The marketplace and workforce preferences as expressed in surveys seem to be pointing to an expansion of work from anywhere options for workers, rather than a return to the pre-COVID-19 normal.1,
In this article, we discuss the tax and other considerations to keep in mind while reviewing remote work requests. As 2020 is drawing to a close, this article also offers a suggested short-term action plan for compliance relating to the 2020 tax year. We will also provide a suggested medium-to-long term action plan for a more sustainable strategy.
But first, we will illustrate, using some fictional examples that offer up common scenarios where employees are raising their hands and asking for (or are forced into) remote work / flexible work arrangements.
Some Typical Scenarios
Ms Lucy Zhou, a Chinese national, had been living in the United States since August 2012. She entered the U.S. as a student on the F-1 visa. Subsequently, upon graduating in 2015, she was employed with ABC Corporation, a U.S. company. In August 2017, her visa status changed from F-1 to H-1B. In January 2020, she travelled to China in order to get her visa stamped. As a result of the COVID-19 pandemic and related lockdowns, she was unable to travel back to the United States. Further, due to the presidential proclamation issued in June 2020 suspending entry of aliens of certain categories into the U.S., Ms Zhou has been unable to re-enter the U.S. even after the lockdown restrictions were lifted. Lucy continues to remain in China indefinitely, until the suspension is lifted, while still being employed by a U.S. company.
Mr Len Watson, a U.S. national and an employee of XYZ Corporation, had been living and working in the Philippines since January 2019, on an international assignment. His assignment was due to end in August 2021; however, due to the public health emergency around COVID-19, his employer ended his assignment on March 30, 2020. Instead of repatriating back to his home state of Pennsylvania, Mr Watson and his family flew to New York to live with Mr Watson’s sister-in-law, to be closer to family. Mr Watson has been in New York since March 2020. His employer continued to withhold Pennsylvania taxes from his paycheck after repatriation (and did not withhold New York taxes).
In January 2020, Mr Paul Lucas, a Canadian national was hired by a U.S. company. He relocated to the U.S. in January 2020 and lived and worked in New York. In May 2020, he decided to travel to Canada for a vacation. Having realized that he can perform his work from anywhere, he expressed a desire to continue working in Canada. He has remained in Canada since, working for the U.S. company.
As we progress from scenario 1 through scenario 3, there is a noticeable shift in the motives for remote working. In Ms Zhou’s case, the remote work arrangement was a requirement because of immigration/travel restrictions. In Mr Watson’s case, while the assignment was ended early due to the public health emergency, the choice to travel to New York was driven by personal preference. A similar motive exists for Mr Lucas’ case, having realized he could perform his work as productively from any location, he chose to stay in Canada.
What we are observing in the marketplace is that many companies are experiencing similar developments in terms of their work-from-anywhere requests. Initially, remote working arrangements were driven by COVID-19 displacements. Soon employees realized that they were able to work as effectively from any location. This has led to a rise in requests by employees to work remotely for reasons of personal convenience (as well as other reasons).2
Role of Global Mobility
In the above scenarios, it largely falls to global mobility program managers to assess the risks and needs in terms of the assignees and the business. The issues that can come up are various and nuanced and program managers are often-times navigating unchartered waters. Having said that, if they have had to deal with assignees under threat from previous health emergencies or natural disasters or emergent civil unrest in the host location, they have had to deal with somewhat similar concerns and issues around relocating employees whose safety is at risk.
Often, the responsibility for any remote work assessment falls on the shoulders of the global mobility program manager. Program managers are well-versed in addressing immigration, tax, and payroll compliance for cross-jurisdictional moves, and in many cases have policies and procedures that address such circumstances; remote work arrangements feel like a natural extension to the mobility program.
Remote Workers and Key Areas of Compliance
Movement of people from one jurisdiction to another brings with it four key areas of compliance that the global mobility program manager must consider.
i. Income Tax and Social Tax Compliance
Since the displaced employee will be subject to the laws of two jurisdictions (possibly more), it is important to determine what his liability to tax is. Several countries announced tax relief measures due to temporary or unintended presence of workers in their jurisdictions, resulting from COVID-19-related displacements. These measures must be reviewed in detail to confirm that each displaced employee meets the conditions for relief.
It is also a common misconception that, due to the presence of income tax treaties between two countries, an individual will automatically qualify for exemptions based on the tax treaty. Residency rules and income tax treaties can be complex, and a careful review of the specific tax treaty should be conducted to confirm if this individual is eligible for such exemptions.
Also, important, from a domestic U.S. perspective, where people were displaced from one state to another, state income tax issues will also need to be considered.
Similar to income taxes, social taxes may be triggered based on the laws of two jurisdictions. A review of social security agreements between the two countries will be required to confirm if exemptions are available in this regard. Importantly, social security taxes in most locations are the obligation of the employer and cannot be fulfilled unless the employer complies with local reporting and withholding requirements.
ii. Payroll Tax Compliance
Even while an employee remains employed with the company in his home country, certain kinds of remote work arrangements may trigger host country payroll obligations for the employer. For instance, some countries may require payroll reporting and withholding on a monthly basis even if the individual is not an employee of the host country company. This might then require creating a “shadow payroll” or a “split payroll” so that the employer is able to fulfil its obligations and remain compliant in the host location.
iii. Corporate Tax Compliance
Where an individual is performing her employment outside her home location, she may be viewed as creating a permanent establishment (PE) or taxable corporate presence in the host location depending on the work performed. For instance, employees who regularly visit the business premises of a related overseas entity could trigger PE implications for the home company. These visits could result in the foreign office being considered a fixed-place PE of the home employer. Similarly, employees who conduct business activities to conclude contracts while travelling in another country could give rise to a PE of the home company in that host country. The risk here is, if that happens, profits attributable to the work performed by this individual could be considered taxable income for the company in the host country.
Therefore, program managers should seek to confirm whether this displacement will trigger a PE for the company in the home location. Many countries, during this period of the pandemic, have implemented policies relaxing the rules that would see a foreign employee trigger PE in a host country under usual circumstances.
iv. Immigration Compliance
Before approving remote workers’ requests to work in overseas locations – or if dealing with an already “existing” situation – program managers may wish to consult with qualified immigration counsel to consider the immigration ramifications of a possible move by the worker into a foreign country (or the presence of a mobile worker in a foreign country due to coronavirus-related circumstances). Different jurisdictions will have different compliance requirements and processes, in addition to coronavirus-related travel restrictions, which are frequently changing. A careful analysis of immigration law must be conducted to reduce the risk of complications in this sensitive area.
Short-Term Action Plan for Mobility Managers
As 2020 draws to a close, it is imperative to establish that for all displacements that occurred in 2020 the company has an action plan to meet its compliance obligations. This not only fosters compliance, but also demonstrates to tax and regulatory authorities the willingness and focus that the company has in respect of compliance, creating goodwill for the company in the books of the regulators.
Step 1: Educate
Education is the first step to understanding the requirements, obligations, and the changes to come. More often than not, compliance failures arise out of a lack of understanding rather than a willful intent to be non-compliant. Therefore, as a first step, it is important to create awareness and education among HR and global mobility business partners about the four key areas of compliance discussed above.
Additionally, program managers can also play a critical role in educating other stakeholders such as tax and payroll managers so that they are better prepared to implement payroll changes required to meet compliance.
Step 2: Gather Information
HR business partners must be encouraged to inform global mobility program managers about employees who were or continue to work in locations other than their home location. If required, the program managers should gather crucial information directly from the employees, such as travel information, exact dates of departure and arrival, family situation, as well as intent for returning to their home location.
Step 3: Review
Once this information has been gathered, program managers can conduct a detailed analysis of income tax, social tax, corporate tax, and immigration as well as employer payroll obligations in both locations.
Global mobility program managers can also work with HR business partners to determine how long the remote working arrangement should be allowed to continue. The aim would be to strike a balance between employee well-being and compliance obligation and at the same time be cognizant that these decisions could set precedents for the broader workforce.
Step 4: Year-End Payroll Adjustments
For tax year 2020, given the unexpected nature and length of the pandemic, most companies were not in a position to reasonably evaluate displacements in real-time and put in place compliance measures. However, it is not too late. To the extent possible, companies can proactively work toward meeting the required employer obligations by making supplemental payroll adjustments to report and pay the mandated taxes before the year-end.
Medium-to-Long-Term Action Plan for Global Mobility Program Managers
As program managers wrap up their short-term action plan for compliance in 2020, they should also have their eyes on the medium-to-long term action plan. For instance, while creating awareness and education as part of the short-term action plan, mobility managers can also begin conversations with the various stakeholders such as HR business partners, tax and payroll managers, and employees themselves on the company’s long-term imperatives. This will help set expectations before taking a deeper dive into a broader long-term strategy.
Therefore, a medium-to-long-term action plan is recommended. This could include KPMG’s “Work anywhere, together,” which takes a module-based approach to bringing about this long-term change. Recognizing that there is no-one-size-fits-all solution, this method developed by KPMG allows a company to approach the remote-work strategy based on what each module offers or by combining one or more modules to meet specific objectives that align with the organization’s priorities and stage of transformation.Illustrated below is a list of common priorities for an organization. These were found to be the top priorities during KPMG’s discussions with various companies.