Emerging from the COVID-19 pandemic, companies continue to face unprecedented challenges to their economic recovery—once again—forcing them to redefine current strategies and policies. Adaptation to lockdown restrictions and shutdowns across the globe became essential for organizations to succeed during the pandemic, leading employers to introduce remote and/or hybrid work policies. While the topic of the “virtual workforce” created many concerns and considerations for multinational U.S. companies, the “Great Resignation” quickly became the unanticipated trend many employers had to navigate. As a result, recovery strategies are now largely focusing on talent retention while keeping pace with economic pressures.
At the onset of the pandemic, multinational organizations generally approached cross-border business strategies with traditional mobility programs consisting of both long- and short-term business travel, transfers, and formal assignments. These programs were structured to be beneficial considering both intentional placements of talent and costs that aligned with program goals. Now, with the increasingly competitive landscape for talent and demand for employee flexibility rising, many multinational organizations are re-strategizing how to best approach cross-border business plans to attract top talent while remaining economically conscious.
Organizations with widespread operations are now trending away from customary approaches of managing a global workforce generally utilizing three strategic approaches that best align with recovery strategies. The three emerging models consist of remote work, hybrid work, and outsourced work, all of which require careful planning and consideration to be utilized effectively.
Remote and hybrid working have been highly discussed throughout the duration of the pandemic when it comes to the unanticipated tax consequences. While there are still risk factors to be considered, there are also, in turn, many benefits to virtual talent. Flexibility in employee work arrangements allows organizations to stay competitive while presenting the opportunity to hire diversified professionals from across the globe to fulfill positions best fit for varying company needs. This strategy, or the combination, can pose many cost-effective advantages for more purposeful approaches to mobilizing talent, eliminating relocation and other assignment-related costs specific to the employee.
While the respective tax obligations for remote or hybrid personnel continue to be challenging, the consideration of both employer and employee tax obligations can assist in the successful utilization of this strategic approach to mobility programs. The following considerations, as noted in our July 2021 alert, are still recommended for implementing successful remote and hybrid work policies, including:
- State and Local Income Tax – If a company has employees working in a state long-term, it becomes likely that the company will be deemed to have a taxable presence in that state. Failure to register and pay taxes will often result in significant penalties and compliance costs; therefore, it is important employers know exactly where their employees are working.
- Foreign Permanent Establishment Risk – When remote work locations extend across international borders, companies should consider international taxation issues. A permanent establishment is a tax concept that may be defined in a country’s domestic tax laws or under a bilateral income tax treaty between the home and host countries. Having an employee working in a foreign jurisdiction for an extended period could create a permanent establishment in that country, triggering a multitude of obligations for the employer including local registration, payroll, social security, and corporate income tax filings in the host country and also in the United States.
- Payroll Taxes – Companies may need to withhold, remit, and report taxes from an employee based on where they are living in a work-from-home environment. If the remote employee is working in a foreign country, a shadow payroll may be required, and the compliance burden may include foreign social security tax.
- Tax Filings – Depending on a specific country’s/state’s regulations, employees may need to file tax returns in multiple jurisdictions. In addition, if the employee is working in more than one location during the year for an extended period, they may be required to pay taxes twice on that income. However, they may be able to utilize foreign tax credits or domestic state-to-state tax credits to help offset double taxation, but employees will likely need assistance navigating through these issues.
Hybrid work strategies have also begun to take a new shape with the concept of “digital nomad” gaining popularity among young professionals. Digital nomads are individuals who earn a living working virtually in various locations of their choosing. This differs from remote working in the sense that remote work is traditionally tied to one location where work is performed virtually. While the flexibility of digital nomads is certainly appealing, companies are encouraged to evaluate policies for virtual employees before onboarding individuals with this desire.
While countries such as Barbados have qualifying programs for employees to work virtually with no personal tax liability or tax obligations, in consequence, every country is different. Governments have started to incentivize professionals in this space to relocate to their country to boost local economic performance, but consideration of such things as work permits, restrictions to visas, and residency laws should be evaluated to avoid the risk of triggering employer and employee tax obligations.
As we noted in July 2021, when companies around the world invest valuable resources to create flexible workforce solutions, proactively addressing the tax issues that arise at the company and employee levels should be a top priority. For many organizations, this is a continued challenge that may require the assistance of professionals with experience in navigating through the complexities of multi-jurisdiction employment.
Global mobility professionals are uniquely qualified to help with designing and implementing the compliance of mobility strategies and reporting aspects to mitigate risk and support both employers and employees.
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