“Accidental” Expats
In the second of our short series of Reward & Employment Tax Solutions related articles on 2020 matters and actions to take before the start of the 2021/22 U.K. tax year, we look at individuals who were intended to work from a particular work location but find themselves in a different work location, for example because of:
- Choosing to “go home” or to a different 2nd home/work location.
- Their particular work location is closed or is an area which is subject to lockdown conditions, so are in another location.
- They were or became “trapped” in a different location due to travel restrictions.
- Their secondments or assignments were cut short early or they didn’t start a new assignment.
This has resulted in a relatively new growth in “accidental expats.” Remote working appears to be more readily accepted as standard practice. We summarise below key issues commonly seen in our experience and some practical tips to help.
Immigration, legal and regulatory obligations
Now the U.K. has left the E.U., and for other country combinations, in any event, it is imperative that the correct immigration rules and procedures have been followed. It is key that an employee has the correct right to work in a different location, and just as importantly is able to return to their original location when it is safe for them to do so. With pre-settled and settled status now a reality in the U.K., this should be considered above all else. From practical experience, no-one wants to get the call that an individual has been stopped by border control officers on their way into or out of a country. This is especially true in the midst of a pandemic and where negative Covid tests may have to be evidenced within a specified time-limit, to prevent the need to self-isolate. The more senior the individual or the more politically unstable the country; the greater the fallout could be. In addition, we know that some countries use immigration data for tax and/or social security purposes, so this links with the below.
Through working in a different jurisdiction, employees may also need to be subject to additional legal or regulatory requirements, could accrue additional employment rights, and even their remuneration may need to meet local obligations (such as minimum wage, bonus, profit related pay, or caps on bonuses etc). Anyone with share plans or deferred compensation arrangements may also now have local obligations and the potential for creating trailing liabilities.
Personal income tax, and where this may become an employer responsibility
Income tax of individuals is usually payable where the work is performed, not where the person resides or where their employment contract was entered into unless certain conditions are met to simplify or remove this obligation. If an individual is now working in an overseas location, not only may they have to register with the local authorities to let them know they are there, the employer may also have registration, payroll withholding or tax return obligations. If an individual spends enough time in that country, they may also accidentally become formally tax residents and may be liable to other taxes and reporting liabilities i.e. on income and/or capital gains, inheritance tax, etc. Thankfully each country will have its own rules on this, and there are double taxation agreements between a number of countries to help avoid double tax, but tax as we all know is complex.
The Organisation for Economic Cooperation and Development (“OECD”) has provided some useful commentary and some countries have released guidance easing the strict tax rules which would normally apply. However not all countries are taking the same approach, and not all countries have made formal announcements. A large number of countries have a 31 December tax year end, and as a result, if a local tax obligation has arisen, individuals, and potentially their employers, will now have statutory deadlines to meet, whether they knew about them or not. In particular, as Covid has gone on now for nearly a year, depending on when someone first went to a new location, they may well have already, or be very close to triggering tax residency, as this is often a stay of 6 months or more.
It is important employers have procedures in place to ensure that they are aware of where their employees are working, whether they have or are likely to trigger local obligations, plus if the individual is at wider risk of changing their tax residency status. As “accidental expats” it is unlikely that an employer’s current policies for formal expats, assignees or even short term business visitors are geared up to cover this population. Employers will need to consider what their policy stance is, which costs they are prepared to bear, or may have to administer regardless, what advice they wish to give to employees and support with tax return preparation, claiming foreign tax credits, or providing statements of foreign sourced income for tax return preparation. In some country combinations, it may be as simple as keeping the employee on “home” country payroll and tax withholding at source and being able to disregard the “host” country. The longer the arrangements go on, the less likely this will remain a compliant fling position to adopt.
Social Security
Like income tax, there may be uncertainty on where the employer and employee should pay social security. There may be additional withholding and reporting obligations for both the employer and employee if an employee is subject to another social security system. Please refer to last week’s article for our commentary on this from a Brexit stand-point. A lot of these points, considerations and deadlines will equally apply to other country combinations, and whether or not a social security agreement is in place between them. Each case should be considered on its own fact pattern and this just adds to the data an employer needs and the complexity of the decision making, administration and compliance.
The good news is, the U.K. Global Health Insurance Card (“GHIC”) process is now up and running, so individuals, or their employers, can now start to make applications and ensure coverage is available as soon as possible. Let us know if we can assist with this.
Permanent Establishment risks
Employees who have relocated overseas, either where their employer has no corporate presence, or already does but via a separate legal entity, may risk creating a permanent establishment within that overseas jurisdiction. The OECD has also released guidance on this and in a number of scenarios this risk may be manageable and remain low. In certain circumstances however this could be a significant risk to the corporate structure and as a result, from a corporate tax perspective, companies may need to comply with additional accounting, tax and reporting requirements. In particular, the more senior the employee, the greater likelihood of risk, especially regarding where board meetings are held, contracts are entered into or routine and regular tasks are undertaken, including but not exclusively the signing of contracts or committing the company to decisions, costs or risks. As with formal expat policies, this is usually considered when personnel are assigned. Often their employment contract would change to the “host employer” to help manage this risk, ensure costs are directly met by the appropriate entity, thus also reducing the need to consider transfer pricing of their costs. However, this policy and the associated controls may not have been applied to “accidental expats” and a review should be undertaken as soon as possible.
A&M Taxand is an international network that can provide support in relation to the above issues. Across our multi-disciplinary tax and wider A&M teams, we can provide cohesive, strategic and practical advice. Clients value our ability to be agile and move quickly to support their needs. Our U.K. team also has extensive in-house practical experience within multinational organisations, so can help ensure all stakeholders’ needs are understood and met. Please contact your usual A&M point of contact or Louise Jenkins, Tracey Norton, Anita Eunson, Shirley Ly, or Linda Cameron for more information.
