Tax Risks of Business Travelers

Contributed by Global Tax Network (GTN), 21 June, 2018

In today's workforce, it is common to have employees working on multiple projects across multiple states or countries. It is surprising to many that working outside of their resident home state for as little as one day may create tax reporting, withholding, and filing requirements. Unfortunately, states and countries do not currently follow a consistent set of rules in determining when non-residents become subject to tax and at which point company reporting and withholding obligations begin.

Achieving compliance involves administrative costs and practical challenges for organizations, but failure to address the requirements can generate financial and other risks for both the organization and their business travelers.

We understand there are many questions our clients face when thinking about sending someone on a business trip. We have compiled some of the most frequently asked questions and answers that we hear regarding the tax risks of business travelers.

I have heard that an individual on a short-term international assignment of no more than 183 days will be exempt from tax in the Host location. How does this work?

There is vast network of income tax treaties globally. For example, the UK has income tax treaties currently in force with over 100 countries. The US has income tax treaties currently in force with over 50 countries. An income tax treaty typically includes an article, often referred to as the "183 day rule," which addresses the taxation of employees working temporarily in another country. If an employee and employer meet the requirements of this article, the employee will not be subject to income tax in the Host location.

Under the Organization for Economic Co-operation and Development (OECD) Model Income Tax Treaty, an employee will not be subject to income tax in the Host location if:

Note that certain countries are now considering the "economic employer" of the employee. The treaty would not apply if the Host location entity were deemed to be the economic employer. As a result, the employee would be taxable in the Host location. These rules should be reviewed on a country-by-country basis.

Given that each treaty is unique, we recommend the applicable (specific) treaty be reviewed to avoid potential traps. These traps can include, but are not limited to:

If our employee is exempt from tax in the Host location under the treaty, are any tax filings required?

Even though the employee may be exempt from income tax under the "183 day rule," the Host location may still require the filing of an income tax return or other form to document the treaty exemption. For example:

Certain countries also require reporting of a treaty exemption even though no income tax is due. Countries are actively conducting audits of companies' compliance with these reporting requirements.

As you can see, the treaty exemptions and tax reporting requirements vary widely and are dependent on the Home and Host location. We recommend each assignment be reviewed to maximize the treaty benefits available on a worldwide basis and to ensure proper income tax reporting in both the Home and Host locations.

If our employees remain in the Host location for less than the number of days identified in our company policy (e.g., less than 30 days), are there any concerns?

Many companies define "business travel" versus "short-term assignment" based on the number of days the employee is expected to travel to a certain location. Although this may be a practical approach, these internal company policy thresholds may not address the technical considerations of the Host location in regards to tax obligations or reporting requirements. For example:

What are the risks for the company, and individual, if we do not address our business travelers' compliance?

Over the years, the awareness and enforcement of business travelers' compliance has grown. With technology advancements and departments sharing more information, the ability for authorities to track business travelers is an issue that was not a reality years ago. Some risks for noncompliance include:

Some of these risks can be mitigated if the company makes a good faith effort to be compliant. If audited, and the company can prove they have policies in place to address their business travelers, the auditor may be more lenient on the company rather than if nothing has been done to-date.

How can we move forward with being compliant for our business travelers?

Addressing business travelers requires the collaboration from various departments within the company, such as Payroll, Tax, Finance, HR, and the Mobility teams. No one department generally "owns" or can administer the entire business traveler compliance process.

For starters, a policy should be in place for business travelers. Items that should be addressed within the policy includehow and when are tax gross-ups funded and is a reconciliation prepared comparing  actual tax liabilities with gross-ups funded by the company, and how are fees for tax services handled? Having a policy in place helps promote fairness and consistency throughout the business traveler population as well as the willingness of the employees to continue to travel on business for the company.

Currently forty-threeUS states assess an income tax on individuals and seven states do not have an individual income tax. If you are sending an employee to a state that assesses an individual income tax, you may be required to implement a payroll in that state; your company could also be subject to other business registration or corporate tax requirements.

The ability to provide travel reports for analysis is one obstacle many companies face.

Travel and workday calendars, smartphone tracking apps, relocation travel reports, etc. are options utilized to track business travelers and analyze the data for risks and next steps.

In 2017, GTN conducted a business traveler survey, which asked companies to identify current practices and challenges faced when managing both domestic and international business travelers. Click the download button below to see the findings.

GTN specializes in mobility tax services. To learn how we can help you better understand the tax risks of business travelers, or if you have additional questions, please contact us at +1.888.486.2695 or at info@gtn.com. Or visit our services page to see what assistance we can provide.

The information provided in this newsletter is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.

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