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Review policies to include alternative workplace locations

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Human Capital BulletinThe global economy, transportation advances and robust internet access have changed both the employer and employee view of the workplace.

Fifteen years ago, working remotely was a relatively new concept, and the percentage of employees able to do so was small. The state of New York took the lead in addressing these employees when lawmakers realized a growing section of the workforce employed in New York businesses was living outside the state, resulting in a loss of tax revenue. Other states quickly took notice and reacted by enacting legislative remedies to address out-of-state employees. These actions forced employers to review their policies on tracking employee work locations to correctly report wages and remit employment taxes, or else face significant penalties for non-compliance.

Those challenges are even more complex today because widespread internet use and ease of travel both make it difficult to know the exact location of every employee, especially in some of the service sectors.

When employees take remote work arrangements to the next level -- working outside the United States -- these employment issues become international as well, and they can have far-ranging implications for both employees and their companies.

Key employment risk areas companies should address include:

Work permits or employment passes – An employer bears the responsibility for obtaining the appropriate work visa or employment pass for their employees. The reputational risk to an employer of having employed undocumented workers can be substantial and have an adverse impact on future applications.

Tax registration and employer payroll tax filing obligations – Employers in most countries bear the responsibility for reporting, withholding and remitting an employee’s individual income taxes. Similar to the U.S., penalties for failure to withhold and remit can equal or exceed the actual tax liability. Employers must register in the country where they are doing business and comply with all employment related rules.

Doing business in a foreign country – Having an employee in another country often means the company is engaged in a business activity with profits that may be subject to entity income taxes, depending on the level of activity. The company must be aware of registration requirements in every location where they are considered to be doing business.

Duty of care – Having an employee working outside the U.S. may include a “duty of care” -- will the organization be adversely impacted should an employee find himself in a dangerous situation? Having a written policy and a plan in place to address such a situation should be a minimum requirement.

Data security and privacy issues - Companies must have protocols in place to safeguard the integrity of data, especially when working within the EU, which has a new set of rules rolling into place in 2018. Internet connections must be secure and companies must know where data is being stored and used in to comply with all of the rules.

Impact on foreign affiliates – Having employees from an affiliate company working in a country without proper documentation can have an adverse impact on an affiliate already registered that could be considered the employer. This could damage a relationship that has been years in the making and cause potential disruption to future operations.

Here are two common scenarios that illustrate some of these key global mobility issues:

Scenario #1: Amanda is a highly rated employee based in Atlanta. Her life partner has been sent to work in London for 11 months for an unrelated company and Amanda plans to accompany him. The U.S. supervisor is facing head count restrictions and does not want to lose a highly rated employee who he will not be able to replace. The supervisor agrees to an informal remote work arrangement and Amanda submits a change of address to the payroll system, indicating a non-U.S. address.

  • Issues: The employer has an employee in a foreign country and is likely subject to employment tax and labor rules in the host location. The company also may have a taxable presence in that country and is subject to tax at the entity level. Without the proper work permits and documentation, the employee is working illegally in the foreign country, which can present reputational risks.

Scenario #2: Brian is a consultant based in Los Angeles who routinely travels to work on-site. He is assigned to support Asia-Pacific development and expects to make at least three trips per month to Asia during the next 12 months, to a total of 18 different countries, including the company’s affiliate headquarters in Singapore. He is in a support role and is sometimes involved in proposals. Brian’s brother is a long-time resident of Singapore and has an extra room, so Brian has “relocated” his base of operations to Singapore. He also submitted a change of address to the payroll system.

  • Issues: As in Scenario #1, the U.S. employer is considered to have an employee in a foreign country and, along with that, comes a duty to report, withhold and remit employment related taxes. The employee is required to have a work visa in Singapore and without it, will eventually be stopped by immigration while leaving or entering the country. The government may consider the Singapore-related entity to be the employer. This could post not only a reputational risk but it could also jeopardize the Singapore affiliate’s ability to obtain future work permits for its own employees, which could be a costly operational exercise.

Having a U.S. employee based outside the country can have implications for both the employee and employer; therefore, working remote agreements should be carefully reviewed and vetted. This includes involvement from HR, legal, tax and line management at a minimum. Only after appropriate review and assessment of risk, should these arrangements be approved.

Contacts
Eddie Adkins
Partner, Washington National Tax Office
Human Capital Services Technical Practice Leader
T +1 202 521 1565

Linette Barclay
Managing Director, Human Capital Services
T +1 404 475 0204

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Companies’ top 5 employment tax mistakes
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