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:
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.
Tax residency, sourcing, treaty relief, exemptions and foreign tax credit positions for internationally mobile employees are always complicated, even in a normal year. In a year where employees were often in the “wrong” country, and many countries adjusted their residency, source and relief rules, there are going to be many difficult positions to consider.
A good place to start is the COVID-19 tax trackers maintained by the OECD and KPMG. There are far too many country specific concessions to discuss here, but there are some general points worth noting regarding residency day count concessions and employment income sourcing rules.
Employment income is typically sourced in the country where the work to earn that income is physically performed. This “workday apportionment” rule has been relaxed in some countries given the unintended work locations during 2020. However, the concessions vary considerably from country to country, and are very limited in scope. Some general points to note:
As can be seen, there is a lot of work to do before a position is arrived at. And even then, it may be subject to debate, not to mention subject to assessment and audit in some countries. Certainty may be in short supply and slow in coming, which makes policy decisions now even more difficult.
Turning finally to those policy matters, it is useful to consider examples to illustrate the four broad scenarios outlined at the top of this article.
These examples are not actual case studies, and may not reflect the tax positions for the countries used in the examples, and should not be relied upon as tax advice:
How would your organisation respond to these scenarios? Do you agree with the policy positions taken? I expect there would be a healthy debate about what is fair and equitable!
In this article, I set out to surface some of the complexities and uncertainties we are facing during the current tax filing season, and in particular to highlight the policy decisions that confront Global Mobility professionals as the “messy” moves of 2020 are cleaned up via the returns.
There is lot here to take in, but I would sum it up as follows:
And of course, given that we are now in 2021 and lockdowns and border closures are sadly continuing, remember that this may not be a one-off project. The exact same problems will likely arise in 2021 tax returns – so for the time being we need to treat this as a continuous exercise. Not what anyone likes to hear, I know, but forewarned is forearmed!