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Short Term Business Assignments: Compliance

This is the first article of a three part series on Short Term Business Assignments. It will explore compliance concerns when sending an employee on assignments overseas and provide an overview on some rescue and tracking measures that can be implemented. This article was written in collaboration with Sean Collins.

In recent years, there has been an overall global rise in business travel. Business activities are undergoing significant changes and are getting increasingly difficult to track and define in accordance to the scope of regulations.

A company’s global mobility program may include overseas assignments of varying lengths, including extended business travel, depending on their needs in the host country and the degree of business commitment.  There can be advantages in sending employees on extended business trip assignments, especially in instances where the company is engaged solely in marketing, sales or customer service activity.  However, there may be implications related to frequent use of such assignments, due to host country regulations surrounding immigration, employment and tax laws that could be applied if the business visa limitations are exceeded.

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Differentiating between short term assignment and business travel

Many companies struggle with differentiating between extended business travel and short term assignments, which opens up the risk of compliance mistakes. Business travel is normally for periods up to 6 months. The tasks performed are covered under business visa conditions and the employee is not subject to tax in the host country. However once a business traveler triggers either a work permit and/or a taxable presence, then the arrangement would typically be structured under a short term assignment, to allow the correct work permit to be secured and the appropriate tax reporting . Short term assignments can be triggered via a variety of factors such as the nature of the work or the time in country but it prevents the assignee from being considered a business traveler.

Short-term vs. Long-term Assignments

Short term business assignments (usually defined as less than 12 months in duration) have several advantages for a business in a foreign market. These include:

  • Providing a cost efficient method of entering a new market
  • Potentially fewer immigration compliance concerns by taking advantage of shorter term work or training visas
  • Less likely to trigger tax residency and payroll requirements if under 183 days (assuming a tax treaty is in place)
  • Employees may be looking for brief overseas assignments so can be a good retention and development tool
  • Less disruptive to families as normally unaccompanied

Long-term assignments carry more cost and complexity due to the fact that assignees may require more substantial company support such as assignment benefits, allowances for housing, dependents or relocation, visa costs and host country payroll compliance measures.  Nonetheless, certain long-term assignments cannot be avoided where a company is established in a country and needs continuity of leadership and skill in the host country.

Non-compliance Risks of the Use of Short-term Business Visas

Given the obvious ease and attraction of using short-term business visas, they are a common solution for a brief overseas assignment.  Even if there are time limits on a business visa, extensions may be available, or a visit to the home country can ‘reset the clock’ and a new visa can be obtained. However, it is still imperative to track cumulative days and stay within the limits of the particular country regulations to avoid triggering tax residency or a permanent establishment. Also be conscious of the immigration climate in the country as repeated trips may come under increasing scrutiny.

Length of Stay

However, there are risks associated with overuse or overextending business visas, even if the initial use was compliant. Non-compliance can arise when the employee stays for a long enough period that they become a tax resident in the host country.

In the majority of countries any stay over 183 days will result in tax residency.  This status gives rise to the need to meet local payroll and withholding requirements, adding cost and complexity to bring the assignment into compliance with a formal work permit. Where a tax treaty between two countries does not exist this limit may be even less, i.e. 30-90 days. In some cases a stay of just one day may trigger a taxable presence, if no treaty is in place and the travelers’ activities are deemed productive work. It is also important to note if the host country considers number of days in a calendar year or rolling 12 month period.

Some countries may also apply a cumulative policy to business travelers who are working on the same project or team. So four workers who each only total 50 days in country may find the authorities view them collectively as being tax resident because of the 200 total days.

Employee Activity

The other instance that a short-term assignment becomes non-compliant is when the type of employee business activity changes.  Most countries’ business visas limit the type of activity to marketing, sales or attending meetings or conferences.  Business activity that creates revenue in the country may violate these limitations, and result in non-compliance with immigration laws as well as trigger permanent establishment risks. Also important to note is that all business travel costs (i.e. airfare, accommodation, etc) must be expensed by the home country and not the host country, otherwise this will create a tax compliance issue.

 

Specific Compliance Problems and Consequences

Permanent Establishment Concerns

Permanent establishment (PE) can occur when an employee on foreign assignment conducts business activity that would trigger corporate tax liability within the host country.  Each country has its own criteria for what constitutes PE, although there are many bi-lateral tax treaties between jurisdictions that allow more latitude in the length of stay and type of activity.

In countries such as Brazil and the United Kingdom, local PE regulations will be strictly applied if the employee concludes contracts on behalf of their employer, whereas other types of activity such as negotiations, marketing and briefings will not incur PE tax consequences.

One caveat to the general country PE rules is the existence of a tax treaty.  For example, under the US-China tax treaty, business visits of 3-4 days (where no contracts are concluded) will not trigger China’s very broad PE definitions for tax purposes.  Otherwise, even brief business trips to China may expose any resulting revenue to China’s corporate tax regime.

Even long term assignments and secondments have come under scrutiny for potential PE, especially in countries such as China and India. If certain conditions are met the host country tax authorities may deem the home country as the economic employer of the assignee and deem the home country to have created a PE. It is vital that employment contracts, assignment letters as well as control over the assignee are carefully laid out to avoid these risks.

Income Tax and Social Security Requirements

Both the employee and employer can be exposed to financial risk if a business visa is misused for longer stays.  The employee could inadvertently become subject to local income tax withholding and social security contributions, and the employer could also be obligated to pay their statutory share of social security. Under such situations the employee may face double taxation, especially where a tax treaty does not exist.

Employment Law Violations

If an employee is found to be in non-compliance with local employment laws by overstaying the business visa limits, then the company may face the requirement to establish a legal local entity for the purposes of a compliant payroll.  This can be costly and time consuming task in some jurisdictions, which is one of the reasons that companies attempt to rely on short term business visas in the first place. Worst case scenario it may be considered a criminal offence resulting in hefty fines or even a prison sentence in some instances.

Immigration and Work Permits

The most obvious area of compliance risk lies with immigration authorities.  Many governments are increasing scrutiny of frequent business travelers to determine if they fall within the requirements to obtain a valid work permit.  In the event that immigration laws have been breached the consequences might include:

  1. The employee being prevented from entering the country, along with the loss of revenue and business opportunity.
  1. The employee or other company personnel may lose the right to re-enter or be otherwise restricted by immigration.
  1. In some cases, governments can levy fines, penalties or other legal remedies against the non-compliant company.

 

Solutions for Companies That Use Short Term Business Visas

Even companies that successfully rely on business visas for a majority of their short term assignments will need to develop a strategy for tracking business travel to avoid non-compliance.

Tracking Methods

Human resource departments should utilize mobile technology and other means for monitoring the activities of business travelers.  Some factors to review will include the type of activity, duration of the stay (including vacation days or weekends), number of employees travelling and frequency of visits to a single country.  Countries such as the United Kingdom and China use a ‘cumulative stay’ formula within a 12-month period that would prevent circumvention via frequent border exits and re-entry.

While sophisticated tracking tools are available on the market, many companies track their business travelers through their T&E policy or travel provider.  Including questions on T&E claims such as reporting number of days in country on current trip and cumulative total over last 12 months, will allow companies to flag risk areas and employees. Travel partners can also flag to HR or Tax departments when an employee intends to stay beyond a certain number of days in a particular country. Having a documented business travel and compliance policy and educating employees and business managers of the risks will also help ensure awareness and reduce risk.

Reporting and Detecting Non-compliance “Triggers”

It is recommended that companies develop a checklist and approval process for planned business travel to evaluate the potential for non-compliance ahead of time.  Criteria can be established on when a case gets flagged for further review (i.e. no. of days or travel to a high risk country). After departure, tracking and reporting of employee activity should be matched up against ‘non-compliance triggers’ and alerts.  These triggers could be based on number of days in the host country, visa extensions and types of business activity to allow HR to monitor the potential for non-compliance.

Create a Contingency Plan For Instances of Non-compliance

Despite a company’s best efforts, there may still be instances of non-compliance that must be handled effectively. It is important to ensure that a plan is in place should such a situation arise in order to minimize the risk to business continuity.  The first step may be to immediately extract the employee out of the host country provided this will not exacerbate the situation, for example by causing them problems at the border. This buys some time to assess the damage and engage specialists to work out how to comply with local requirements.

Then dependent on the exact circumstances there are a range of possible solutions:

  • Second the employee to a subsidiary in the host country using an Intra-Company Transfer visa
  • Send the worker into the host country as an independent contractor. Some countries have a skilled visa class that doesn’t require employer sponsorship and may allow them to contract to a foreign entity. Use of partner or client in the host country to legally employ the assignee
  • Establish a legal local corporate entity to run a compliant payroll
  • Utilize a third party service such as Shield GEO to act as local employer of record for purposes of payroll and immigration

There are costs for all of these measures, but as it becomes more difficult to avoid business travel immigration issues, every multi-national must confront the reality of this expense.  In any non-compliant situation, it is wise to consult with local and international experts in immigration and employment, who can offer direct and specific advice for each jurisdiction, and how to remedy any potential violations.

This article was written in collaboration with Sean Collins – the founder of Talent Mobility Asia, an independent global mobility consulting firm, based in Asia. If you wish to discuss Talent Mobility Asia’s consulting services further please contact seanc@talentmobilityasia.com or visit www.talentmobilityasia.com

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