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From boardroom to boarding gate: mitigating global tax risks for executive business travellers

When employees spend short periods of time traveling to a foreign country on an ad hoc basis for work, there is often an assumption that those short trips will not trigger any tax consequences. But those employees should verify that that assumption is justified.

Employees who travel to a different country for business on behalf of their employer typically rely -- whether they realise it or not -- on the protection from double taxation offered by double taxation agreements (DTAs) that their country of residence may have entered into with the jurisdiction(s) they are visiting. These agreements are designed to protect taxpayers from double taxation when they would otherwise be subject to tax both in their country of residence and the host country.

If there is no DTA in place, there may be no protection or exemption from taxes in the host country. Even if there is a DTA, the specific terms of each agreement must be considered to determine if it offers exemption from income tax in the host country. This is not always a given, for executive employees in particular. Executive employees include those who are part of the C-suite, sit on boards (in both the home and host jurisdictions), or who are empowered by their employer to negotiate or conclude contracts/commercial terms. For executive employees, it is crucial sufficient detail is understood regarding the nature of their role, activities, and interactions with the team in the host jurisdiction. There is a significantly higher likelihood of failing the DTA condition relating to which entity they are paid ‘on behalf of’ as set out below, and triggering a host country tax liability, compared to a less senior employee.
DTAs – what do you need to consider?

All treaties vary slightly, but in simplified and very general terms, a DTA should offer protection from income tax liability in the host country if each of the below conditions is met:

  • The employee remains tax resident in their home country;

  • They spend no more than 183 days in the host jurisdiction in any given 12-month period;

  • The remuneration continues to be paid by, and on behalf of, the home country employer; and

  • None of the costs associated with the individual’s employment are recharged to a permanent establishment in the host country.

However, there is complexity to some of these terms, particularly when it comes to executive employees, that may require further consideration. These considerations include:

  • A growing number of countries, including Australia, Canada, China, Germany, India, and the Netherlands, apply the concept of an “economic employer” rather than the legal employer to determine which entity qualifies as the employer under a treaty. The economic employer is the entity that bears the risks and rewards of the employee’s work, controls or directs the employee’s activities, and determines how integrated the employee is in the organisation. If an employee goes to work temporarily in a country that uses the economic employer concept, depending on the characteristics of the employment, the situation may not qualify for the exemption from host jurisdiction taxation provided in tax treaties that follow the OECD Model Tax Treaty, and taxation might arise in the host country as of day one of employment. An example is provided by the UK tax authorities (HMRC) of a group financial controller visiting the UK subsidiary of his overseas employer for 55-59 days per tax year, and indicates such a role would be considered to be ‘significantly integrated’ into the business. For executive employees, the tax authorities are more likely to view them as integrated into the host country organisation and creating value there.

  • The OECD commentary on the Model Tax Treaty provides additional guidance and examples on the interpretation of the conditions for exemption from income tax in a host location. For example, one scenario relates to centralised functions in cases where employees perform global roles, with the costs of those centralised functions allocated among the group companies in the jurisdictions where they work. In that scenario, the work performed by the employee in the host jurisdiction is an integral part of the business of the home jurisdiction employer. The second condition of the article on the taxation of employment income of the OECD Model Income Tax Treaty should therefore apply to the remuneration derived by that employee for their work in the host jurisdiction, assuming the other conditions are satisfied. The additional OECD commentary should always be considered alongside the specific treaty conditions to determine the correct outcome.

An employee’s activities in the host jurisdiction could give rise to a PE of their home country employer in that jurisdiction for corporate tax purposes. This risk is elevated for executive employees, who are more likely to have the right to negotiate commercial terms, bind the company, sign contracts, and act as an agent of the company. If a PE is created, that may also entail an obligation under transfer pricing principles to recharge a portion of the employee’s costs to that PE.

For groups with international branch structures (common in financial services businesses), if employees of a branch office visit the business’s headquarters (a corporate entity) then generally the branch structure will be considered legally transparent and the employee will be effectively employed by the HQ they are visiting. In that case, the condition of the DTA article requiring that remuneration is paid by, or on behalf of, an employer not resident in the host country is not met,  and this triggers a tax obligation in the host country from day one.

Against the backdrop of a sharpened focus on the tax governance of global businesses, compliance for non-resident directors is an important area to get right. Common misconceptions are that board members cannot be subject to tax in a territory where they are non-resident, that directors are always treated in the same way as employees (for domestic tax as well as DTA purposes), and that board members can be subject to tax only if they receive a directorship fee payable by the entity on whose board they sit, but not if they are remunerated fully by a group company in a different jurisdiction. Most DTAs include a specific article on the tax treatment of directors’ fees, separate from the article on the tax treatment of employment income. For more on this topic, see Non-resident directors, what are the UK PAYE income tax and NIC risks? - BDO and Non-resident directors – the pitfalls and risks of failing to get the tax and social security report - BDO 

Even if a DTA’s conditions for exemption from income tax in the host location are satisfied, that is not necessarily the end of the story. In many cases, there are compliance obligations that the employee and/or employer may need to satisfy.

Global business traveller reporting obligations in the UK

In the UK, there is a default payroll and tax withholding (PAYE) obligation from the first day that an employee spends visiting a UK entity for work purposes. This is the case regardless of whether the employee is ultimately eligible for an exemption from UK income taxes under the terms of a DTA. To alleviate this administrative burden, UK employers can enter into something called a “Short-Term Business Visitors Agreement” (STBVA, or Appendix 4 agreement) with the UK tax authorities, which allows them to effectively self-assess whether the employees are expected to be eligible for an exemption under a DTA. If that is the case, there is no payroll reporting requirement, provided they also have a means of monitoring visitors to the UK. Employers must instead undertake reporting about all their overseas visitors at the end of each tax year, to be filed by 31 May following the end of the tax year on 5 April. The amount of information required about the visitors depends on how much time they spend working in the UK.

Other jurisdictions also impose comparable reporting requirements. 

For more information on the reporting and tax (and social security) obligations associated with internationally mobile executives, please consult your regular BDO contact or the authors of this article. 

Andrew Kelly
Steph Carr
BDO in United Kingdom

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