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'Top Ten' Global Mobility Issues for Tax Directors to Think About

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'Top Ten' Global Mobility Issues for Tax Directors to Think About www.pwc.com/globalmobility ‘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
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