Karen McGrory (BDO) answers a query on the tax issues facing large multinationals when its employees travel internationally within the group.
Question
We are a large multinational corporation with locations all around the world. Our employees (and occasionally directors) are frequently required to travel between jurisdictions to share their particular industry expertise. The key locations where business travel has historically been most frequent are the UK, US and Netherlands. We have recently acquired a company in Brazil and expect a lot of employee travel as part of the integration process. We currently report under a short term business visitors agreement in the UK only, but are keen to understand if we are meeting all of our obligations.
Answer
International business travellers are an area of increasing scrutiny in countries across the world. Facing pressure to increase tax receipts in difficult economic climates, tax authorities are viewing non-citizens, working in the country for what could be very short periods of time, to offer a relatively easy tax take. Considering both potential interest and the penalties for failure to get the position right from the outset, as well as the acknowledged difficulties of tracking employees in order to be compliant, it is not difficult to understand their interest. With the upcoming implementation of the new base erosion and profit shifting (BEPS) rules and country by country reporting for large multinationals, it will be crucial to understand where your employees are working and be confident that the associated compliance requirements are being met. It is not always fully appreciated that the implications of business travellers extend beyond income tax to social security and – perhaps more significantly – wider corporate issues, including direct and indirect taxes and transfer pricing.
Employment tax issues
In the UK, the first step to compliance from an employment tax perspective is to put in place the short term business visitors (STBV) agreement (known as an EP appendix 4). This relaxes the basic rule for PAYE withholding that requires an employer to withhold tax through a UK payroll from the first day that any individual is working in the UK for the benefit of the UK business. Making use of this relaxation is dependent upon meeting the relevant conditions set out by the dependent services (employment) article of a double taxation agreement (DTA) in place between the UK and the individual’s home country. It is therefore important to understand these conditions fully, including HMRC interpretation at PAYE82000 of HMRC manuals. If all the conditions are met, the individual’s employment income is exempt from UK tax. The STBV agreement essentially allows the employer to self-assess whether an exemption under the DTA will be available.
Generally, for the exemption to be available:
(a)the individual must be in the UK for fewer than 183 days in a 365 day period (as defined by the relevant DTA);
(b)the individual must be employed outside the UK; and
(c)the costs of their remuneration must not be recharged to a permanent establishment (PE) of the business in the UK.
In the UK, the tax authorities apply the ‘economic employer’ concept to (b) (PAYE82000), so consideration is not limited to the location of the individual’s employment contract; instead, the authorities look more widely at whether the individual is ultimately working for the benefit of the UK company (see OECD Model Tax Convention C(15)1, 8.11–8.15), e.g. generating profits for the UK business by their presence in the UK, or where risks associated with the employee’s work would be borne in the UK. We anticipate that more tax authorities will start to apply this more stringent concept to their interpretation of the DTAs; Ireland is a recent example of where the tax authorities’ position on this clause of the DTA has been revised. Each country must therefore be reviewed independently to ensure that the correct interpretation of the DTA is being applied.
HMRC guidance on the use of STBV agreements also includes reference to the ‘60 day rule’. This advises that a cost recharge to the UK business can essentially be disregarded, and that such an employee could still be included under the STBV agreement, as long as they spend no more than 60 days in the UK (and these do not form part of a more substantial or recurring period), and all of the other conditions of the DTA article are satisfied.
All of the above relies on the existence of a DTA between the UK and other country in question. As long as that is the case and all of the conditions of the dependent services article are satisfied, the PAYE relaxation will be available. The only consideration will be the amount of information required to be submitted to the UK tax authorities with the year-end reporting. The requirements vary depending on the number of days each employee spent here (PAYE82000); for the purposes of the treaty, a ‘day’ is counted as physical presence in the country for any part of a day.
Brazil is frequently seen as an example of a country with which the UK does not (currently) have a DTA in place; there is therefore no possibility of exemption from host country taxes under the agreement. While there is still the option of unilateral relief in order to mitigate the impact of double taxation, this does not alter the PAYE position. No relaxation is available and any employee visiting the UK from a non-DTA country should be added to the UK payroll immediately, in order to account for an appropriate amount of withholding. Tax returns would then need to be filed in each country in order to claim applicable relief for taxes paid on the relevant portion of employment income. To the extent that you intended to protect the employee from the tax exposure in the host country, you then have the option of tax equalising your business travellers, grossing up the UK taxable pay.
A fairly recent development for short term business visitors is the 30 day annual reporting scheme (PAYE81950). This is for employees who have fewer than 30 workdays in the UK in a tax year but who do not fall within the scope of the STBV agreement; e.g. where there is no DTA with the home country, or where visitors are employed through a foreign branch of the UK company and are therefore deemed to have a UK employer. This concession allows employers to make a single payroll entry (full payment submission) at the end of the year to account for an appropriate amount of income and tax withholding for each of the qualifying employees who have travelled to the UK during the tax year. The alternative is to deal with the strict requirements of real time information now applied to all UK payroll operations, which could be extremely administratively burdensome for any number of employees. The scheme may be useful for any of your new employees visiting from Brazil for short periods; a separate supplementary application is required to HMRC.
Caution must be exercised in the case of directors, as the same rules will not necessarily apply to them. In the UK/US DTA, for example, there is a separate article which deals specifically with directors, which means that they cannot be considered under the dependent services article. As a result, where a US individual is a statutory director of a UK company and travels to the UK in order to perform directorship duties (e.g. sitting on board meetings), there is no exception to the rule. In this situation, withholding must be applied to any applicable directors’ fees, or otherwise to an appropriate portion of the individual’s overall remuneration.
The reporting requirements for international business travellers are different in every country. However, as mentioned above, we are seeing an escalation in the scrutiny applied by an ever increasing number of jurisdictions. If you are not currently taking any specific actions in the Netherlands or US in relation to their inbound travellers, then you may be failing to meet your compliance requirements there.
In the Netherlands, similar to the UK, a single workday can result in an obligation for the employer to withhold Dutch PAYE. However, there is no requirement to submit an upfront application to alleviate the obligation to withhold tax, and Dutch employers may therefore self-assess if exemption from tax will be available under the relevant DTA. There can be exceptions to this, however; the Dutch tax authorities can inform an employer that an upfront application is required, for example if there is a record of historic non-compliance. Annual reporting to the tax authorities is required by 1 February each year.
From a US perspective, an individual becomes taxable in the US if they exceed 90 days of presence, exceed $3,000 of US sourced income or are paid by a US employer (per IRC 861(a)(3) and 864(b)(1)). Meeting any one of these conditions could therefore trigger a US withholding tax requirement. The second factor can easily present problems when dealing with your more senior employees; an individual with an annual salary of £120,000 working just five days in the US out of an estimated 240 annual workdays would exceed the $3,000 threshold. In order to remove the need to operate withholding tax where all of the relevant DTA conditions are met, a one-off application can be made for the employer known as a form 8233 (exemption from withholding on compensation for independent (and certain dependent) personal services of a non-resident alien individual). Additional complexity is introduced by taxation at the state level; while many of the US states accept and apply the federal DTA, there remain some exceptions, including California. Exemption under the DTA cannot therefore be claimed at a state level and tax may be payable (which may or may not be creditable in the home country).
Other implications
Moving beyond the employment tax issues, there are potentially even more significant implications at the corporate level. Depending on the type of work they are performing, an employee working in a different country could result in the creation of a PE in that host location. This will usually entail a corporation tax obligation for the home country entity. BEPS Action 7 focuses on preventing artificial avoidance of the creation of a PE in a tax jurisdiction; for example, widening the definition of a dependent agent to one who ‘habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise’, rather than the usual assumption of the individual who signs the contracts.
Transfer pricing rules are also being tightened up so companies need to ensure that their profits and costs are being allocated to jurisdictions reflecting the value created in each respective location. When your employees are working across locations, this becomes a rather complex matter and requires detailed analysis of the levels of staff expertise (both local and visiting), the specific nature of duties carried out outside an employee’s home location, and the value and risks associated with their work.
International business travellers are a very complex area, involving considerations across different taxes and different country systems. Tracking your employees’ presence around the world should be a key priority and you need to ensure that you have a robust process in place to deal with this. There are now technological solutions like smartphone apps available to make it as effective and straightforward as possible. Non-compliance or, perhaps more significantly, inadvertently creating a corporate presence in another country could entail substantial costs for the company, so it is essential that the issue is monitored on a continuous basis.
Karen McGrory (BDO) answers a query on the tax issues facing large multinationals when its employees travel internationally within the group.
Question
We are a large multinational corporation with locations all around the world. Our employees (and occasionally directors) are frequently required to travel between jurisdictions to share their particular industry expertise. The key locations where business travel has historically been most frequent are the UK, US and Netherlands. We have recently acquired a company in Brazil and expect a lot of employee travel as part of the integration process. We currently report under a short term business visitors agreement in the UK only, but are keen to understand if we are meeting all of our obligations.
Answer
International business travellers are an area of increasing scrutiny in countries across the world. Facing pressure to increase tax receipts in difficult economic climates, tax authorities are viewing non-citizens, working in the country for what could be very short periods of time, to offer a relatively easy tax take. Considering both potential interest and the penalties for failure to get the position right from the outset, as well as the acknowledged difficulties of tracking employees in order to be compliant, it is not difficult to understand their interest. With the upcoming implementation of the new base erosion and profit shifting (BEPS) rules and country by country reporting for large multinationals, it will be crucial to understand where your employees are working and be confident that the associated compliance requirements are being met. It is not always fully appreciated that the implications of business travellers extend beyond income tax to social security and – perhaps more significantly – wider corporate issues, including direct and indirect taxes and transfer pricing.
Employment tax issues
In the UK, the first step to compliance from an employment tax perspective is to put in place the short term business visitors (STBV) agreement (known as an EP appendix 4). This relaxes the basic rule for PAYE withholding that requires an employer to withhold tax through a UK payroll from the first day that any individual is working in the UK for the benefit of the UK business. Making use of this relaxation is dependent upon meeting the relevant conditions set out by the dependent services (employment) article of a double taxation agreement (DTA) in place between the UK and the individual’s home country. It is therefore important to understand these conditions fully, including HMRC interpretation at PAYE82000 of HMRC manuals. If all the conditions are met, the individual’s employment income is exempt from UK tax. The STBV agreement essentially allows the employer to self-assess whether an exemption under the DTA will be available.
Generally, for the exemption to be available:
(a)the individual must be in the UK for fewer than 183 days in a 365 day period (as defined by the relevant DTA);
(b)the individual must be employed outside the UK; and
(c)the costs of their remuneration must not be recharged to a permanent establishment (PE) of the business in the UK.
In the UK, the tax authorities apply the ‘economic employer’ concept to (b) (PAYE82000), so consideration is not limited to the location of the individual’s employment contract; instead, the authorities look more widely at whether the individual is ultimately working for the benefit of the UK company (see OECD Model Tax Convention C(15)1, 8.11–8.15), e.g. generating profits for the UK business by their presence in the UK, or where risks associated with the employee’s work would be borne in the UK. We anticipate that more tax authorities will start to apply this more stringent concept to their interpretation of the DTAs; Ireland is a recent example of where the tax authorities’ position on this clause of the DTA has been revised. Each country must therefore be reviewed independently to ensure that the correct interpretation of the DTA is being applied.
HMRC guidance on the use of STBV agreements also includes reference to the ‘60 day rule’. This advises that a cost recharge to the UK business can essentially be disregarded, and that such an employee could still be included under the STBV agreement, as long as they spend no more than 60 days in the UK (and these do not form part of a more substantial or recurring period), and all of the other conditions of the DTA article are satisfied.
All of the above relies on the existence of a DTA between the UK and other country in question. As long as that is the case and all of the conditions of the dependent services article are satisfied, the PAYE relaxation will be available. The only consideration will be the amount of information required to be submitted to the UK tax authorities with the year-end reporting. The requirements vary depending on the number of days each employee spent here (PAYE82000); for the purposes of the treaty, a ‘day’ is counted as physical presence in the country for any part of a day.
Brazil is frequently seen as an example of a country with which the UK does not (currently) have a DTA in place; there is therefore no possibility of exemption from host country taxes under the agreement. While there is still the option of unilateral relief in order to mitigate the impact of double taxation, this does not alter the PAYE position. No relaxation is available and any employee visiting the UK from a non-DTA country should be added to the UK payroll immediately, in order to account for an appropriate amount of withholding. Tax returns would then need to be filed in each country in order to claim applicable relief for taxes paid on the relevant portion of employment income. To the extent that you intended to protect the employee from the tax exposure in the host country, you then have the option of tax equalising your business travellers, grossing up the UK taxable pay.
A fairly recent development for short term business visitors is the 30 day annual reporting scheme (PAYE81950). This is for employees who have fewer than 30 workdays in the UK in a tax year but who do not fall within the scope of the STBV agreement; e.g. where there is no DTA with the home country, or where visitors are employed through a foreign branch of the UK company and are therefore deemed to have a UK employer. This concession allows employers to make a single payroll entry (full payment submission) at the end of the year to account for an appropriate amount of income and tax withholding for each of the qualifying employees who have travelled to the UK during the tax year. The alternative is to deal with the strict requirements of real time information now applied to all UK payroll operations, which could be extremely administratively burdensome for any number of employees. The scheme may be useful for any of your new employees visiting from Brazil for short periods; a separate supplementary application is required to HMRC.
Caution must be exercised in the case of directors, as the same rules will not necessarily apply to them. In the UK/US DTA, for example, there is a separate article which deals specifically with directors, which means that they cannot be considered under the dependent services article. As a result, where a US individual is a statutory director of a UK company and travels to the UK in order to perform directorship duties (e.g. sitting on board meetings), there is no exception to the rule. In this situation, withholding must be applied to any applicable directors’ fees, or otherwise to an appropriate portion of the individual’s overall remuneration.
The reporting requirements for international business travellers are different in every country. However, as mentioned above, we are seeing an escalation in the scrutiny applied by an ever increasing number of jurisdictions. If you are not currently taking any specific actions in the Netherlands or US in relation to their inbound travellers, then you may be failing to meet your compliance requirements there.
In the Netherlands, similar to the UK, a single workday can result in an obligation for the employer to withhold Dutch PAYE. However, there is no requirement to submit an upfront application to alleviate the obligation to withhold tax, and Dutch employers may therefore self-assess if exemption from tax will be available under the relevant DTA. There can be exceptions to this, however; the Dutch tax authorities can inform an employer that an upfront application is required, for example if there is a record of historic non-compliance. Annual reporting to the tax authorities is required by 1 February each year.
From a US perspective, an individual becomes taxable in the US if they exceed 90 days of presence, exceed $3,000 of US sourced income or are paid by a US employer (per IRC 861(a)(3) and 864(b)(1)). Meeting any one of these conditions could therefore trigger a US withholding tax requirement. The second factor can easily present problems when dealing with your more senior employees; an individual with an annual salary of £120,000 working just five days in the US out of an estimated 240 annual workdays would exceed the $3,000 threshold. In order to remove the need to operate withholding tax where all of the relevant DTA conditions are met, a one-off application can be made for the employer known as a form 8233 (exemption from withholding on compensation for independent (and certain dependent) personal services of a non-resident alien individual). Additional complexity is introduced by taxation at the state level; while many of the US states accept and apply the federal DTA, there remain some exceptions, including California. Exemption under the DTA cannot therefore be claimed at a state level and tax may be payable (which may or may not be creditable in the home country).
Other implications
Moving beyond the employment tax issues, there are potentially even more significant implications at the corporate level. Depending on the type of work they are performing, an employee working in a different country could result in the creation of a PE in that host location. This will usually entail a corporation tax obligation for the home country entity. BEPS Action 7 focuses on preventing artificial avoidance of the creation of a PE in a tax jurisdiction; for example, widening the definition of a dependent agent to one who ‘habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise’, rather than the usual assumption of the individual who signs the contracts.
Transfer pricing rules are also being tightened up so companies need to ensure that their profits and costs are being allocated to jurisdictions reflecting the value created in each respective location. When your employees are working across locations, this becomes a rather complex matter and requires detailed analysis of the levels of staff expertise (both local and visiting), the specific nature of duties carried out outside an employee’s home location, and the value and risks associated with their work.
International business travellers are a very complex area, involving considerations across different taxes and different country systems. Tracking your employees’ presence around the world should be a key priority and you need to ensure that you have a robust process in place to deal with this. There are now technological solutions like smartphone apps available to make it as effective and straightforward as possible. Non-compliance or, perhaps more significantly, inadvertently creating a corporate presence in another country could entail substantial costs for the company, so it is essential that the issue is monitored on a continuous basis.
