Permanent and long-term work assignments generally are easy to identify through company documentation, but short-term business travel presents more significant challenges to payroll professionals, an expert said May 16.
Short-term business travelers may include employees traveling on business or conducting business in other countries, often without ending tax residency in their home location or exceeding the number of travel days that may qualify the business traveler for mobility benefits, said Nick Broomhead, CPP, an employment manager at Deloitte.
Whether the travel is orchestrated by the employer or the travelers are flying “under the radar,” the employer may be at risk for additional taxes, Broomhead said at the American Payroll Association's 2018 Congress in National Harbor, Md.
In many countries, tax treaty relief for business travelers may apply if the recipient is present in the host location for less than 183 days in the relevant treaty period, the business traveler’s compensation is paid by or on behalf of an employer who is not a resident of the host country, and the compensation is not borne by a permanent establishment that the employer has in the host country, Broomhead said. Liabilities can arise in host locations from an employee’s first day of arrival, he said.
In counting 183 days for tax purposes, most countries define a day as any day with a substantial business activity where the employee actually conducts work. Even dinner with a client may count towards an employee’s time in a host location, Broomhead said.
Employees who start the morning with a meeting in one country but spend the rest of the work day in another country may be subject to taxes on employment income in both countries, Broomhead said.
Determining how much employment income may be taxable in each country in circumstances where workdays are split may involve a more complex calculations, he said, emphasizing the importance of applying the same methods to calculating a business traveler’s days.
Ensuring that payroll tax reporting is consistent with representations being made to other relevant authorities, such as for immigration purposes also is important, he said.
Different departments communicating with each other and sharing the data that exists in the employer’s systems can improve the accurate tracking of business travelers for payroll purposes and also may improve compliance, Broomhead said.
Short-Term Business Traveler Tax Triggers
A number of countries follow a substance-over-form approach to defining the employer for tax treaty purposes, Broomhead said. Rather than basing tax treaty interpretation on the traditional concept of a legal or formal employer, tax authorities look instead to the idea of an economic employer, he said.
In these countries, the economic employer is generally the entity that assumes risks and responsibilities related to the employee’s work, Broomhead said. The determination is based on factors such as who instructs and has control over the business traveler, who meets remuneration costs, and who provides the tools and resources necessary for the business traveler’s work, he said.
The principles and definitions that apply to the economic employer concept vary by country, Broomhead said
Cost-sharing agreements between the home and host company, as well as cost recharges may affect treaty relief, Broomhead said. Automatic data exchanges and new programs implemented under laws that target international tax transparency has increased the information that is shared among agencies and countries, he said.
Increased information exchange between tax and immigration authorities has led to more aggressive enforcement of tax reporting and withholding laws, increasing the risk of audits, Broomhead said.
The connection between immigration and tax function makes it increasingly important for employers to track travel days in all countries that business travelers visit and to diligently monitor if their activities fall within the boundaries of the permissible business visitor activities in a particular country, he said.
Diligently monitoring internal data on employee travel and keeping abreast of ongoing changes to tax law, as well as policy changes by other relevant authorities in countries hosting short-term business travelers is critical for any employer that wants to minimize their tax obligation while still being fully compliant with the current laws, Broomhead said.
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