By Russ Banham
At the end of the last century, globalization resulted in an extraordinary uptick in the volume of employees on assignment abroad and the length of their stays. The tax, legal, and immigration rules limiting the duration of these assignments were different but difficult to enforce given the mass of assignees and their ebb and flow. Those days are long gone.
Most countries today are stringently policing their rules and harshly penalizing companies for non-compliance. Stay too long in a country and risk a stiff fine or worse—incarceration and the permanent barring of the employee to conduct business in the country.
The constantly shifting landscape of regulations across the world makes compliance even more problematic.”Privacy, visa, and tax regulations are forever in flux, putting the onus on companies to stay on top of these changes,” says John Fernandez, executive vice president at relocations services provider Global Mobility Solutions (GMS). “Failure to do so can be financially painful.”
It’s no wonder that nearly eight in 10 corporate respondents (79 percent) to a 2016 survey by Cartus on global mobility practices said their organizations has increased their focus on compliance in the last two years. Seventy-two percent also stated that they want to get ahead of possible challenges much sooner.
This due diligence is likely to be necessary, as the global regulatory environment reacts to the impact of Brexit on the European Union and the Trump administration’s interest in trade protectionism. If other EU countries follow Britain’s plans to leave the union, the freedom of movement currently enjoyed by business travelers will curtail.
“If the EU fragments, which we don’t see happening, it would result in a need for separate agreements with each country in the union,” says Bill Nemer, president of relocation services, at Graebel Companies, Inc. “The reciprocity that currently exists would likely change, resulting in a patchwork quilt of new treaties affecting global mobility.”
At the same time, potential policies in the U.S. may incite retaliatory actions by foreign trading partners that could have an impact on global mobility. “We’re beginning to hear from clients with a significant factory presence in Mexico that they are having internal strategy sessions to assess the impact on the mobility of their employees from a possible border wall and Mexico’s reaction to it,” says Ivana Gibson, vice president of client development at relocation services provider MSI.
Already an Uphill Climb
The present state is already tough enough from an expatriate compliance standpoint, given the vast array of complicated tax and immigration statutes and codes. As nations look for ways to increase national tax coffers, they’re sharpening their knives to ensure foreign corporations pay their due share.
“Historically, compliance has always existed for companies with employees traveling on assignments abroad. The difference today is that governments are cracking down to make sure the rules are followed precisely,” says Gibson. “When regulators learn a company is non-compliant, the consequences are much stronger.”
Global Mobility Solutions’ insight into penalties and fines on a country-by-country basis gives pause for deep consideration. In Australia, a company found to be noncompliant can be refused permission to sponsor future foreign employees. In Japan, a non-compliant employee can be incarcerated for up to one year and be barred from future entry to the country. In Korea, a two-year incarceration is possible. In Germany, an employer can be fined up to €500,000 for non-compliance. In France, the fine is €75,000 per non-compliant employee.
A particularly disturbing scenario is one in which an employee inadvertently violates a country’s reentry regulations. “We’ve seen situations where an employee is detained for days at a foreign airport before the situation is resolved,” says Fernandez.
Employees working in a country for a specific duration of time may be required to pay income tax and social security tax on wages earned during the assignment period. Not all countries require the latter, however.Many nations have signed bilateral social security tax treaties that exempt the assignee from having to pay social security taxes in the host country to avoid dual taxation. The U.S., for instance, has 25 such agreements in place.
Employees even may be required to pay a tax on the income they derive from dividends on the corporate-provided stock they hold. “If the employer provides equity to an employee who is abroad in certain countries for a longer period that is allowed by law, the dividends may be construed as taxable income by the host country,” Gibson says.
This hodgepodge of different regulations also confronts companies in domestic U.S. employee assignments. States with an income tax typically require out-of-state assignees to pay state taxes on their income if they spend at least 183 days in the state, either consecutively or in total. This can be a rattling surprise for an employee from a state without an income tax. “If you live in a state without a state income tax, but work half the week in another state with the tax, there is a point at which you may be required to pay a significant portion of your income as tax to the second state— something you may never have imagined,” Nemer says.
On the Guard
Governments simply want their fair share of taxable income, and they now have the technological means to obtain it. In this era of digitization and rapid data access and exchange, customs agents can easily discern how many times a business traveler has been in the country and the duration of these visits. “They add up the days and if it exceeds what is permissible by law, they’ll detain the person,” Fernandez says.
Some assignments abroad are easier to manage than others. For instance, a long-term assignment is not as difficult to track as one in which an employee travels to a foreign location on a frequent, repetitive basis. “This type of mobility is perceived as cost-effective, but it is far more difficult to track for tax, visa, and immigration compliance,” Fernandez says.
The various compliance issues compound for global companies with hundreds if not thousands of employees constantly on the move. Unless they have the in-house expertise to know where these individuals are at all times, they’re apt to overlook a non-compliant assignee.What might they do to up their game?
All companies need to be more proactive, constantly checking a host country’s treaties and regulations and the detailed explanations within them. The rules must be compared to assignees’ travel schedules, explicitly tracking how long they are abroad in each region (on business but also on vacation) to ensure full compliance.
As the world of business enters a period of potential trade upheaval, Gibson advises against knee-jerk reactions. “Global mobility compliance must be pursued strategically as a high-level business objective,” she says. “You need to address the entire question of compliance, not just a segment of it.”
This due diligence is never ending, she adds. “The moment you think you’ve got it all figured out, there’s always an unexpected surprise.”
In this era of digitization and rapid data access and exchange, customs agents can easily discern how many times a business traveler has been in the country and the duration of these visits.
Russ Banham is a Pulitzer-nominated journalist and author of more than two dozen books
SIDEBAR: Costly Non-Compliance
Fees and penalties for organizations that don’t maintain compliance when relocating an employee vary by country. But they have one thing in common: They are costly. Here’s a snapshot of what an organization could expect if they aren’t following country protocol.
• Australia: Organizations may lose the ability to sponsor future foreign transferee.
• France: Organizations can incur a fine up to €75,000 per noncompliant employee plus possible debarment from continuing the business for up to five years.
• Germany: Fines for employees can be up to €1,000 and up to €500,000 for organizations for an offense of negligence.
• Japan: Non-compliant organizations face a fine up to 3 million yen and/or incarceration for up to three years.
• Korea: Organizations can incur fines up to 20 million won or two-year incarceration.
• Spain: Fines are up to €60,000 or closure of the company for up to five years.
• United Kingdom: Organizations face up to a £10,000 fine per noncompliant employee.
• USA: Organizations are subject to fines from $110 to $1,100 per employee for technical paperwork violations. If it’s a first intentional violation, fines climb to $375 to $3,200 per employee and up to $16,000 per employee for repeat offenses.
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