Post-COVID world global workforce tax complications

While the COVID-19 pandemic may be loosening its grip on the American economy, U.S. multinational companies are still tackling new challenges like inflationary forces, recessions rippling across Europe, and further market pressures across their supply chains.  With a backdrop of future economic uncertainty, many companies are also still working to navigate their way through the unprecedented impact of the “Great Resignation,” operating in intensely competitive labor markets while determining how to most effectively manage, retain and attract talent.

Remote and hybrid work arrangements have gradually become global norms, and this has allowed many U.S. companies to embrace cross-border, international talent strategies to address their business and workforce needs. For business leaders responsible for operating costs, risks, compliance, talent, sales and delivering projects, diversifying talent across borders can bring about a far more dynamic and fluid international workforce. This global workforce also introduces  new complexities for management and corporate leadership to manage, among them tax management.

Global mobility in flux

Employee global mobility is a well-established strategy used by companies when working towards a variety of goals. From expansion into new international markets, developing and managing a pipeline of global talent, delivering projects across borders, to leading the business in key markets, the movement of employees has undergone evolution over the decades.

Long-term, multi-year assignments -- assignment benefit packages which provide an employee and their family with financially generous incentives -- have largely trended out of favor for U.S. companies. Instead, companies are increasingly choosing short-term rotations, permanent relocations and increasing levels of global business travel which are returning to pre-pandemic levels.

Employee mobility, for many companies, has featured variations of a core set of arrangements governed by a range of cost, benefit and tax management policies, as the graphic below highlights.

While tax law undergoes constant change and development, the management of corporate, employer and employee taxes, as well as the processes, policies, methodologies, vendors, compliance and management structures, are well established and refined. And though employee mobility may generate scenarios that create uncertainty, particularly when managing cross-border employment tax complexities, employers generally have the tools and technical resources to manage this.

New mobilities in a post-COVID world

Emerging from COVID-19, companies are developing, deploying, and adapting to their global workforce in new ways. As the graphic captures, managing a global workforce and employee mobility can no longer be conceived of in traditional forms tied to company offline locations, such as movement from “location A to location B,” undertaking roles that are geographically tied to a corporate location, or even to defined employee roles within the business.

The extent of scenarios where an employee may now be mobile in some form has significantly increased. Many companies, however, are still trying to address working arrangements and employee demographics that may not have existed within their pre-pandemic organizational structure. In turn, the tax complexities and the management requirements needed to comply with them may be triggering myriad challenges that many businesses are tackling for the first time. 

With no precedent and no established processes and policies for managing a global workforce emerging from a global pandemic, existing mobility management approaches are of limited relevance and applicability to the challenges of new modes of employee mobility.

The altered tax landscape

The tax legislative landscape continues to be challenging with coordinated, aligned and timely developments tied to global workforce issues, appear unlikely. While the Organisation for Economic Co-operation and Development (OECD) has published thought leadership on remote and hybrid work, it has not formally moved beyond the guidance issued during the early stages of the pandemic that, in essence, advocated for tax authorities to mitigate unintended tax consequences arising from unexpected mobility. And though an announcement by the OECD was made earlier in 2022 that a review of tax implications of remote work may starting, to date there’s no timeline for this project.

Therefore, employers are navigating an environment where tax authorities may not provide clear guidance on how they will approach the tax considerations of employees working in new global workforce models, whether remotely, under third-party employment arrangements or even as digital nomads.

For mobility in particular, the complexity around employee and corporate taxation issues related to mobile workers arises from how is conceived of in double-tax treaties and social security agreements. Employers must consider the specific technical tax concepts such as the ”posting” of an employee from one country to another, identifiable tax residency, limited multi-country arrangements and serial relocations. 

The concept of an employer “posting” employees to work overseas is a particular challenge when employees are choosing and being allowed to work in another country for a period of time.   Bilateral social security agreements often contain provisions that allow employees who are posted to work in another country for their employer to remain a participant in their home country social security rather than contribute where they are working for a fixed period of time, typically up to five years. The U.S. Social Security Administration for example, has begun rejecting applications from employers to continue U.S. contributions for remote workers, noting they are not being “posted” to work overseas as the terms of the agreement requires.

Such legislative disconnects between the new modes of mobility and global workforces creates pitfalls and risks for employers. For instance, organizations may face tax and compliance obligations overseas in what may otherwise appear straightforward arrangements. With tax authorities like the UK’s HM Revenue & Customs reminding companies of their compliance obligations for international employees, companies face enforcement and potential audit activity while they work to establish how their global workforce should be structured.

Three emerging modes of mobility

1. Going global through others

A key feature of the evolution in global workforces and employee mobility is how talent is sourced and engaged. Increases in the use of professional employment organizations and employers of record have given companies the ability to move across borders quickly, hiring talent via a third party in geographies where they may not have a corporate presence, or where the timeframe for establishing a legal presence in a new country may be longer than the business’ need to hire or expand. Acting as the local employer, these companies manage employer compliance obligations from payroll reporting, tax withholding and the provision of statutory benefits. 

While alleviating the tax compliance burden, these arrangements can carry considerable risk to the company engaging via a third party. Tax authorities may view the employment arrangement as effectively with the company engaging the talent and not the third party. Treating these arrangements as transparent for corporate and employer tax purposes can therefore potentially expose companies to the risk of creating a corporate presence, triggering registration requirements, payment of corporate and employer taxes.

As companies enter and scale in new markets, seek talent across borders and establish a physical office presence in other countries, increasing headcount through a third-party employer, even for a temporary period, may bring an effective business solution to the company and could accrue risks.

2. Temporary talent

Throughout the pandemic, many employers turned to independent contractors as an effective means to engage talents across country borders and to meet the needs of the business where talent may be scarce or where fixed compensation overheads are less attractive than drawing on temporary resources.

The need for substance in such arrangements is a widely understood way to mitigate risks that the arrangements may be viewed as one of “employer-employee” rather than an engagement with an independent contractor. Companies must be able to demonstrate that an individual is not under their direction and control nor integrated into the business like an employee -- e.g., the individual sets their own schedule, is remunerated in a way not comparable to salary and does not participate in employee benefit schemes. Depending on the nature of the project work, the role and its duration, clarity on points like this may be difficult to establish and in turn, that complicates determination of whether an individual is or is not acting as an employee in that country.

Carrying similar tax risks to those outlined above, contractors are unlikely to be visible within the organization as an employee. As such, identifying where tax risk is accruing can be significantly more challenging where contractors are not centrally tracked or easily identifiable. These factors have the potential to carry a range of corporate and employer risks should a tax or labor authority review the work and determine that individuals involved are engaged as employees and not contractors.

3. The rise of the digital nomad

The concept of a “digital nomad” has evolved in the past few years from a working arrangement for a small fringe of the working population to a mainstream initiative dozens of governments globally have pursued to encourage economic growth and to attract talent and knowledge. While the requirements may differ across countries, the schemes allow an individual to work remotely for a period of time without needing visa sponsorship from a local employer, as may normally be the case. For some programs, like those in Costa Rica and Barbados, employees who qualify attract no personal tax liability or tax filing obligation and do not create tax exposure or obligations for the employee.

That status, however, is not consistent across all programs,  so while digital nomad visas allow employees the opportunity to be globally mobile at their own discretion, they have the potential to both transfer the responsibility for tax compliance to the employee and thus make the tracking of risk and tax responsibilities challenging for the employing company.

Employees looking to take advantage of these programs may trigger tax traveling to countries where visa-free or digital nomad visas do not provide protections again income tax exposure. Employees who do not establish individual tax residency, for example, may not be able to rely on the reliefs and protections of a double-tax treaty to mitigate individual tax exposure in the countries where they travel. In turn, this individual tax risk status may confer upon the employee obligations to operate payroll, pay payroll taxes and submit employer and corporate returns.

Managing risks and complexities

For HR, total reward, mobility and tax professionals, new and emerging global workforces demand different internal structures, processes and approaches for effective management of the associated tax challenges. These new structures, processes and approaches will also help companies successfully adapt to risk in an evolving environment. Critical to that will be the deployment of technology to integrate different existing platforms, aggregate data, and set parameters to identify where tax risk exists.  

Being able to pre-emptively identify risk before employees move, manage compensation and tax processes end-to-end during periods of mobility, and understand the obligations arising from remote hired employees will provide companies with the ability to leverage and evolve their global workforce.

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