The Jet Set - Managing tax liabilities for international commuters
It is probably comes as no surprise that the fastest growing assignee is the “international commuter”. The problem for many employers is that these “business travellers” are often not classified as assignees and nor do they fit into any existing corporate policy –as a result they very often end up “under the radar”.
What is the current position for the employer?
Have a clear project plan which incorporates the communications timeline, the resources and budget etc. The sponsor, for what will be a large change management programme, is unlikely to have hands on operational global mobility or relocation knowledge, unlikely to be a subject matter expert, or be a service delivery expert. You and your team have that invaluable knowledge and expertise and are the key resource that will make a success of this change. In the planning process don’t just map the data, but map the people between the two organisations and engage both sides. This will enable them to not only work together but to support each other as well throughout all the journey’s ups and downs.
Initially, we need to look at whether or not a business traveller is exempt from tax in the host country under a double taxation agreement. The typical exemption clause (usually Article 14 or 15 in the relevant treaty) requires the individual to be (a) resident in the home country (b) spend less than 183 days in the host location in any 12 month period, and (c) for the salary costs to remain in the home country entity and not be recharged to the host entity. For most countries, a quick check that the rules are not being breached is sufficient and there may be no additional registration requirement or filing needed.
The UK, however, has a much stricter approach. For business travellers working in the UK, exemption from tax withholding is not available by default, but must be applied for. In the absence of such an application, the UK “host” entity is technically required to operate UK tax withholding, include the relevant individual(s) on a monthly RTI submission and make monthly payments of tax. If it subsequently turns out that a treaty claim is valid and the tax is not due, the refund application must be made on an individual tax return filing at year end, typically including a copy of a residence certificate from the home country.
Fortunately, there are some de minimis limits. No reporting is needed for most business travellers that spend less than 60 days in the UK, provided that those 60 days are not part of a longer, more substantial period. Furthermore, the requirement to avoid recharging salary costs to the UK is also relaxed under the same 60 day rule. It should however be remembered that this relaxation only applies if an application has been made. In addition, it is essential that some form of robust reporting or tracking of travel is put in place, which is not only a requirement under the agreement, but is often a key component of any employer compliance review.
So what happens if the treaty conditions cannot be met, for example a commuter is spending more than 182 days in the UK?
In that situation, the UK host employer must operate UK tax withholding from day one. It is often the case that tax withholding cannot cease in the home country and a “double withholding” situation arises. Typically, the employer may need to advance the UK tax in the form of a loan, which is then repaid when the home country tax return is filed and corresponding tax reclaim made. It is critical that the company has a defined policy covering this type of situation and legally enforceable loan agreements, which can be enforced should the employee chose not to refund the home country tax on receipt or they leave the employment prior to any repayments being made.
An additional consideration will be that of social security. Employers are often unaware that even if exemption from tax is possible under a treaty, this does not extend to social security. In order to ensure compliance, the home country employer should apply for a certificate of coverage (known as an “A1” in the European Economic Area) to ensure social security exemption is approved in the host location. Whilst there is no set time limits on when it becomes necessary to do obtain a certificate, it is certainly recommended where a business traveller begins to spend more substantial periods in the host location. As an example, HMRC will typically expect such certificates for anyone that is spending on/around three months or more in the UK – although they could in theory require this for shorter periods of travel.
Tracking, reporting and compliance
We are often asked “how will the authorities even know about these people”? It is a good question, but it seems each jurisdiction is looking at this very issue and adopting different approaches. Some, like the UK, will put the onus on the “host employer”, often requesting copies of tracking reports and imposing severe penalties for failing to report or settle liabilities. A similar approach of tracking and reporting is currently being implemented by the Swiss tax authorities. Others, such as the Netherlands will often approach this as part of the social security audit, requiring details of all individuals that have worked in the relevant locations, but not paid into the social security system – which would, by default, include business travellers.
For employers that currently have no system in place, it is essential that tracking systems are identified and monitored on a regular basis. For countries with strict procedures such as the UK, it is essential that relevant applications are made and full compliance requirements met. Many jurisdictions have identified this as an easy target, with many employers unaware or non compliant – and are making significant steps to identify and penalise as part of the wider remit of increasing tax revenues.
About the Author: Richard Watts-Joyce CTA, ATT
Richard is a co-founder and partner of the UK office of Global Tax Network, managing and planning policy development, risk management and tax and social security compliance for international assignment programs. Richard has over 18 years of experience in international tax consulting, having previously worked for KPMG and PricewaterhouseCoopers. Richard is also a member of the European Register of Tax Advisers for the Confédération Fiscale Européenne (CFE) and International Tax Planning Association (ITPA,) and a regular speaker at relocation events and training conferences.