Over the summer months, the spread of COVID-19 has shown little evidence of slowing. While the virus continues to present new lockdowns, the world continues to hold its breath on how, when and what a resolution looks like.
Employers globally continue to be agile in responding to the impact of COVID-19 on their business and their people. Increasing numbers of companies are now planning for a return to the office from summer 2021, so a “new normal” is emerging where remote working will, for many people, be their default working arrangements in the future.
As businesses establish the framework for these arrangements, the possibilities of remote working provide employees with new boundaries and the chance to explore opportunities to work without the tie to a local office. This changing acceptance of such arrangements by U.S. employers and increased geographic freedom for employees is shifting the dynamics of employee mobility at international companies at a time when many assignments and transfers are unable to proceed.
As some employees leave cities for the suburbs, move to neighboring states, or spend extended periods working from other states, others have looked internationally to spend periods of time working outside the United States.
Meanwhile, as cascading international travel bans started to take effect in March, as borders started to close and flight cancellations increased, some employees chose to leave the country as the pandemic accelerated. These employees may be planning on an extended stay outside the United States or may be unable to return due to immigration restrictions.
Tax risks for telecommuting employees
While the spread and impact of the pandemic has continued to develop, so have the tax implications for this new wave of internationally mobile employees. Many of the reliefs, protections and revenue authority guidance issued around the globe at the outset of COVID-19 was aimed at supporting employees who found themselves caught temporarily in a country or unable to leave or return.
Helping mitigate unintended any tax consequences, the responses recognized the range of potential tax implications caused by COVID-19 should be considered the consequence of a force majeure
event– an event of unforeseen circumstances which inhibits or prevents normal activity. Covering individual tax residency, taxation of employment income, employer taxes and payroll, and corporate tax risk, reliefs were wide-ranging internationally, though inconsistent in scope. In the United States, the IRS’s revenue procedures
in April 2020, permitted excluding up to 60 days counting towards federal tax residency for individuals present for longer than intended, as well as for counting of days towards thresholds for the purposes of relief from U.S. income tax under a double tax treaty.
Countries such as the United Kingdom released similar guidelines for individuals present there for “exceptional circumstances,” while in continental Europe, some taxing authorities collaborated to agree on protocols to mitigate additional taxes for individuals unable to work as normal under the first lockdown.
Yet while disruption caused by COVID-19 continues to impact international businesses, very few reliefs have been extended – only days of U.S. presence to the end of May could be excluded under the guidance the IRS has indicated it does not currently intend to revisit the tax residency and treaty reliefs.
Nearly six months into the COVID-19 outbreak domestically, two critical scenarios are now facing U.S. employers as they work to balance new work-from-home policies with parameters for employees seeking to relocate internationally.
1. Employees who moved internationally at the onset of COVID-19
Initial concerns around tax risk as employees became unable to travel during the global lockdown from mid-March on were mitigated by the reliefs and regulation relaxations announced by authorities. More recently however, travel restrictions in many countries and regions have lifted, international flights have increased and travel limitations are characterized more by quarantine measures on arrival. U.S. office locations remain shuttered and in some cases into 2021 with work-from-home arrangements being required for many employees. Many employees who chose to work outside the United States are no longer unable to travel and are asking to or deciding to remain overseas. Consequently, there is now a less clear-cut situation both in the United States and globally as to what “normal” activity is for employee working arrangements, and whether employees are facing unforeseen issues while they may not entirely be elective. As such, it is increasingly important for employers to review whether the protections of a force majeure situation are still relevant as international working arrangements begin to take more permanence. Accordingly, existing tax law, treaties and totalization agreements are used to determine the tax implications for both employees and employers.
It is increasingly important for employers to review whether the protections of a force majeure situation are still relevant as international working arrangements begin to take more permanence.
The U.S. model treaty outlines the criteria found in many U.S. treaties that provides relief from taxation for employees temporarily working in a foreign country. Individuals present in a foreign country for 183 days or less in any 12-month period, 1) who are not paid by or on behalf of an employer of the foreign country, and 2) who do not have their employment costs borne by a “permanent establishment” in that foreign country can exclude employment income attributable to working there from foreign taxation. For many employees overseas since mid-March, 183 days of presence is quickly approaching, and with it, a foreign tax liability and obligations from their first day of presence in that country.
The issue of an employee becoming taxable overseas is not simply an individual problem. U.S. employees performing their work duties in a foreign country may also trigger a range of obligations and administration for their U.S. employer.
For U.S. employers, having employees working longer-term in a foreign country beyond the period of relief a double tax treaty provides means the likelihood of employer obligations and corporate exposure greatly increases. Employees overseas since March or April are an urgent tax risk to U.S. companies, who may find they are required to register overseas, pay employment taxes and have greater compliance burdens. Affected employees will have far more complex personal tax affairs – such as managing cash flow where there are U.S. and foreign payroll withholdings, or incurring higher rates of taxation and costly combined foreign and U.S. state taxes.
U.S. companies that have been monitoring the movements of employees who have relocated during the pandemic should start to take action now to understand the risks involved and take actions to mitigate or manage them.
2. Navigating a path for international telecommuting
As U.S. companies address the realities of having a newly remote workforce, international telecommuting is becoming an increasingly common employee request. Employers need to understand the potential tax implications of these moves for their business to balance supporting and accommodating employees, while mitigating undesirable tax consequences. A key to this balance is to develop telecommuting policies that provide a framework that can be effectively managed and overseen, while putting in place the parameters that identify and respond to tax risk. In this “new normal” of international telecommuting, U.S. companies will need to consider how double tax treaties and other bilateral agreements allow these arrangements to be effective.
Fundamentally, in developing a policy, companies may enable a new normal of international remote working that gives a degree of permanence to working arrangements outside the country where an individual is employed. In doing so, policies should incorporate parameters that address tax risk and unintended tax consequences that cannot be mitigated by earlier COVID-19-related reliefs or relaxations in rules. Specifically, employers should consider having policies that address the following criteria for countries employees ask to travel to:
Time for action for U.S. employers
- Double tax treaty country – Employees may spend up to 183 days in a treaty country before triggering a tax liability, along with other criteria. However, as the counting period is often 183 days in any 12-month period, care should be given so remote working is sufficiently under this threshold, perhaps 150 days. Therefore, if an employee has traveled there previously or has a need to return, they can do so without exceeding the threshold and triggering a tax liability and, potentially, a employer payroll withholding obligation.
- Country with no U.S. tax treaty – Where a tax treaty does not exist, the protections from individual and corporate taxation outlined above do not apply. As such, employees may be taxable from their first day of presence, and in turn trigger employer payroll reporting and tax withholding obligations. Similarly, the presence of one of more employees remotely working in that country could give rise to a corporate taxable presence.
- Totalization agreement country – U.S. employers may be able to obtain a Certificate of Coverage for employees working in a country where there is a bilateral social security agreement, allowing both to remain covered only in the United States. However, it’s important to understand how totalization agreements apply. Some cover only citizens of the respective countries, while others require the employer to send the employee to work overseas at an international office – for remote working at an employee’s request, this potentially means an employee may not qualify to remain covered only in the U.S. This opens the door to costly foreign employee and employer social security costs.
- Country-specific issues – Even if a treaty applies, local tax law may create obligations that bring exposure and compliance risks to U.S. employers. Individuals working in Belgium, for example, may trigger a “Belgian establishment,” requiring the U.S. company to register, file an employment law declaration and file a corporate tax return, even if no corporate tax is due. In other countries, employee obligations may still arise which may require employees to register and pay social taxes personally if they choose to work there remotely.
- Corporate tax risk – Employees permitted to work remotely overseas may arguably no longer find themselves in a force majeure situation from the perspective of a foreign tax authority. Particularly where there is more permanence to their working arrangements, it is critical that U.S. employers understand the protections a tax treaty may provide for creating a permanent establishment, as well as possible complexities in the domestic interpretation of the treaty. Iceland, for example, may allow an individual to relocate and work remotely long-term without assessing a permanent establishment, while other nations will consider factors such as the nature of the work, whether it is “preparatory or auxiliary,” whether business and contracts are being concluded, and whether the home working arrangements could indicate a permanent place of business for the U.S. employer.
Many of the reliefs and protections announced internationally to help mitigate unintended tax consequences arising from employee mobility are not applicable to international remote working arrangements. With new remote working policies coming into effect and a shifting acceptance of international remote working, U.S. employers should incorporate tax planning into policy development to ensure more flexible working arrangements do not create tax complexities and risks. Working arrangements permitted by an employer bring a range of individual, employer and corporate tax risks that should be assessed based on parameters established to manage exposure or on a case-by-case basis.
Where employees have been overseas since the start of COVID-19, there is little time left to manage the potential tax impact for employees in tax treaty countries. As these individuals approaching 183 days of presence there, companies need to assess this situation promptly,
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