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COVID-19 tax considerations for global mobility professionals

May 28, 2020 / 6 min read

Once employees are safe and settled, what’s next on a global mobility professional’s to-do list? Determining how COVID-19 affects U.S. foreign tax filings, living allowances, and potential permanent establishment.

In the early stages of the COVID-19 pandemic, those who manage global mobility programs rightfully focused their efforts on making sure that employees were safe and that those who needed to relocate were able to do so. As the dust settles and the picture gets a little bit clearer as to who’ll be where for the remainder of 2020, it’s a good time to start thinking about how employee locations might affect the obligations of businesses and their employees worldwide. Here are a few of the concerns that may need to be addressed.

Inadvertent permanent establishment: One of the most common ways that the pandemic has affected globally mobile professionals is the modification or cancellation of location-based plans. Some individuals who were scheduled to be seconded to an overseas assignment may now be working remotely from the United States or another subsidiary. Similarly, many non-U.S. workers who planned short visits to the States in the early stages of the pandemic have found themselves working remotely from within the United States for extended periods due to travel restrictions.

From a business standpoint, all functions need to understand that the physical location of the employee could have an impact on a country’s ability to tax both the employee and the employer. In extreme cases, an employee performing certain tasks within a jurisdiction for a long enough period of time could create a permanent establishment and trigger a corporate tax obligation on the employer. This should always be considered when sending someone abroad, but it’s of particular concern in the current environment where someone could wind up working in a jurisdiction for much longer than planned.

IRS FAQ guidance has suggested that some temporary relief from permanent establishment rules may apply for non-U.S. employees working within the United States for extended periods of time due to COVID-19 travel restrictions, but such relief can vary from country to country. It’s important for those who oversee global mobility assignments to coordinate with tax advisors to make sure that no one inadvertently triggers a country’s permanent establishment rules due to unplanned travel limitations or some other COVID-19 accommodation.

The physical location of the employee could have an impact on a country’s ability to tax both the employee and the employer.

Hypothetical tax issue: Employers who opt to tax-equalize U.S. employees who work overseas will typically implement “hypothetical tax.” Often referred to as “hypo tax,” this is a reduction in salary based on an estimate of the amount of tax the employee would have to pay if he hadn’t gone on assignment. While on assignment, employees often don’t have a tax obligation due to the foreign-earned income exclusion or foreign tax credits. If an employee now has returned to the United States due to COVID-19, employers must consider how an indefinite return to the United States could affect the tax calculation. The decision to switch from hypothetical tax back to appropriate federal and state tax withholding should be based on the expected duration of the return to the States and the likelihood of an eventual return to the foreign jurisdiction.

Days of presence: Tax rules that govern individual employees are typically driven by the rules that each country uses to determine residency for tax purposes. The number of days that an individual spends in a country will be a key criterion in that determination, and the spread of COVID-19 has caused a significant number of individuals to stay in unplanned locations for unexpectedly long periods. Here are some items to consider that may affect an employee’s tax obligations.

Social security: If an employee’s participation in a home country’s social system exempts him or her from taxation in the assignment country via a totalization agreement, the employer will need to consider how any change in that person’s location affects the exemption.

U.S. stimulus eligibility: Overseas employees have substantially higher taxable incomes due to living allowances and other taxable benefits being included in their U.S. W-2 wages. As part of an employer’s tax equalization policy, they may want to consider what an employee’s eligibility for the CARES Act stimulus payment would be without the compensation from the additional fringe benefits and compensate the employee accordingly.

Until a vaccine or cure for COVID-19 is widely available, the pandemic will pose a daily challenge to global mobility.

COVID-19-related tax filing deadline changes: The U.S. 1040 filing deadline has been changed to July 15, 2020. Extension to Oct. 15, 2020 is still available if the proper extension is filed. Most U.S. states have followed the federal guidelines and moved their filing deadline to July 15. Individuals who have filing obligations in a foreign country must be aware of any impactful changes to foreign tax filing deadlines.

Planning and logistics: Global mobility programs exist to get people on the ground in the locations where they’re most valuable to a business. Until a vaccine or cure for COVID-19 is widely available, the pandemic will pose a daily challenge to global mobility, and businesses will need to plan accordingly. Budgets and human resources policies should allow for appropriate living allowances and even hardship allowances where necessary. It may be a long time before national boundaries can be crossed with the ease to which we became accustomed before the pandemic, and global mobility professionals will need to navigate a host of new requirements to make sure an individual is settled on-site in time to perform the tasks assigned.

To learn more about how COVID-19 is changing the global mobility landscape and how we can help your business cope, please contact a Plante Moran professional.

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