Increasingly, US companies are sending employees on what amount to short international assignments, and they may not even know it. These may be formal short-term assignments with written agreements or could simply be “international commutes” involving occasional business trips to one or more countries.
The one thing these trips have in common is that the workers will receive payments for travel, food and accommodation based on actual expenses. (Alternatively, they may receive per diems as round-sum allowances, a process that eliminates the need to file detailed expense claims for food and accommodation.) Travelers may also receive other relocation or assignment-based compensation, such as payments related to moving expenses. All or some of these payments may need to be reported to US tax authorities at year end via W2 forms. So far, so good.
But what about requirements in the host country? That’s where things can get sticky, and a lot of companies get it wrong, especially (ironically) when there’s a double taxation treaty (DTT) between the host country and the US.
Traveling employees may need to disclose their physical presence in the host country, as there could be certain responsibilities based on how many days they spend there. Even if there’s ultimately no tax liability, there may be a reporting or filing obligation. Workers may need to obtain up-front DTT approval (a rarely known requirement) or, in cases where there is no DTT, obtain an exemption under local domestic law. Typically, this is done either in advance or during the assignment by completing an application and filing it with the relevant tax office. Be particularly careful where costs (salary and/or expenses) for these travelers are either paid for by or recharged to an entity in the host country, as that will invalidate the DTT claim or other exemption and trigger tax liabilities. (That in itself is a complicated story for another time … )
In addition, some expenses, such as hotel-room movie rentals, may trigger US tax and reporting obligations under the IRS accountable plan rules. Companies should track all reimbursements and determine whether such taxes apply.
As you can see, tax payments and expense reporting surrounding short-term foreign visits can be complex, and rules vary greatly from country to country. Tracking expenses can be elusive — some companies manage the process through HR, others through the travel or finance department. It’s important to have a clear policy and communicate it to employees so that expenses don’t slip through the cracks.
Here are four examples illustrating situations that short-term international business visitors may face.
The UK’s approach to short-term business visitors has changed. In the past, the US-UK DTT prevented US employees from being taxed (subject to the rules being met). In the past few years, however, the country has adopted stricter compliance rules. Although the DTT protects US individuals from paying income tax, the employer (usually the UK company, unless the US company is considered to have a place of business in the UK under the PAYE regulations) may still have to withhold wages under the UK’s Pay As You Earn (PAYE) law.
Businesses in countries that have a DTT with the UK can apply for a Short Term Visitor Arrangement to loosen or avoid the PAYE requirement if employees stay in the country for 183 days or less (and meet the other terms for DTT relief).
It’s important to carefully track each employee’s travel, because sometimes workers accumulate enough days in the country to trigger a PAYE reporting requirement without the employer’s knowledge. The UK has increased its PAYE auditing, so it’s better to be safe than sorry and invest in the resources necessary to accurately track the number of days your employees stay in-country.
Singapore does not have a DTT with the US. It is an example of a country that requires foreign employees to register by completing a form — in this case a Section 13(6) notification letter — upon arrival, even if they plan to stay for less than 60 days (and are thus exempt from Singapore taxes).
Things get a little more complicated if the same employee comes back the next year.
If the employee’s total employment period is not more than 60 days in one calendar year but is more than 60 days in the next calendar year, and if the total employment period in the two consecutive years is less than 183 days, the employee can be exempt from tax in Singapore for the first year, but the employer is required to file a Singapore tax clearance return for the second.
If the employee’s total employment period is not more than 60 days in one year but is more than 183 days the next year, or if the total employment period in the two consecutive years is at least 183 days, the employee cannot be exempt from tax in Singapore even for the year which the employment period is less than 60 days — the employer must file a Singapore tax clearance return for both years.
This example shows the importance of giving more than a cursory glance to foreign laws when sending employees for a short stay.
The Czech Republic
The Czech Republic is as good an example as any for illustrating IRS accountable plan rules when requesting reimbursement for business travel abroad. The US Department of State has approved per diem rates for each foreign country, and the Czech Republic’s rates can be found here. Travel under an IRS accountable plan must meet these three conditions:
- Expenses must have a business connection.
- Employees must adequately account for these expenses within a reasonable period of time.
- Employees must return any excess reimbursement or allowance within a reasonable period of time.
Short-term housing costs (for stays of less than a year) are considered on a per diem basis and are not taxable in the US as long as they don’t exceed a maximum amount specified on a chart. The same is true for meals and incidentals, such as laundry expenses. Business-related local travel can also be expensed this way.
Airfares for assignment flights are not taxable in the US, but travel for personal home leave for employees or their families is taxable.
A Word About the Affordable Care Act (ACA)
US citizens who are absent from the United States for 330 days or more don’t have to worry about the ACA’s mandatory insurance provisions. Citizens in that situation are considered to have “minimum essential coverage.”
But citizens who are absent for a shorter period, and who are not considered residents of a foreign country, must either obtain minimal essential coverage, qualify for a coverage exemption or make a “shared responsibility” payment every month. Minimum essential coverage can include a group health plan provided by an overseas employer. An exemption from minimum coverage may be obtained for a once-per-year gap that lasts less than three months.
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