Sending employees to work abroad is becoming the norm these days. It's an exciting opportunity✈️, but it's not without risks. Both employers and employees must be aware of these risks and how to handle them. So let's explore what you need to know..
One of the main corporate risks involves an employee creating a permanent establishment (PE) for the employer in a foreign country. The rules vary by location and are complex. If an employee has the authority to conduct business, like negotiating or signing contracts on behalf of the employer in another country, they might create a PE. This can lead to reporting and filing obligations and may create additional tax exposure in the country where the employee is working.
A common misunderstanding is that staying in a country for less than 183 days eliminates an individual's tax liability. This might be true if certain criteria are met, but employers may still have to withhold local taxes initially until an exemption is obtained, if that is available.
Country-specific rules must be explored to know whether an exemption is possible and / or when to withhold tax and social security. Additionally, employers may have to file regular tax forms to report the employee's income and withholding. Failing to withhold taxes on time can result in interest and penalties 💰📝.
The general principle is that an employee is liable to social security in the country in which they work. It may be possible for the employee and the employer to continue to pay social security in the country from which the individual has moved, subject to specific criteria being satisfied, which will be set out in the terms of any social security agreement between the two countries.
Incorrect operation of social security can result in higher costs, interest and penalties for the employer, as well as incomplete benefit records for the employee.
When an employee works in another country they may obtain employment rights in that country. In practice this may mean enhanced employment protection for example against termination, or minimum wages, as well as maternity/paternity and redundancy payments.
Employers also need to know their employees' locations to ensure safety, including workplace conditions and potential evacuation needs. Ensuring proper insurance coverage for these scenarios is essential.
Rules across countries differ in terms of data privacy so it is important to know what data the employee might be processing. Where an employee is working remotely there may be additional considerations regarding how they keep information confidential 🔒📊.
The most important thing to consider is whether the employee has the right to work in that country. An employee working in a country without the correct visa or work permit can create issues for both the employee and the employer in terms of fines as well as restricting future access to that country. In some instances, failure to obtain the right work permit or visa can result in creating a criminal record for the employee.
In addition to income tax withholding and reporting requirements that an employee can create for the employer; they may well also create personal filing requirements. These can range from having to register with local jurisdictions to being required to file an income tax return at the end of the tax year to report their earnings whilst working in that country. Not doing so on a timely basis is likely to attract interest and penalties. In the most severe scenarios, it can lead to double taxation, as it may not be possible to claim a refund for the taxes paid in the other country, where they were previously working and liable to tax, which should have been “turned off”.
In the excitement of the move, it is easy to overlook the fact that there may not be the same access to medical care, particularly in an emergency, as there is in the location in which the employee currently works. Even if medical attention is available, it could come at a considerably higher cost than in the current location.
Where an employee moves to a country and becomes locally employed there, it is likely to have an impact on their ability to continue to participate in their home country benefit plans. This is likely to include continuing to make contributions to their pension plan, as well as medical benefit cover and certain long term incentive plans that they may be currently participating in. With careful planning it may be possible to maintain some of these benefits. As such, it is important to consider these in the round as part of the planning process.
When the employee becomes employed locally, they will transfer onto the local terms of the country, including the pay scales there. It is advisable to do comparisons between their net and gross pay in each jurisdiction as they may have ongoing obligations in their country of origin, which may be difficult to service if their net pay is less than in the new location. It may also be more expensive to live in that jurisdiction and so consider undertaking an accurate comparison between disposable incomes in each country to avoid any nasty surprises for the employee.
It is important to maintain connections with the employee while they are working in a different country from both a business continuity perspective, as well as to protect the welfare of the employee. Once the excitement of the initial relocation has passed, employees may start to feel lonely, which can have an impact on their mental health and may contribute to the failure of the move.