Across the globe, the spread of the novel coronavirus (Covid-19) is having a significant humanitarian impact and increasingly, an economic impact from stock markets to global supply chains. As governments move rapidly to contain the spread of the virus, global employers are also working to address how to manage employees in affected areas while continuing business operations. The daily developments have prompted management advice from the Wall Street Journal to the Harvard Business Review, with the U.S.
Center for Disease Control (CDC) noting that the virus could cause serious disruption in work for employees. For multinational companies with global operations, the increased potential for employees to relocate across international borders, whether as part of business continuity strategies or for personal reasons, the business may face a range of unexpected tax issues to also address.
In this article, we’ll look at how governments are responding relating to individual tax compliance and address the tax risk areas employers should consider as they formulate policy for working arrangements during the coming months.
A ‘wait-and-see’ approach is being taken by most governments in response to the impact on individual annual tax filings and tax changes in response to the economic effects of the coronavirus. While a handful of countries have extended tax filing deadlines to ease the compliance burden for taxpayers during a challenging time, many are yet to announce changes. Taxpayers should therefore continue to take steps to meet their tax compliance obligations.
For internationally mobile employees who may have tax return filings in more than one country, the same steps should be taken for compliance. Where there are significant obstacles to obtaining information required to complete a tax return, it may be possible to extend the filing deadline by application or alternatively, review whether there is reasonable cause for a late filing to request the tax authorities abate possible penalties.
By contrast, the 2020 Budget announcement in Hong Kong has directly addressed the impact of coronavirus, alongside the months of protests, by putting forward a range of measures intended to simulate the local economy. The Budget proposes a reduction in tax on employment income, capped at HK $20,000 (approximately US $2,550) and one-time cash payout to Hong Kong permanent residents aged 18 and above of HK $10,000 (approximately $1,250).
For global companies with internationally mobile employees in Hong Kong and other countries, it will be important to identify how such incentives are handled as part of assignment and tax policies. Will the benefits accrue to the individual or the company? How is this being communicated to internationally mobile employees? Additionally, for employees caught up in affected areas, what support is being provided to manage their taxes and mitigate the impact of potential late filing penalties?
Many employers have or are likely to announce changes in working arrangements over the coming months. Initiatives being deployed by multinationals include allowing employees to work remotely from home, limiting business travel domestically and internationally, cancelling events and relocating employees to new international locations. The increased flexibility has the potential to create new challenges for mobility professionals, expanding their remit and increasing the complexity of managing tax risk during the coronavirus response.
Outside a company’s formal employee mobility program, multinational companies have seen employees choose to relocate themselves and their families in response based events in their assignment country over the years. Already, companies have seen employees move out of China ahead of the virus spreading and others within the Asia-Pacific moving to less affected countries. Taking the work from home policy beyond its intended result, understandably employees may take precautions that employers may have little or no visibility of, particularly where travel is arranged outside corporate travel booking systems.
Mobility professionals will need to work closely with HR Business Partners and business units to find and manage employees who move to a new country to work. While businesses are responding to the virus with travel guidelines, employees may move without formal approval.
Where employees work from a country remotely or in a country in which the company does not have an entity, they put the business at risk of creating a corporate taxable presence in that country. This may result in the profits of the employing company being pulled into corporate tax in the country the employee moves to.
The facts and circumstances of each situation should be reviewed in turn, but where an employee is based on a long-term basis in a country they may create a permanent establishment by having a fixed place of business or based on the role they are performing in the country.
While many double tax treaties provide protection, where there is no treaty or there are longer term relocations, it will be important to review to see whether stealth expats are creating corporate tax risk and for the business to be prepared to take appropriate action – this may involve relocating the employee or a leave of absence in some cases.
Where employees relocate to a new country in response to the spread of the virus, they may also trigger personal income tax liabilities. Employees will need to understand the individual tax implications of their presence in a new country, whether they can plan travel to mitigate taxation under a double tax treaty – for stealth expats, multinational companies may want to extend tax assistance to these new ‘expats’ where it helps manage tax compliance.
Global employers may also find they have payroll reporting and tax withholding obligations for these employees, whether through a local entity or as a non-resident employer. The associated obligations that fall on the business need to be understood to ensure continuing global compliance but could result in additional complexity and tax costs, where local employment tax liabilities arise.
While many countries have an extensive double tax treaty network, there is typically a more limited number of bilateral ‘totalization’ agreements that allow for employer and employee social security to be made only in an employee’s home country. Employees working in new country locations may therefore trigger additional social security liabilities for themselves and their employer, which can be very high.
Employees should also be mindful of the law of the country they relocate to or from. Some countries, like Brazil and China, may regard locally paid income as wholly taxable in that country, irrespective of where the individual physically works. To the extent a stealth expat becomes taxable in another country, they may face complexities and unexpectedly higher tax burdens. It will be for the company to determine what support, if any, the specific situations warrant.
Multinational companies are reviewing the impact of the virus across their business, their suppliers and customers. It may be advisable to relocate teams of employees in strategically important roles out of risk areas or keep them in place for a longer than expected period of time. Formal assignments may increase as a result of these relocations, for some employers, resulting in assignments arise that do not fit in the parameters of existing company mobility policy.
Agility and proactively will be needed to identify the appropriate benefits employees and their families should receive, the range of tax and payroll issues and how to effectively manage these assignments over a possibly unknown period of time.
HR leaders play a critical role in ensuring businesses execute on their global growth strategy, with these professionals increasingly having a seat at the C-suite table. For mobility professionals too, global growth requires strategic engagement with the business to enable talent to deliver globally. The coronavirus presents a range of unique and complex challenges to tackle from wellbeing to benefits to taxes.
With proactive engagement with the business, mobility professionals can help navigate the uncertain path ahead as multinational companies plan and act - identifying tax risk, managing complexity and cost, and enabling employees to continue working wherever they are located.
