employers may also find they have payroll reporting and tax withholding obligations for these employees, whether through a local entity or as a non-resident employer. The associated obligations that fall on the business need to be understood to ensure continuing global compliance, but they could result in additional complexities and tax costs, particularly where local employment tax liabilities are considered.
- Social security: While the U.S. has an extensive double-tax treaty network, it and other countries have a more limited number of bilateral “’totalization” agreements that allow for employer and employee social security to be made only in an employee’s home country. Employees working in new country locations may therefore trigger additional social security liabilities for themselves and their employer, which can be very high.
- Double taxation: Employees should also be mindful of the law of the country they relocate to or from. Some countries, Brazil and China for example, may regard locally paid income as wholly taxable in that country, irrespective of where the individual physically works. To the extent a stealth expat becomes taxable in another country, that employee may face complexities and unexpectedly higher tax burdens. A company needs to determine what support, if any, these types of situations warrant.
U.S. companies should be reviewing the impact of the virus on their business, their suppliers and their customers. It may be advisable to relocate teams of employees in strategically important roles in out-of-risk areas, or to keep them in place for a longer than expected period of time. Formal assignments may increase as a result of these relocations, for some employers, resulting in assignments arising that do not fit the parameters and intention of a company’s mobility policy. Agile and proactive actions will be useful to identify the appropriate benefits employees and their families should receive, to determine the range of tax and payroll issues at stake and to effectively manage these assignments over an unknown period of time.
The role of mobility professionals
Human resources leaders play a critical role in ensuring businesses execute their global growth strategy. Accordingly, these professionals increasingly having a seat at the C-suite table. For mobility professionals, too, global growth requires strategic engagement with the business to enable talent to deliver globally. The COVID-19 outbreak presents a range of unique and complex challenges to businesses -- from the wellbeing of employees to their benefits and taxes. With proactive engagement with the business, mobility professionals can help navigate the uncertain path ahead as U.S. companies plan and act -- identifying tax risk, managing complexity and cost, and enabling employees to continue working wherever they are located when possible