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‘Top Ten’ global mobility issues for Tax Directors to think about

April 2018 #makingmobilityeasy

March 2018 #makingmobilityeasy ‘Top Ten’ global mobility issues for Tax Directors to think about 2 Contents

Introduction: What’s changed?

The ‘Top Ten’: Mobile workforces can impact…

Corporate-level tax obligations

1. Cross-border employment structures and related documentation

2. Permanent establishments (PEs)

3. Withholding and payroll compliance

4. Deductions for stock-based compensation

Individual-level taxes and reporting that are employer costs/obligations

5. Deferred compensation and foreign pension arrangements

6. Information reporting requirements

Business priorities that are also… challenging compliance areas

7. Frequent business travel

8. Entering new markets

9. Acquisitions and dispositions of business interests

10. Payment of international director fees

‘Top Ten’ global mobility issues for Tax Directors to think about 3 Introduction

What’s changed?

Mobile workforces fill a critical business need—requiring organizations to get How mobility happens is quickly evolving... talented employees on-site where Not only are businesses demanding much greater employee needed, often at a moment’s notice. movement across borders, but how this migration is taking However, cross-border employee mobility place is transforming. The number of traditional relocations to is experiencing incredible change satisfy business needs is shrinking, while the use of frequent business travel is and, as a result, its implementation is exponentially increasing in an unexpected way, surprising many organizations. becoming increasingly complex. Other non-traditional mobility methods are also expanding, including project Consider the following example… workers, commuters, and individuals employed by central business models Company X is a large, global organization (e.g., global employment companies). In addition, new alternative work that has a small traditional mobility arrangements in this ‘Gig Economy’ are arising, such as temporary workers, program. However, a payroll audit remote workers, and contractors. highlighted large numbers of short- term business visitors traveling to the United Kingdom and this resulted in a How are companies responding? Change can bring opportunity significant tax and penalty assessment. The corporate controller was concerned Companies often struggle to keep up This fast-paced environment can present about this risk area and requested with the business’ demand for mobility opportunities for forward-thinking a study that found Company X had while ensuring proper compliance organizations. Although historically an unexpected number of personnel and a keen eye on cost. Each mode of Tax Directors have been less engaged traveling to 35 countries each year. mobility, such as frequent business with mobile workforce tax matters, this HR and Tax executives were surprised travel, can create its own variety of is changing—leading Tax executives to learn that Company X had 50 times both individual and corporate level are recognizing the heightened more cross-border, international tax issues that can be difficult for the compliance concerns associated with, business travelers than it did on enterprise to track. Tax considerations for example, expanded non-traditional traditional relocation assignments. are intertwined with other matters such mobility patterns. They are responding as immigration requirements, corporate with automated solutions and a more The discovery led to a review of many of mobility policies, and a lack of proper hands-on and coordinated approach the key issues highlighted in the ‘Top 10’ processes—all creating unexpected by a cross-functional team in order to including corporate level withholding challenges for the organization. achieve efficient processes, cost savings, and income tax obligations, and and more informed decision-making. personal tax and reporting obligations of impacted travelers. The bottom line... Top management typically Global frameworks are changing swiftly... taps the corporate tax At the same time, the global regulatory environment is department to manage global fundamentally evolving. Legislative and regulatory changes tax compliance risk and this and their enforcement—such as those enacted under the BEPS initiative, recently enacted US tax reform, and shifting immigration policies should include understanding around the world—are generating tax and other compliance challenges and areas related to mobility that risks that must be properly managed. The focus of governments and tax authorities on ensuring companies and individuals pay their fair share of tax can require in-depth analysis has never been higher. and may potentially increase enterprise-wide risk.

‘Top Ten’ global mobility issues for Tax Directors to think about 4 1. Cross-border employment structures and related documentation

Starting point for analyzing The structure should have substance do not always expand upon the tax liability and risk and reflect the reality of the employee’s individual’s relationship with the host activities and which entity is benefiting country entity or even state who the from the services. Special consideration employer is. Proper intercompany Global organizations use a variety should be given to the cross-charging documentation of the facts can help to of employment structures to move of costs and substantiation of corporate address potential misunderstandings talent across borders. Corporate tax tax deductions. The employment with respect to whether the employee’s departments should be involved when relationships should be clearly activities create corporate tax exposure. deciding the proper employment documented to help substantiate Upfront analysis allows the corporate structure for globally mobile the employer relationship, the entity tax department to weigh in on more employees and how such structures benefiting from the services, and the complex assignment scenarios. should be implemented (e.g., proper process by which intercompany charges documentation.) Employment should be facilitated. Contemporaneous documentation also structures are a critical step to support enables the entity to be better prepared desired tax and risk management Proper documentation in case of an audit. This documentation positions, impacting both corporate often serves as a preliminary and individual-level taxes. Typically, an assignment letter is issued roadmap for auditors that are seeking to the employee that documents the substantiation for deductions and Examples duration of the short-term move and proof of compliance with transfer explains the international benefits Many companies adopt a so-called pricing requirements. being offered. Assignment letters home country model that attempts to maintain a ‘legal’ employment relationship with the home country employer and loan or ‘second’ the Actions to consider employee to the foreign affiliate. This may allow the employee to continue Companies need to choose and document efficient cross-border their employment relationship with the employment structures that enable tax, business, and other home country employer for continuity compliance needs. The process starts with asking a variety of questions and consistency of benefits while that should drive the necessary documentation. Which entity should be treated providing a link to the host country as the employer of the assignees and for what purpose? What is the expected employer for execution of assignment compensation and benefits cost allocation between related entities during the related activities (wage withholding assignment period? What entity will ultimately bear the labor costs and claim and reporting, assignment related the tax deduction? benefits, etc.) Other companies may opt The documentation of employment relationships should make clear what the for a home/host agreement with salary inter-company service relationship is between the home and host country being delivered by more than one entities as well as the relevant employment relationships. It should also clarify entity making the determination of the which entity, if any, has the requirement to operate withholding for personal tax ultimate employer a critical factor. and social security obligations on employment income. Whatever intercompany agreement is put in place, it is not a substitute for the international assignment letter issued directly to the employee. The two should be in harmony and not contain any conflicting statements.

‘Top Ten’ global mobility issues for Tax Directors to think about 5 2. Permanent establishments (PEs)

Increased scope of PE-causing The imposition of foreign corporate activities: Additional costs and income tax, by itself, may or may not be an important financial concern for the challenges can result company, depending upon its structure, foreign tax credit position, and the Globally mobile employees can create specific tax rate and international a significant PE risk for the enterprise. tax rules applicable. However, Tax The unfortunate result can be the Directors should remain vigilant for requirement to register the company as other potential consequences. The a taxpayer, file local country returns, failure to remit such taxes properly and remit taxes, most notably corporate could result in interest, penalties, and income tax. Companies may mistakenly other unexpected costs and sanctions. think their mobile workers in a specific Some tax authorities will increase jurisdiction do not have any individual their scrutiny of taxpayers that do not tax liabilities. Unfortunately if the show compliance, e.g., by increasing employee activity creates a PE for their risk rating. There may also be corporate tax purposes, this could reputational risk if such information is mandate that individual tax liabilities made public and a company is viewed be remitted. as not ‘paying their fair share’ of tax.

‘Top Ten’ global mobility issues for Tax Directors to think about 6 BEPS initiative places additional a Dependent Agent (DA) PE. These transferring between entities or under spotlight on PE issues broadened the definition to include a secondment arrangement) may be The Organization for Economic individuals, sales agents, and considered to be moving intellectual Cooperation and Development contractors who may be habitually property. Tax Directors should consider (OECD), along with the G20, has performing activities in a location whether intercompany pricing of developed a framework of actions to that, in the aggregate, play a pivotal services between entities reflects address the threat to tax fairness and role in the negotiation and conclusion such value, as well as maintaining the tax revenues caused by base erosion of contracts executed in other tax proper underlying transfer pricing and profit shifting (the so-called BEPS jurisdictions. As a result, the number documentation and agreements. initiative). The intended aim is to of cases where individuals can create ensure that profits are taxed where a DA PE are likely to increase, creating Disclosure and transparency of actual business activity is performed additional risk for employers of work locations mobile workers. and value is created. Actions by Organizations will need to report governments under the BEPS initiative There likely will be an increased a number of specific pieces of are creating fundamental changes focus on intercompany service information under so-called country- to the international tax environment agreements for internationally by-country reporting, including the with direct implications to mobile mobile employees and on ensuring number of employees in a particular workforces. Tax authorities are likely to recharge arrangements reflect the location. Given the increased sharing be more focused on whether companies arm’s length value of the services of information between tax authorities, are creating PEs. performed. Specifically, certain skilled this information will provide roadmaps for tax audit purposes. Having the Under the BEPS initiative, changes employees with specific knowledge who move between countries (by ability to track where employees are were proposed to the definition of working, as well as understanding what their activities are in-country will be even more critical going forward. Actions to consider Mitigation of PE risk The BEPS initiative requires a greater level of diligence around documentation and the employment structure supporting cross- As a general rule, properly executed border employment activity. Companies need to have controls in place international employee secondment for tracking and reporting mobile employees and understanding the nature of agreements (and/or local employment the activities being performed. Maintaining appropriate transfer pricing policies, agreements) that align the economic ensuring that recharges are in line with the transfer pricing guidelines, and cost of the mobile employee’s accurately reflecting the reality of the work performed/value created in each compensation and benefits with jurisdiction will require input from corporate tax. the income statement of the foreign affiliate benefiting from the services Corporate tax should also involve HR and global mobility teams early in any provided can go a long way to discussions concerning foreign operations and international tax planning minimizing PE risk. However, for where individual activities are required on the ground to ensure that business more senior employees, or individual substance is established and maintained. It is important for tax and HR to be relocations to new jurisdictions, the in communication and form a holistic approach since there can be tensions corporate tax department should take between the optimum position for corporate and personal tax purposes. For care to review the terms and conditions example, arguing that the individual is acting on behalf of the ‘home’ employer of the foreign relocation and weigh to retain the possibility of claiming treaty relief may be completely at odds with in on the proper allocation of income the argument that no PE has been created. generated and expense attributable to the assignment.

‘Top Ten’ global mobility issues for Tax Directors to think about 7 3. Withholding and payroll compliance

Heightened scrutiny by tax Tracking residency for individual fails to meet the requirements authorities prompts need for withholding purposes to break residency, i.e., an unanticipated residency status due to a spouse who robust processes The question of when withholding obligations stop and start is a critical one remains in the home country or in-state work days during the assignment period. Payroll compliance is a key area for for mobile individuals. For example, in audits in many countries, particularly the United States, this can be a complex For companies with employees going where the country derives a significant analysis with respect to state and local into the United States, complying with share of revenue from payroll withholding requirements. Many states US payroll withholding and reporting withholding and social security taxes. have rules that define state residency requirements can be a challenge, Increasingly, tax authorities are looking during temporary assignments, allowing especially for an organization with limited for ways to reduce their cost of tax an employee to ‘break residency’ with US operations. A recent trend is the use collection and increase tax compliance that state if certain requirements are of Professional Employer Organizations by placing the onus of enforcement on satisfied. Many employers, unaware of the (PEOs), a third party company that the employer. Compliance, however, employee’s personal situation, often stop technically ‘employs’ the workers of can be especially challenging as it US state and local withholding when the several companies. PEOs oversee all relates to mobile employees since employee commences work outside the HR-related functions, including payroll it often entails complying with United States. However, US state and local administration and tax reporting payroll obligations in more than one income tax may still be due because the responsibilities for their clients. jurisdiction (home and host countries).

Benefits of strong process controls Actions to consider The capability to accurately report global compensation is becoming a Employers should evaluate whether they are properly fulfilling their priority for businesses that want to global payroll obligations, which can include withholding, social tax lower their tax compliance risk—the obligations, as well as reporting requirements. And they should seek an integration of automation is typically understanding of the common pitfalls in the jurisdictions in which they have a key component. Doing so can more significant operations. Even the most well-meaning employer can get present the potential for significant caught by non-familiar issues such as non-calendar tax years or positions that cost savings, over and above the costs seem counter-intuitive. For example, in some territories, a withholding obligation associated with not remitting the can exist for the employer even though the employee is eligible for treaty relief. proper tax amounts. Organizations that Lack of compliance with these obligations can result in penalties and interest can demonstrate robust reporting and for the company—costs the corporate tax department wants to avoid. withholding processes may be able to Specifically regarding the United States, companies should review the US obtain approval from tax authorities in federal, state and local, and FICA tax withholding obligations for their US- certain jurisdictions to exempt specific based international assignees. Their careful review of these US tax rules populations from the requirement to file should also enable them to properly advise employees of their exposure to an individual income tax return (e.g., state and local taxation. If the employee claims to be a state nonresident or a business travelers) through a so-called nonresident alien, certain documentation may need to be filed. cooperative compliance agreement. Businesses should be aware of a special withholding tax rule intended to help Conversely, the inability to accurately ensure the US government’s ability to obtain tax revenue. For example, there report global compensation can is a new 10% US federal withholding tax that generally applies if a nonresident create significant tax exposure for alien taxpayer sells or exchanges an interest in a partnership that was engaged the organization. The potential in a trade or business in the United States. The new law treats the sale of result of noncompliance may include the partnership interest as effectively connected income (ECI) and, therefore, unexpected tax and other costs: subject to US federal withholding tax. (Note that as of the time of writing, the interest, penalties, and a drain on IRS had delayed implementation of these withholding rules as they relate to resources if an audit occurs. publicly-traded partnership (PTP) interests).

‘Top Ten’ global mobility issues for Tax Directors to think about 8 4. Deductions for stock-based compensation

The importance of accounting owing to limitations on social security tax rate(s) in the intercompany equity the rate of tax withholding that may relevant jurisdiction(s)—regardless be applied. In general, US GAAP of the tax withholding rate otherwise charge-back agreements (ASU 2016-09) allows employers applied. Open market sales of shares to ‘net settle’ stock awards and use at settlement also provide flexibility Stock-based compensation (such its own cash to fund withholding on the tax withholding rate that may as option rights and RSUs) granted taxes up to the employee’s maximum be applied to international employee by a parent corporation may not be statutory individual income and stock awards. deductible at the foreign affiliate level for corporate income tax purposes unless active steps are taken to recharge the cost of the stock award to the Actions to consider foreign affiliate in exchange for a cash As a general rule, equity recharge agreements should be established payment from the affiliate to the parent. to ensure that the foreign affiliate benefiting from the services of the This is the case generally—even where employee bears the fair market value of the stock-based compensation the foreign-based employee has been delivered to the employee. The agreement should be clear on the allocation subject to personal income taxation on method of the cost connected to the stock-based award where the employee the full fair market value of the stock provides services to more than one affiliate during the stock vesting period. award, usually at vesting/transfer. US-based organizations that previously did not recharge equity due to a full foreign tax credit position should review this approach in light of US tax reform Claiming the income tax benefit and the transition to a territorial system. US GAAP and international accounting As noted above, stock awards may be ‘net settled’ where shares are provided standards generally require the to the employee net of withholding tax. The company should review whether stock-based awards to be recognized the withholding rate used is limited to the maximum individual tax rate in the (amortized) as an expense on the books relevant jurisdiction, particularly in the case of individuals who have moved of the corporation over the vesting between countries during the vesting period or who are covered under a tax period. The ability to claim a cash equalization policy. Rate changes should be monitored. For example in the corporate income tax benefit for the United States, withholding tax rates including supplemental tax withholding compensation amount to be realized rates have changed due to the enactment of tax reform. by the employee at vesting/transfer can be an important consideration in The company should also establish a system to track its mobile employees, minimizing costs to the organization. allocate equity compensation, and ensure payrolls in the applicable foreign locations are equipped to meet the relevant tax withholding and information Mobile employees can create additional reporting requirements. The requirement to withhold is a key area of focus for complexity as they may have moved many tax authorities for the simple reason that they realize many employers between jurisdictions during the award struggle to get it right with respect to internationally mobile employees. vesting period. Generally, the entity (or Companies should recognize the various traps for the unwary, such as social entities) benefiting from the services of security obligations that are not levied uniformly across jurisdictions. the mobile employee should bear the From a broader perspective, the charge-out of any employee compensation cost of the stock-based compensation. costs should be closely monitored, especially for ‘C-suite’ executives. Opportunities may arise depending upon the country’s specific laws—for Withholding on awards example, recently enacted US tax law restricts the US corporate income tax Depending on the method used to deduction for compensation paid to the CEO, CFO and top three highest paid account for such awards in the United executives of public companies to US $1 million. The elimination of the so- States, it may be necessary to determine called performance based compensation exception may result in increased US whether the method of settling stock corporate income taxes payable (as well as the write down in value of related awards creates unintended liability deferred tax assets for financial statement purposes)—unless a portion of these compensation costs can be recharged to foreign subsidiaries that benefit from some portion of the services.

‘Top Ten’ global mobility issues for Tax Directors to think about 9 5. Deferred compensation and foreign pension arrangements

Detailed analysis and complexity can arise Actions to consider Deferred compensation plans should be reviewed for effectiveness Deferred compensation arrangements in non-US jurisdictions and non-US plans should be reviewed for US under one country’s law are not compliance where participants may be (or may become) US taxpayers. necessarily tax deferred under the laws These plans have created the need for companies to manage compliance of another jurisdiction. Companies may in multiple locations for a single employee who has relocated and earned not be aware of the technical difficulties compensation in several countries. Companies may consider modifying such in achieving a deferral under foreign law arrangements or discontinuing their use for certain employees. and, thus, compensation may become taxable at vesting to employees. This The application of Sections 409A and 457A should also be reviewed to may occur despite the fact that no cash determine if modifications can be achieved to avoid accelerated US taxation payment has been made to the employee and/or penalties. Note that any company with a contractual vesting clause to fund the tax. The result: unforeseen in their deferred compensation plan (e.g., age plus years of service results in tax costs that could be passed on to immediate vesting) may need to focus on Section 457A for US employees the employer under the terms of a tax working for the benefit of a foreign affiliate in a non-treaty country. reimbursement agreement. Foreign pension plan participants who are US taxpayers should be identified to determine whether they may have US taxable income resulting from plan Example – where mobile employee participation. Form W-2 reporting requirements should also be reviewed. is a taxpayer in the United States Where individuals are in plans potentially covered by a treaty, the terms of the treaty should be reviewed to determine whether and to what extent relief is From a US tax perspective, Internal available. For example, relief may be limited to the host jurisdiction only, which Revenue Code Section 457A creates can create unexpected tax costs. special issues for companies where vesting of deferred compensation rights occurs but payment is deferred in certain countries that do not have a tax treaty with the US and/or where If the individual is a ‘highly the organization itself is subject to compensated’ employee, it may be limited taxation. Overseas deferred necessary to capture taxable income Various types of compensation arrangements, similarly, from the ‘accrued vested benefit’ (which compensation and should be reviewed for compliance with includes the growth in value), even benefits are offered Section 409A where employees are sent where there are no current employer to work in the US or where US citizens contributions. A number of treaties to employees—e.g., variable are locally employed by a foreign entity. provide for favorable tax treatment payments are typically made of employee contributions, employer either in the form of non- In addition, global organizations contributions, and growth in foreign guaranteed bonus awards or often employ foreign nationals in the plans, as well as providing for corporate stock-based payments. Leading United States who remain covered tax deductions where otherwise not companies develop a baseline cost by a corporate retirement program available. Rules can differ widely so estimate of their tax equalization in their home country. These foreign individual treaty analysis is required. expense and formalize an pension plans may have preferential accounting policy to deal with tax treatment under local tax laws; Another consideration is whether however, they generally don’t meet Section 409A applies to the foreign the variable pay components. the ‘qualification rules’ for preferential plan as foreign plans that do not qualify Budgeting can help with accruing treatment in the United States. In some for the treaty or the broad-based costs, however the tax costs cases, where the foreign plan is both retirement plan exceptions are left with also need to be accrued on the funded and vested, there is a potential very few options. The consequences of books of the ‘correct entity’ and US tax liability (and employer reporting failure to comply with these rules can reconciled as actual tax payments requirement) under Section 402(b). be significant. are made (updated annually).

‘Top Ten’ global mobility issues for Tax Directors to think about 10 6. Information reporting requirements

A growing trend by countries Example – FATCA reporting accounts, and expensive penalties for seeking greater transparency requirements in the United States noncompliance may be levied. For example, if a US citizen or resident and revenue The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 holds an interest in a foreign pension plan, that interest may be reportable. More countries are enacting or in the United States to address noncompliance by US taxpayers In addition, certain deferred promulgating foreign financial asset compensation arrangements offered information reporting requirements for using foreign accounts. One mechanism implemented to combat by non-US parent companies may be individual taxpayers—this may cover reportable under these rules. not only foreign bank accounts, but noncompliance is requiring foreign also assets held outside of that country. financial institutions (FFIs) to report US FBAR forms also may Governments are seeking to boost their information to the IRS about financial be required revenue through these disclosures to accounts held by US taxpayers (or ensure that they are receiving their by foreign entities in which US Mobile employees also may have a proper share of tax associated with taxpayers hold a substantial ownership requirement to report foreign financial these assets. Examples include the interest). FFIs can register directly accounts on FinCEN Form 114, (so- United States, India, Japan, and Spain. with the IRS or comply with FATCA called FBAR) in the United States. This intergovernmental agreements. filing is required if a US person has Compliance with these requirements certain financial interests or signatory can be daunting for foreign nationals Section 6038D, enacted under FATCA, or other authority over certain foreign on assignment and generally increase creates complex information reporting accounts. From a practical perspective, the complexity and cost of compliance requirements for certain US citizens or much of the same information may for companies covering tax preparation resident individuals that hold Specified need to be reported on both forms expenses for their mobile employees. Foreign Financial Assets (SFFAs). This (Form 8938 and FinCEN Form 114); Additionally, penalties levied for the provision mandates the reporting on nonetheless, there are key differences failure to report such assets can create IRS Form 8938 of a broad array of requiring attention to detail. unexpected costs to the business. foreign assets, not just foreign bank

Actions to consider Companies should understand the information reporting requirements for both home and host jurisdictions for their mobile workforces. The expected deluge of information to be received by revenue authorities from initiatives such as FATCA and CRS (the Common Standard on Reporting and Due Diligence for Financial Account Information proposed by the OECD) is prompting governments to sharpen their focus on international issues and increase penalties for noncompliance. Specifically with respect to the United States, companies should understand the process for completing IRS Form 8938 as required by Section 6038D and raise questions regarding compliance in this area. They should also stay abreast of the reporting rules connected with employees who have signature authority but no financial interest in certain employer-owned foreign accounts.

‘Top Ten’ global mobility issues for Tax Directors to think about 11 7. Frequent business travel

This critical business need can generate tax Under cooperative compliance agreements with compliance risks a foreign tax authority, an employer with robust payroll processes may withhold and remit the required individual taxes for business travelers. Some tax authorities also allow composite Frequent business travel allows tax filings to remit required individual taxes for business traveler populations. companies to have a highly mobile Both options eliminate the need for each individual to file a return. workforce while being cost effective, making it an attractive alternative to the traditional assignment. While this sounds appealing, companies create corporate income and value- Heightened scrutiny by should be aware that tax authorities added tax exposure in the host country tax authorities are continuously looking to increase or state. This may occur even if the time Tax Directors are becoming their tax base by targeting these spent there is relatively limited. These increasingly concerned about the nonresidents conducting business in concerns apply equally to inbound and potentially adverse tax consequences their jurisdiction. outbound mobile executives. caused by these travelers. Countries Business travelers required to file a and localities are expanding their Difficulty tracking tax tax return in a foreign jurisdiction audit activities due to their need for compliance obligations generally will need a taxpayer revenue to fund fiscal deficits. Audits Business travelers are generally identification number (in the United related to PE and employer withholding not part of the traditional mobility States, this is an individual taxpayer and reporting are becoming more program and are often not on the identification number or ITIN, as the frequent and intense. Tax authorities ‘radar screen’ of HR or corporate traveler may be ineligible to have a may inquire about company personnel tax. Business units may incorrectly social security number). Each country and their in-country presence. The assume that if an individual spends will have its own processes but in many company’s task of compiling such less than a specified number of days in countries, these numbers are becoming information in response may be very a particular tax jurisdiction (usually increasingly difficult to obtain. challenging if no process is in place to 183 for international purposes), there track this information. are no tax consequences resulting from the individual’s activities. This is often not the case since the business traveler may not be resident in a treaty partner country that contains favorable thresholds for incurring tax. In addition, depending on the structure of the assignment or the enterprise itself (for example, certain branch structures), an individual may not be eligible to use the treaty.

What adverse consequences may arise? In addition to incurring individual income and employment taxes, the nature of the individual’s activities may

‘Top Ten’ global mobility issues for Tax Directors to think about 12 Cross-state business travel within the United States Business travel between states within the United States, can also present risks and additional complexity for corporate tax teams. Certain states (e.g., New York) are particularly focused on mobile populations. Wage withholding and reporting compliance for this situation is a routine part of New York and other state payroll tax audits.

Actions to consider One of the most significant challenges is that the company may not be aware that they have frequent business travelers creating cross-border compliance liabilities, and are surprised to know how many they actually have. Companies should consider establishing a monitoring program in order to document and understand travel patterns and areas of potential exposure. Once cross-border business travelers are identified, companies should review the activities of such employees to determine whether there is any tax exposure at either the individual or corporate level. For international travelers, a treaty may provide relief from personal income tax for short term business travel under the dependent personal services article. However, to claim such relief, most treaties tie personal income tax liability to whether the corporate employing entity has a PE in the host jurisdiction, a conclusion only the corporate tax teams are likely to know. Problems can also arise because the assumption that treaty relief is available in the host location is increasingly coming under challenge. The adoption of an ‘economic employer’ definition for purposes of treaty relief is becoming the norm with many tax authorities. If this occurs, liabilities can arise in host locations from day one and although credit for host location tax may be available, the administrative burden required for compliance can be complex and costly. In addition, companies must consider whether employment costs are recharged to an affiliate (directly/indirectly) in the country where the individual is working. The treaty may also look at the length of time that services are provided to determine if corporate tax is due. For example, is the traveler part of a larger group of employees working there and perhaps part of a plan for a long-term presence in that country? Consistency is also important—what is presented for tax purposes should be consistent with other representations being made to relevant authorities such as for immigration purposes and in Europe, for compliance with the ‘Posted Workers Directive.’ This requires companies to plan ahead and not simply address problems after they have arisen.

‘Top Ten’ global mobility issues for Tax Directors to think about 13 8. Entering new markets

Upfront planning for mobile Unexpected assignment costs However, Tax Directors may wish to workforces is critical for Mobile workforce-related costs confer with their company’s mobility professionals about how to avoid any corporate growth agendas frequently come as a surprise to business units and management. This unexpected increases to cost estimates is especially true for mobile employees generated for the project under the Growth objectives are a critical goal current mobility policies. For example, for many multinational enterprises. covered under tax reimbursement or equalization policies. Cost large tax equalization and gross-up However, cost containment is also a payments may occur that are not top priority. When businesses embark estimates for mobile employees can be generated to help the business properly budgeted. To avoid them, on new business opportunities, companies may consider: such as entering new markets, Tax make informed decisions as to cost. Directors should advise not only on Special consideration should be given • limitations on reimbursement of the appropriate corporate structure, to those senior executives needed to employee tax amounts in the case of but also take into account how implement the project as their related non-company income mobile workforces will be part of tax and assignment costs are likely • special rules for employees who are the operation. For example, will to be significant. Advanced planning separated from employment but who mobile employees cross borders to can help minimize these costs, such as remain resident in a foreign location, get the operation up and running? when certain compensation is awarded. i.e., so they are not able to expose the Have the appropriate work Leading companies develop a baseline business to increased tax gross-up costs authorization visas been obtained to cost estimate of their tax equalization on final tax equalization settlements allow the company to be compliant expense company-wide and formalize from a payroll withholding and • policy language regarding any an accounting policy to deal with reporting perspective? What mobile delayed tax reimbursements pursuant the variable pay components. They workforces will be part of the final to Section 409A. typically develop a methodology for business structure? maintaining and reconciling accurate budgets and accruals. Employment structures and asso- ciated enterprise-level tax risks The most efficient employment Actions to consider structures for mobile workforces in any new market should be determined Companies should ensure that mobile workforce costs, efficient upfront, along with a strategy of what employment structures, and related planning opportunities are foreign taxes should be remitted and by determined upfront and considered in new market decision-making. which entity. This should include not Mobility professionals should be included in the core planning team at all only corporate income tax, but a variety stages so that if management alters the growth agenda or implementation of other enterprise level tax obligations plan, any mobility-related cost impacts can be identified. that may be generated by mobile Companies should prepare cost projections at the pre-assignment stage to workforces. Most notably, value-added provide the business unit and management with an estimated budget relating type taxes can apply if the entity that to mobile employees and allow the business to make decisions around the employs the mobile workers performs compensation elements and benefits to include in the assignment package. services for the related entity that Cost estimates should be refreshed for changes to equity compensation and holds an outside contract to customers. personal circumstances, as well as new external variables such as exchange Failure to identify and report these rate fluctuations and changes in tax legislation. Trailing liabilities related to obligations can result in interest, deferred compensation, such as equity, can also necessitate the preparation of penalties, and other unexpected costs revised cost estimates even after an assignment has ended. for the business.

‘Top Ten’ global mobility issues for Tax Directors to think about 14 9. Acquisitions and dispositions of business interests

Risk assessments should unaware of these potentially large • Acceleration of stock vesting in a home take into account potential liabilities may be in for a surprise and/or host country upon a change of if these liabilities either come due control (acceleration provisions may be liabilities associated with or are discovered upon audit by tax included in the equity plan, severance mobile employees authorities after closing. or retention agreement, assignment letter or employment agreements; Due diligence of pre-closing liabilities Examples of potential risk areas some countries, irrespective of these is a critical part of any acquisition provisions, may trigger accelerated • Payroll reporting compliance for or disposition transaction between vesting based on local laws and mobile employees—including social unrelated parties, irrespective of increase the tax equalization cost security and income tax whether stock or assets are transferred. associated with mobile employees) Although ‘known liabilities’ are • Corporate income tax filings • ‘Parachute payments’ paid to generally disclosed, there are various obligations connected to mobile mobile employees and any Section mobility-related liabilities that can be workforces 280G/4999 rules in the United States unforeseen and create unexpected costs • Individual income tax reporting or similar so-called golden parachute for the parties that should be taken failures by the employees payment tax issues connected with a into account before closing. Companies change-of-control.

Actions to consider Companies should consider including in their pre-transaction risk assessments potential trailing liabilities and a target company’s adherence to reporting requirements related to mobile employees. Global mobility teams are seldom brought in during the due diligence phase when negotiating an M&A transaction. The corporate tax team is typically at the table and should consider pulling in the relevant expertise as early as possible to help identify potential areas of exposure. Organizations should understand the process for complying with rules under Sections 280G and 4999 in the United States as well as any accelerated vesting implications in the foreign jurisdictions where the target company is operating.

‘Top Ten’ global mobility issues for Tax Directors to think about 15 10. Payment of international director fees

Withholding and other Unless exempt from US tax under Social security and residency issues tax obligations should be a tax treaty, a nonresident director There may also be social security issues of a US company will generally be keenly tracked to consider for US directors of foreign subject to US federal income tax on companies which in some cases can US source compensation received Multinational corporations seeking a be mitigated under a social security for their services. The US source (totalization) agreement. global perspective often have directors compensation is also subject to on their boards who are resident in reporting and nonresident withholding In addition, an unexpected and other countries. Nonresident directors under Section 1441. The US company potentially adverse tax result may can present a number of unique tax compensating the director generally occur where a non-US company withholding and reporting issues that has the obligation to withhold and conducts its director meetings outside will depend upon the jurisdiction report the income. Failure to comply the jurisdiction in which the entity is involved. For example, the income tax with withholding (if required) and located. In many countries, this may and payroll withholding obligations reporting on Form 1042-S may result give rise to the entity having a tax vary by country and by treaty so an in a variety of penalties for the US residence elsewhere if that residency analysis of the domestic rules of the company. In certain cases the US depends on the entity’s place of countries in which the nonresident company may also have foreign management and not solely on its place board member is performing services reporting obligations as well. of incorporation. This may potentially and the applicable treaty is required. result in other tax filings and liabilities.

Example of withholding obligations – United States For a nonresident on the board of Actions to consider a US company, a key issue is the determination of the US source portion Companies should review the status of directors on the boards of of any director’s compensation where companies not resident in the countries where the directors reside. They may develop a process of tracking director meetings and activities the individual is a nonresident and to determine any portion of directors’ fees earned in another country. duties are performed both in the United States and overseas. Similarly, many In addition, treaties should be reviewed to determine whether any exemption US citizens are now on the boards of or modification of taxable income is applicable and ensure completion of foreign companies and the terms of appropriate documentation (e.g., US Form W-8BEN) to validate the foreign certain treaties can result in fees for status of directors. meetings held in the United States being treated as sourced to the country where the company is resident.

‘Top Ten’ global mobility issues for Tax Directors to think about 16 Let’s talk

For more information about these issues, please contact your PwC Global Mobility Services engagement team or one of the following professionals:

Peter Clarke Julia French Global Leader +1 (203) 539-5474 +1 (646) 471-4743 [email protected] [email protected] Kathy McDermott Al Giardina +1 (203) 539-4060 +1 (203) 539-4051 [email protected] [email protected] Clarissa Cole Derek Nash +1 (213) 217-3164 +1 (202) 414-1702 [email protected] [email protected]

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