In the competition to hire top talent, many tech and telecom firms are looking abroad. The industry’s employees are already more likely to be location-independent. In fact, the recent Grant Thornton State of Work survey showed that 72% are remote, and more than half rarely go into an office.
Plus, many tech companies already think in global terms. “This industry is inherently global, and many tech companies are international from day one — especially software companies that can sell through the internet and deliver through a URL,” Grant Thornton Technology and Telecommunications Industry U.S. Leader Steve Perkins said. “Companies can leverage an international workforce to rapidly expand into new regional customer markets.”
If your employees are remote, then your pool of potential candidates could span the globe. However, companies need to understand the tax implications for each unique geography. “They have to navigate regions, jurisdictions, countries and a variety of other factors,” Perkins said.
3 types of tax implications
Many tech employees have already considered the tax implications of working outside their own region, whether for their current jobs or potential new ones. In the State of Work survey, more than half of tech and telecom employees said that they’ve already done some research.
There are a range of tax risks when hiring international talent, and some are particularly relevant to the industry:
- Corporate Tax: A new hire working remotely in another country could create a corporate taxable presence, with corporate income tax and compliance obligations in that country — even if your company doesn’t have any other location there.
- Employer Tax: There may be an obligation to register with the tax authorities, operate a payroll, and calculate and remit taxes in the country where the employee resides. That can include overseas employment taxes and social security contributions.
- Employee Tax: The employee’s tax arrangements may differ, and include new obligations, if they have a U.S. employer rather than one in the country where they reside.
Once you understand the tax implications for a particular worker and their location, you need to consider which approach is the best fit for your tax obligations.
8 tax approaches to consider
Once you understand the tax implications of a new overseas employee, you can consider the following eight approaches to engage and hire them.
- Register the U.S. company overseas:
If you find a candidate in a country where you do not have a local company, determine whether the new hire’s remote working arrangements could constitute a taxable presence for your company there. If so, this could pull your U.S. company’s profits into taxation in that country, with a requirement to register and file tax returns. This, in turn, can trigger U.S. tax ramifications and compliance obligations. Note that this will trigger local compliance and filing obligations, such as requiring payroll be operated, taxes withheld, and local employer and employee social contributions to be paid. Your company needs to understand statutory benefits and the benefits that are customarily provided in the local market, since a local presence can help you compete to hire more local talent in the country.
- Hire the individual into your local company:
In a country where you already have a local company, you might choose to hire a new employee into that company. This can give them access to local benefit plans, payroll tax withholding, remuneration paid in local currency and other employment arrangements in line with the rest of the market. However, if the new hire is actually working for your U.S. company, this can possibly create a taxable corporate presence for the U.S. company.
- Form a new company overseas:
Your company might choose to create and register a new corporate entity in a foreign country, depending on a range of factors, including the number of new hires in the country. As with first option mentioned above, this will trigger the new company to comply with local laws around reporting, compliance and withholdings. Also, consider required local social contributions.
- Have the new hire take on the compliance obligations:
There may be countries where corporate and PE risk for the U.S. employer is limited, and there may be no obligation to register and operate a local payroll. There may be differences in how the lack of payroll obligations arise. In this circumstance, it’s important to understand the impact on the employee and the administration burden that employee may need to take on in comparison to a regular employee of a local company.
- Hire a contractor instead of employee:
When you do not have a local company in a country, or when the local company will not hire them, it might be tempting to engage someone as an independent contractor rather than an employee. There can be a misperception that an independent contractor does not carry the same tax compliance and cost exposure to a U.S. company as if they were hired as an employee, but the substance of the engagement determines whether a contractor arrangement is appropriate, or whether the person might be deemed to be an employee.
- Use a professional employment organization:
An employer might choose to engage a third-party professional employment organization (PEO) to employ an individual and lease them back to the company for a fee. This arrangement allows the PEO to take on the legal, tax and payroll compliance burdens on behalf of the U.S. employer. PEOs offer a potentially quick but more expensive solution for interim or long-term employees in countries where your company does not want to create a new entity. However, make sure to consider both the possible tax risk to the company as well as the employee experience using a PEO.
- Decide whether to embrace “digital nomad” visas:
Countries such as Costa Rica, Romania and Greece are embracing the ability to work from anywhere with the introduction of “digital nomad” visas. These visas allow individuals to reside in the country for an extended period without more complex visa sponsorship requirements. While attractive to employees and the self-employed alike, these arrangements often do not include any provisions that exempt an individual or the employing company from becoming liable to taxes.
- Do nothing:
Both the company and employee often have exposure and obligations to manage taxes for an employee in a foreign country. If employees meet their obligations, file returns and pay taxes, a U.S. employer who chooses to take no actions in the foreign jurisdiction may be visible to the foreign country tax authorities. So, there is inherently risk in a company choosing not to quantify or understand its potential exposure in a foreign country where it is paying someone for work.
As these options are narrowing, the company should consider the transfer pricing implications to adding a new jurisdiction to its taxation footprint. Many countries require documentation supporting a company’s transfer pricing policy. Adding a resource in a new country may require a shift in internal pricing, and adjustments to accounting systems to accommodate the new policy.
It is also critical to ensure the company is appropriately registered, with timely filing for corporate income tax obligations from the new workforce. “Companies must ensure they are onside with both the employment tax issues and the corporate tax requirements of global employees. We see a lot of coordination among government agencies to ensure compliance on both the employer and employee side,” said Grant Thornton International Tax Managing Director Chris Summer.
Continue your consideration
The talent market continues to shift, along with many other business factors, so tech companies may need to keep global employment options under consideration.
The recent Grant Thornton Tech CFO Survey showed that remote work is still near the top of CFO concerns, along with related risks like cybersecurity. The real challenge is that these risks continue to evolve. “Companies are planning for ongoing disruption,” Perkins said.
As your tech company continues to consider and adapt employment options, make sure that you have a clear understanding of the unique tax implications and exposures that relate to each potential employee abroad.
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