Employee expenses are a necessary part of
international business, such as air travel, lodging, meals, vehicle expenses
and per diem allowances. However, when
you have employees overseas that are submitting expenses, you are going to be
subject to local rules and laws on which expenses are permitted and any limits
that may be in place.
You may be trying to manage this from the home office, but how are you going to learn the local practices and procedures and integrate them into your own system? What do you do if some portion of the employee expenses are taxable in the host country, impacting your employee’s net compensation?
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The primary thing to remember is that when you hire employees overseas, you will need to follow all foreign employment and tax laws, which includes expense reimbursement policies.
Fortunately, there are efficient solutions
for you, and to get you started we have put together this quick guide on
expense reimbursement for your overseas employees.
Common Challenges with Expense Reimbursement
When you start to reimburse expenses in different countries you will run into a few challenges that may be new. In many cases, you won’t be able to reimburse the expenses directly from home as your overseas employees will be subject to a different payroll and tax system. You will need to find a way to manage expenses on the ground in the foreign destination where the expenses are incurred.
Local Tax Laws: When is an expense a taxable benefit?
Every country has its own rules when it
comes to defining when an expense is actually a taxable benefit to the
employee. The rule of thumb is that the
expense should be strictly business related, with no personal enrichment or
benefit. But each country will interpret
that differently according to tax policy, and will also impose monetary limits
on certain expenses, such as mileage rates for vehicle expenses, or meal per
If you are reimbursing your overseas employee
expenses from home, you will have to account for the exchange rate (and any
fluctuations) if the expense is submitted in a foreign currency.
Similarly, you may be dealing with receipts
and documentation in another language, which will require translation and
Common Expense Reimbursement Requirements
Receipts and Expense Reports
Almost all expenses require some type of
receipt, whether paper or electronic, and an expense report to itemize them by
category and amount. Some expenses such
as food allowances per diem may not have a receipt, but still need to be
accounted for in payroll.
Format and Documentation
Some countries will have a very specific
format that you have to use to document the receipts as valid and accurate. Taxable expenses may even require a separate form
to fill out as part of the payroll process.
Limits on Tax Free Expenses
One thing that you will have to pay
attention to are the limits on tax free amounts for expenses, and how to treat
any amounts that are over and taxable to the employee. This all has to be integrated into your
foreign payroll system to ensure compliance.
Case Examples: Countries with Complex Reimbursement Systems
Expense Reimbursement in Germany
As an example of Germany’s stringent approach to expenses and taxation, mileage is reimbursed tax-free only if the employee can document that the routes driven were the most direct to the business destination. This rule is designed to prevent reimbursement for travel that mixes personal and business purposes.
Expense Reimbursement in Peru
When your company reimburses or pays employee expenses in Peru directly, that must be done via non-cash methods within the Peruvian financial system, including bank deposits, credit cards, and wire transfers. Otherwise, the payment could be viewed as a taxable benefit to the employee if it is paid outside the Peruvian system.
Expense Reimbursement in Mexico
Mexico’s expense reimbursement policies are strict. Travel expenses and reimbursement must be included in payroll, and taxability will depend on whether there is supporting documentation for tax exemption. In general, travel expenses are non-taxable if they occur outside a 50km radius from the place of business, and even per diem rates must have third party receipts.
Expense Reimbursement in Kenya
Reimbursement of expenses in Kenya is done
through M-Pesa, a mobile-money payment system relying on technology exclusive
to Kenya. This may make the tracking and
management of expenses from the home country difficult, as you wont have a
comparable platform to work on.
How to Keep Track of Expenses
The traditional method of retaining paper
receipts and then stapling them to a written expense report still works, but
there are more elegant solutions available too.
There are a number of moblie apps and
platforms that make tracking expenses much easier, and you can utilize scanned
receipts for simple storage. The only
issue is being able to integrate the app technology with the foreign payroll
system when necessary.
Using Shield GEO for Expense Reimbursements
If you use a DIY foreign employment method, running payroll and integrating expense reimbursement from home can be a real headache. A simpler solution is to use a GEO employer of record in the host country to handle the whole thing for you.
Shield GEO will set up your foreign employment from end to end, and make sure that all payroll, expense reimbursement and tax rules are met in the destination. Our local partners understand all of the payroll rules and will make sure that expenses are tracked and reported accurately, and reimbursed quickly to the employee. We make international employment simple.
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