Crossing borders presents tax issues for employers, employees
The border topic is getting a lot of attention these days. Whether it is about the border wall, the border adjustment tax (that I discussed in a past column) or the possible renegotiation of the North American Free Trade Agreement (NAFTA), there is a lot of chatter in the press and on social media on border-related topics. International business requires movement of goods and people. That also applies to domestic trade activities. Any actions regarding borders will have some impact in these business activities.
We cannot escape the reality business transactions and business activity crosses borders. It is the exception in this day and age that a manufacturer only deals with local customers and vendors. The same applies to many in the services industry. Many of us deal with different area codes, time zones, languages and currencies on a regular basis.
In our current work environment, one can work remotely with a computer and a smartphone. Business can be conducted from coffee shops, airports, the mall, a home office or even someone else’s office. The ability to move and conduct business activities from almost anywhere we are physically present can raise a number of employee and employer income and payroll tax issues in addition to other tax and nontax issues.
We have seen state and local taxing authorities, as well as foreign countries, assert a taxable presence may exist for income taxes, sales and use taxes, value-added taxes and other transaction-related taxes and fees. Traditional brick and mortar is not necessarily the mode for operation in 2017. Taxing authorities are struggling to adapt their tax rules to these changes in how business transactions and activity are conducted.
For those who travel, the term “short-term business traveler” is often used by taxing jurisdictions. Travel to a different state or a different country may raise a number of employer- and employee-related issues that may create tax risks for both the employer and the employee. With the advancement of technology, information and data analytics, there are many records a taxing jurisdiction may request if reviewing a business’ activity in a specific jurisdiction. This may include expense reports, credit card statements, cell phone records or even wireless information in regards to where a phone or computer accessed a wireless connection. That is the low-hanging fruit, and there may be other information that also may contain location information of employee activities and this includes computer login information, corporate jet logs, and security/access card scan logs.
For an employer, there are a number of tax-related risks for having employees engage in short-term business travel. These may include payroll withholding taxes in the state or country where the employee travels. If the travel is outside the United States, there also may be employer social security or health taxes that may be applicable. In addition, the employer may have corporate income, sales tax or value added taxes in the jurisdiction visited and the possibility of a taxable presence for the employer under permanent establishment or state nexus rules. Even if there is no actual tax liability for the employer, there may be return filing requirements under local law that are required for the business.
The employee also faces similar risks. Traveling to a different state or a foreign country can create an income tax liability for the employee, as well as an income tax return filing obligation. States and foreign countries have deferring rules and thresholds in determining what triggers a tax liability or a filing obligation. Immigration-related issues, such as work permits or visas, also may need to be obtained.
Failure to follow the applicable rules for these activities, including any compliance obligations, may bring penalties. Penalties for noncompliance with state and foreign tax filings and tax payment or withholding requirements can be significant.
In recent years, both the United Kingdom and Canada, for example, have instituted certain procedures (including certain registration and compliance requirements) for employers and employees from foreign countries who are working while in their jurisdiction. In the U.K., a Short Term Business Visitor Agreement (STBVA) between the government and the employer may allow for relaxing some of the stringent withholding and reporting rules for employees from a tax treaty jurisdiction. Canada has its own program under its Regulation 102.
Other issues also may arise regarding health insurance coverage when the employee is out of their home region, as well as other benefit and human-resource-related issues. In addition, labor laws may vary in the various states or countries where an employee may travel. Business registration and regulatory issues also may apply depending on the particular fact situation for the employee and employer.
Governmental units, such as states and foreign countries, have budget gaps and are always looking for revenue opportunities. Understanding the potential exposure or liability is helpful in setting up processes and procedures to monitor any activity and ensure compliance with any state or foreign tax and other laws that may be applicable.
Some first steps for a business impacted by such activities may be to identify any business travelers or those working from outside the company-owned locations. This may require data mining from information currently available, such as expense reports, time reports and other business records. This information may allow the business to determine what states or countries there is employee activity and, thus, need some additional inquiry and follow-up. If a particular project will take employees out of the state or out of the country, knowing the number of employees and the length of the project may allow for some proactive rather than reactive tax planning for the project.
Borders do matter in many circumstances. The ability to work remotely presents a number of tax and nontax issues for employers to consider. These new work models present risks for noncompliance for both employers and employee. Setting up appropriate processes and procedures to gather information, identify and mitigate risks and comply with applicable laws and regulations can reduce the risk for noncompliance and any penalties that may result.
William Roth is a tax partner with the local office of international accounting firm BDO USA LLP.