Picture the scene. You suddenly find yourself expanding the business into new geographies across the globe. You need to hire people locally — and fast. There’s a long checklist of things to watch out for. Among those, and very importantly, is getting their taxes right.
In this article, we’ll look at the tax considerations that are apt to worry employers who are quickly expanding internationally.
Taxable presence
When hiring or moving globally, one big risk to avoid is that of establishing a taxable presence. It’s a close relative of tax residency.
Based on the types of activities conducted by the employee, this could encompass any attributed profit, income tax regulations, and additional national reporting obligations.
Determining the tax residency status of employees working in multiple jurisdictions can be complex and may affect their tax obligations.
- Cross-border workers: An employer needs to know how international workers are compensated both passively and actively, what duties they perform, whether they are permanent or temporary assignees, and whether they are designated as employees or contractors.
- Double taxation: Double taxation is another big concern for distributed workers. Referring to a situation whereby an individual is taxed on the same income by more than one tax authority, double taxation can all too easily occur when an employee works remotely in a different country or state than their employer’s location.
Sounds tough to keep track of, right? The good news is that outsourcing a business’ global payroll administration reduces risks. Your payroll partner can account for the domestic tax rules of the worker’s location. Efficient global payroll will include software designed to manage international tax rules.
Additional employment-related global tax concerns
There are, in fact, many common compliance fears during tax season for globally distributed teams.
Permanent Establishment Risk
Companies may inadvertently create a permanent taxable presence in jurisdictions where their remote workers are based, triggering tax obligations.
There are ways to limit the risk of establishing permanence.
One is to limit business activity in the new location, of course. But that may not be possible.
Another option is to use independent contractors instead of full-time employees. Yet another is to follow the 183-day rule.
Withholding Tax Obligations
Companies must ensure compliance with withholding tax requirements, such as withholding taxes on payments to non-resident workers or contractors.
To get tax withholdings right internationally, several factors should be on your radar.
For example, there is Base Erosion and Profit Shifting. An initiative by the inter-governmental agency, the OECD, helps multinational organizations learn discrepancies in tax rules.
This Thomas Reuters article delves into additional tips. Conducting your business within the confines of a minimum global tax of 15% is one. Another tip is that your company should conduct regular what-if scenarios.
Reporting requirements
Meeting the reporting obligations of various tax authorities, including filing accurate and timely tax returns, can be challenging with a globally distributed workforce.
Right away, you’ll need to familiarize yourself with all local tax laws touching your business. Local tax experts will come in handy. Cross-border transactions will require your vigilant attention.
It will also become a necessity for you to centralize your tax data management. This will help you in maintaining accurate, easily accessible records.
Additionally, you’ll want to tap your technology team to implement and deploy viable cloud-based tax compliance software. This, along with the aforementioned centralization of tax data, will prove helpful in the regular audits you should plan.
The conditions leading to global tax complexity are a foregone conclusion
Organizations that are agile enough to hire and deploy staff internationally enjoy a profound competitive advantage, attracting and retaining the best people. Embracing these trends should be a cornerstone of any business’ global talent strategy.
Indeed, Forbes notes that remote and hybrid workplaces are growing rapidly. As of 2023,12.7% of full-time employees work from home, showing just how quickly remote work environments have become normalized.
The risks of non-compliance
The broad distribution of global teams has increasingly brought tax challenges to the fore for businesses worldwide. Other developing factors, such as digital nomadism and employee relocation, further lay bare organizations’ current ability to comply.
As your distributed global team grows, it is crucial for the business to have a way to navigate all this complexity efficiently. The consequences of running afoul of global employment laws — whether they be tax-related or other — can result in large fines.
Consider, for instance, how Spanish delivery app Glovo faced a $90.6 million fine by the U.S. Department of Labor for misclassifying workers. The company had previously faced smaller sanctions for similar labor infractions.
Then there’s e-commerce giant Amazon, which was fined $3.67 million for subcontracting delivery workers in Catalonia, Spain. Ouch!
Partnering with an EOR simplifies your global tax compliance
The good news is that, however hard complying with these various tax regimes is becoming, there’s a simple way out: an employer of record (EOR) solution.
Having an EOR as a partner in such situations can be the defining factor in achieving tax compliance. By partnering with an EOR, companies offload the burden of managing complex tax matters and focus, instead, on business growth.
Speak to an expert to learn more about how EORs can help.
If you’d like to find out more about streamlining payroll for a global team, including the challenges you might face and a roadmap to consolidate fragmented systems, take a look at our ebook.
