Global payroll professionals would seem to have enough responsibility when handling payrolls for local nationals in multiple countries. Country-specific earnings reporting, including taxable fringe benefits, income and social security taxation, statutory reporting, vendor management, and Sarbanes-Oxley (SOX) Act compliance are just some of these responsibilities. But with most organizations deploying at least some personnel across country borders in a variety of roles, these situations can add even more complex challenges to an already complicated global payroll picture.
Thus, global payroll professionals also need to become familiar with a variety of cross-border immigration and tax rules and techniques as yet another responsibility. Adding further to this complexity is the fact that global payroll professionals may not always be informed in advance of such matters, thus requiring a variety of time-consuming and costly exposure mitigation processes and procedures after the fact, which often require assistance from outside immigration and tax advisors.
Where to Start?
Among the first questions to ask in such situations are:
- Who are these employees, and what tasks and activities are they doing in the other country?
- How long will they be performing these tasks and activities in the other country?
- Does my organization have a legal entity in that country?
- Who is bearing the costs (salary, bonus, expenses, etc.) of these employees—the employee’s home country legal entity, the host country legal entity, or a client project or other entity?
In many cases, these employees may be conducting sales calls or attending business meetings, conferences, or seminars—and the costs remain in their home countries. Where this is the case, a payroll issue usually doesn’t exist. But, although entry into the country on a “business” visa may seem to be a relatively simple matter, in some cases there may be work for the company’s global mobility organization (GMO) to obtain a business visa where invitation letters, birth certificates, visa applications, medical records/inoculations, etc., may be required.
But employees traveling with proper business visas and who are careful to conduct activities consistent with that visa type almost always need to be cognizant of the number of days they spend in the host location.
How Many Days in Host Locale?
Tax treaties often specify a period not exceeding 183 days (either in a 12-month period or calendar year). Depending on the country, the trigger point may be fewer than 183 days. Guidance in this area can be obtained by reviewing the applicable income tax treaty between the two countries (usually under articles related to dependent personal services). Where no such tax treaty exists, the trigger point may be the first day of presence in the host country. Consultation with an outside tax advisor may be necessary when there is uncertainty.
It’s important to understand that when the employee is present in another country for a number of days that exceeds the eligibility period specified in the tax treaty, the employee usually becomes taxable retroactive to the first day of presence in the host country. Global payroll professionals need to make arrangements to ensure compliance with the host country income and, potentially, social security tax rules (although compliance with local social security taxation may be subject to different rules entirely). Penalties may be applicable as well.
Where it is known from the outset that the employee will be taxable in the host country, either because of an expectation to exceed the number of days as explained above or because their activities are not eligible for tax treaty exemption, as is usually the case when costs are borne by an entity within the host country, then a proper work permit or visa is usually required. As part of this process, the employee would also obtain a host country tax identification number, which is required by payroll in order to report host country wages and remit tax withholdings.
Occasionally, there may be de minimis income limitations that provide for exemption from income tax withholding. Such is the case in the United States, where tax withholding is not required on “commercial travelers” who satisfy the following criteria:
- Their presence in the United States is for no more than a total of 90 days during the taxable year.
- Compensation they receive for work performed in the United States totals no more than $3,000 during the taxable year.
- They are employed by a U.S. employer in a foreign country or a U.S. possession or by a foreign employer not engaged in a trade or business in the United States.
But you can’t stop there. You’re only at the beginning of the process. Since host country taxes in most cross-border situations, as in expatriate matters, are usually funded by the organization through a “shadow payroll,” these tax payments are treated as reimbursements to the employee and thus must be included as earnings (home and host), which are then grossed-up and/or tax equalized.
Refunds back to the company are usually possible when credits are available for taxes paid to other countries and are considered as a component of the tax return/equalization process. Completing this entire process can take at least a year, as the tax equalization calculations are determined only after the individual tax returns are filed. None of this is good news for the business unit trying to close a project when costs continue to roll in well afterward.
Do You Have a Legal Entity in the Host Country?
Very large organizations doing business globally have some type of legal entity in those countries where they conduct business activities. However, not all legal entities may be chartered to conduct the types of activities cross-border employees intend to pursue in that country. This can happen, for example, when a project is sold to a client in a country where either a limited capacity entity (i.e., a branch or representative sales office) or no entity at all may exist. In such situations, the limited capacity entity may not be able to sponsor work visas, thus requiring the client to do so. When this happens, it can take an extended amount of time to obtain the documentation and agreements necessary for the client to sponsor the visas, requiring the involvement of the client’s legal and procurement organizations.
A Unique Global Payroll Opportunity
The increased responsibilities inherent in delivering cost-effective, tax-compliant, cross-border payroll, tax, and immigration services provide a unique opportunity for global payroll professionals to expand their scope and depth of knowledge in the areas of global mobility, international payrolls, and taxation. They also provide new opportunities to collaborate with other key stakeholders in their organizations, including HR, legal, and tax in providing key guidance to business units on effective and efficient resource utilization and maintenance of profitability.
Alan Moidel is Senior Director, Global Payroll and Mobility Services, for BMC Software, Inc., located in Houston, Texas. Moidel has extensive shared services experience in the areas of international human resources, payroll, finance, accounting, and tax. At BMC, he directs the company’s global payroll and mobility activities to ensure efficient, cost-effective systems and compliance with local and international payroll, tax, immigration, and accounting requirements. Before BMC, Moidel held various industry and consulting positions with Pride International, The Hackett Group, BearingPoint, Ernst & Young, Deloitte & Touche, Thomson Learning, and Mobil Oil Corporation.