As the pandemic closed borders and workplaces around the world during 2020, many internationally mobile workers were displaced. International transfers, secondments and repatriations were delayed, although in some cases new roles began wherever the worker happened to be at the time. Seconded employees visiting families back home during lockdown became stranded away from their host country. Business travellers ended up working from hotels for weeks longer than planned. Embassies closed, visas expired, work permits were declined. Cross-border commuters stopped commuting. Then started again. Then stopped. It has been a mess.
Understandably, at the time, many employers focussed on employee wellbeing and business continuity rather than the minutiae of tax and policy positions, unless it was an emergency or escalation. “Let’s make sure they’re all okay, and can do their jobs, we’ll sort out the tax later” was an often-heard phrase. Well, “later” has arrived like an unwelcome guest, as we prepare to file 2020 personal tax returns.
If these 2020 tax issues have not yet been pro-actively resolved, or perhaps even properly identified, then the 2020 tax return filing provides a (potentially last) opportunity to deal with these matters in a compliant, or at least voluntary, way.
But why should employers concern themselves with the tax positions of their employees? “The personal tax implications are their own responsibility” is a common response. And indeed, this may be true in many cases, particularly in relation to personal choice of work location. But it is becoming quite apparent that employers will need to decide on a consistent and fair policy position, in response to the inevitable queries and judgement calls that are coming in, given that many situations were not created by personal choice. I have found that these scenarios fall into four broad categories:
- Tax equalised expats
An equalised employee’s tax position can have a direct impact on employer costs. Some displacement scenarios being examined do not fit neatly into the company’s tax equalisation policy. Dislocation of home and host country can make policy interpretation more nuanced when the Tax Equalisation Reconciliation is prepared and agreed.
- Non-equalised movers with tax windfalls or liabilities
There will be winners and losers in the displaced worker lottery. Many employees will feel it is not their fault that they were impacted by a border closure or postponed work permit, so why should some colleagues cash in while others have a cash crunch?
- Payroll and net pay corrections
Many employees were not only in the wrong country, they were on the “wrong” payroll for a period of time. Should net pay be corrected to reflect where they actually worked; or where they should have worked? And will the company bear the cost of retro withholding corrections (with a gross up cost), or recover this from the employee? Who keeps refunds of tax withheld in the wrong country?
- Employer and corporate tax obligations
Last but not least, employers need to pay attention to what comes out of the woodwork on a tax return or travel diary, since it may result in tax authorities raising queries about third-country filing requirements, unmet employer wage tax withholding liabilities, social security contributions, corporate tax presence, transfer pricing / cost recharges, and even VAT.
But before I explore each of these issues, I want turn to the root cause of the problem – unexpected and complicated individual tax positions, and the technical analysis required to arrive at them.