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.
Individual tax position
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.
Tax residency day counts
- Several countries have issued concessions that permit individuals to disregard certain COVID19-displacement days when counting days of presence under residency tests (e.g. UK, Canada, India). However, these concessions often only apply i) for a limited period during 2020 (usually the first wave lockdown period), and ii) where the dislocation of the employee was unavoidable, for example because flights were cancelled, or borders were closed. The concessions will generally not apply if the individual was in the “wrong” country outside the prescribed emergency period, or because of their own personal choice. The onus is typically on the individual to provide evidence that they tried to return to the correct country, i.e. by booking a flight that was subsequently cancelled
- A vast number of countries have issued no formal concessions at all on days of presence relating to COVID19 displacement
- Several countries (e.g. Finland, France) have stated that they will apply their normal residency tests during 2020, regardless of the reasons for displacement
- A few countries (e.g. US, Canada) have issued specific guidance with respect to counting the 183-day test for source country relief under Art. 15 of a treaty
- The OECD has issued updated guidance in January 2021 on tax treaty residence tie-breaker tests during the pandemic. Their view is that temporary dislocation of an employee should not impact their treaty residence position – for example centre of vital interests should not change and habitual abode should not change. However, these guidelines apply only if the treaty tie-breaker tests are in play, which first requires that an employee is considered resident in two treaty states (dual resident). If COVID displacement results in a person being tax resident in one country and not another (whether applying normal rules or the concessions) then the treaty tie-breakers are not required, and the individual cannot rely on the OECD guidance to argue that they “should be” tax resident elsewhere.
Employment income source 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:
- Concessions to disregard workday sourcing for a defined period (e.g. Australia) are the exception rather than the rule
- Relatively few countries (e.g. Ireland) have issued formal guidance on relaxation of wage tax withholding where strict sourcing would result in administrative burdens with respect to temporarily displaced workers, as was recommended by the OECD in April 2020
- The most comprehensive alteration to normal sourcing principles is with respect to frontier workers (cross-border commuters), particularly for the many countries bordering Germany and Switzerland. Many bi-lateral tax treaty consultation agreements have been made setting out specific deemed sourcing rules, relaxation of day counts, and evidentiary requirements. Most of these agreements continue in force at least until 31 December and some remain in force into 2021
- Where domestic law contains a foreign earnings exemption (e.g. South Africa, US) we see the thresholds for qualification being relaxed during lockdown and border closure
- A number of countries (e.g. Greece) have stated how they intend to source and tax state-paid wage subsidies for cross-border workers
- Some countries (e.g. Finland, Austria, UK), have reiterated their existing laws regarding force majeure and illness, with respect to workday sourcing
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.
Mobility policy considerations
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.