Planning for a globally mobile workforce during Coronavirus
The current disruption to international employment arrangements caused by Coronavirus, has thrown up many unfamiliar compliance challenges. Reports abound of employees stranded overseas working remotely in an unexpected location, unplanned extensions to overseas assignments, as well as employees being repatriated early due to postponement of overseas projects.
Employers must review regularly the impact of these scenarios on their international employee payroll, unexpected tax and legal risks, and plan how to avoid penalties, and reduce confusion amongst key global talent.
The main issues to consider are:
International employee payroll obligations
International employee payroll withholding failures often cause the highest financial exposure for an employer. Questions arise as to which country’s payroll the employee should remain on, where the employee should be paid and whether all tax and social security withholdings are correctly made.
Agreements may be in place with tax authorities to allow for an apportionment of salary to be taxed according to days spent working in the country. Disrupted work and travel patterns are likely to result in changes being required to these agreements to ensure accurate tax withholding. HMRC has recently announced that, where employees have suffered significant delay in travel restrictions caused by Coronavirus, HMRC will allow for amendments to existing agreements (S.690 ITEPA 2003 Directions) upon written request.
Adjusting international employee payrolls for disrupted assignments can be complex but does present the opportunity to review existing payroll arrangements generally. This review should include a check to ensure the payroll processes are still robust, and early identification of any under or overpayments of tax rather than after the tax year end.
Unexpected tax charges
An employee returning to their home country early or remaining in the host country for a prolonged period can cause unplanned tax residency issues. This can lead to unexpected tax charges in home and host countries for both employer and employee. An employee becoming resident in more than one country at the same time is also possible, with double tax charges arising where double tax treaties are not considered or do not exist.
Some countries’ tax authorities have already announced some relaxation to their residence rules in light of Coronavirus, and this may prove helpful in some circumstances, but not all. For example, HMRC had announced that up to 60 days spent in the UK for exceptional circumstances can now include Coronavirus-related situations (e.g. being advised by a health professional to self-isolate in the UK), and can be disregarded for statutory residence test purposes.
This creates a greater need for comprehensive and contemporaneous record-keeping by both the employer and employee in order to manage reporting obligations, such as tax return filing.
Permanent establishment risks
Corporate tax and VAT liabilities as well as other reporting requirements may arise for the employing business where a permanent establishment is inadvertently created by virtue of the employee working remotely in an unplanned location.
There is a need to review the potential impact of changes to employee’s roles and responsibilities to ensure a permanent establishment has not been created inadvertently.
Immigration and local laws
Work permits must be in place, otherwise both employer and employee face penalties and potential expulsion from the country they are working from. As a result of the Coronavirus disruptions, work permits may have expired or the employee may have decided to self-isolate close to family in another country where no work permits have been applied for.
Employees working remotely overseas will also bring about compliance with the country’s local labour laws. Employers must ensure they adhere to working time requirements, leave and overtime entitlements, etc.
It is crucial that employers are able to track the movements of their employees to manage these immigration and legal issues. New tracking systems may need to be implemented to replace the existing systems that may not be sufficient.
With Coronavirus having a major impact on business activity, employers could be planning staff redundancies to save costs. On termination of an overseas secondment, the employee typically returns home to resume their role with the employer. However, due to the economic downturn or an unplanned early return, there may not be a role for the employee. In these circumstances, the employer may terminate the employment and not just the assignment agreement.
Employers should seek legal advice. The tax and social security consequences on international employments are complex and will depend on what payments are made to an employee on termination. Some employers may have agreements to ‘gross up’ tax liabilities to ensure the employee does not suffer the tax charge, which would increase the charge to tax even further. Furthermore, double tax treaties may determine the tax treatment of any payments made on termination, otherwise double tax and reporting could arise in more than one country.
Get help from the experts
Our specialist Global Mobility team can help global employers navigate these complex situations. Get in touch with us for a free no-obligation consultation and to find out more information.