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13 Apr 2021
by Andrew Bailey

Global mobility and the potential tax issues that may have arisen during the pandemic

Reward and global mobility professionals are often faced with the challenge of supporting the home business as it deliberately expands into new locations or, particularly in light of Covid-19, finds itself with employees unexpectedly residing and working in another country.

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When entering an entirely new location either on purpose or ‘accidently’ there are wider tax considerations to address.

At the outset of the pandemic concessions by tax authorities and relaxations to the general rules meant that ‘doing nothing’ was a potential option for those residing and working in another country. However, as time has passed this has not been the case for many months. Indeed, in many scenarios, employees are now choosing to work remotely in a different country to that in which their employer is based. Whatever the reason, if you have employees working in another country, employers need to consider potential payroll withholding obligations. If you fail to consider these, compliance obligations will not be met. Potential tax planning and cost savings could also be missed. 

The practicalities of paying those abroad

Generally, either as a matter of policy or because there is no local payroll or entity in the new location, an individual may be kept on the home payroll. Many companies do not realise that there may still be an employer withholding obligation in the new location or that home payroll obligations could be impacted. It is essential that you explore all rules and regulations and, where necessary, establish a real or “shadow payroll” to account for local taxes from day one. 

A local withholding obligation may apply to individuals working from home in another country. In particular, this is where employers need to be aware and be very careful, as failure to operate payroll withholding may result in the employer being responsible for the employee’s taxes and being unable to recover this from the employee.

It may be possible to run an in-country payroll through a local agent, and some countries offer relaxed payroll rules for certain expatriates and Covid impacted employees, so always seek advice. Do not assume that just because an individual may be tax treaty exempt – if they are tax resident elsewhere – that there is no employer withholding obligation in the host country/country of working and there is no need to seek local tax authority approval for not withholding.

Social security taxes also need consideration

Payroll tax is one issue to address, but what about National Insurance contributions/social security? Where should the employee and employer pay social security?

The world of social security is essentially governed by three separate sets of rules:

  • Europe (EEA) – EC Regulations
  • Bi-lateral Agreement countries (‘Reciprocal’ or ‘Totalisation’)
  • Non-Agreement countries.

Which rules apply may depend on the following:

  • Home/host country combination
  • Nationality of the assignee
  • Where assignee was last insured (paying contributions)
  • Duration of assignment
  • Location (residence) of the employer.

For moves within Europe the general rule is that you ‘pay where you work’. As an exception to this you may apply for an A1 certificate to keep the employee within their home system if all relevant conditions are met.

For other moves, do check if your country has a bi-lateral agreement with the new location.  That agreement could exempt the employee from social security in the new location where a valid Certificate of Coverage is obtained.

Time limits and conditions will apply to both of the above situations and individual rules and agreements should be consulted.

Where no agreements exist at all then home and host country rules will determine whether social security is payable and for how long. It may be payable in both. Special measures have been introduced as a result of Covid-19 to allow for relaxation of strict rules, so do check to see how these may be applied.

Other issues for consideration

This article has touched only on the employer payroll issues that may arise. We have not addressed a number of potential issues such as:

  • Tax planning
  • Individual/employee tax obligations – potential tax treaty application
  • Dual withholding – how to mitigate
  • Corporate tax residence and ‘permanent establishment’ issues
  • Recharging costs – impact on treaty exemption, transfer pricing & VAT
  • Immigration & labour law
  • Other issues affecting ability to work in another country e.g. licencing and regulations.

As an employer you should consider all of the above.

Andrew Bailey is head of Global Employer Services at BDO LLP.