Article

Expatriate tax implications from COVID-19

Katy Bond Katy Bond

Across the globe, the spread of coronavirus (COVID-19) is having a significant humanitarian impact and, increasingly, an economic impact from stock markets to global supply chains. As governments move rapidly to contain the spread of the virus, global employers are also working to address how to manage employees in affected areas while continuing business operations, Katy Bond tells us.

Daily developments in the spread of the virus and the need to contain its advance could cause serious disruptions in work for employees. For companies with global operations, there is increased potential for employees to relocate across international borders, whether as part of business continuity strategies or for personal reasons. This presents a range of unexpected tax issues to also address.

By reviewing how governments are responding to individual tax compliance, employers can understand and address the tax risk areas they should consider. They can then formulate policies for working arrangements during the coming months.

The initial tax response

We are increasingly seeing governments close their borders as they move to restrict travel. While the UK is currently “open”, the disruption to flights is already causing confusion. Tax considerations are currently not a priority. This is all likely to have an impact on individual annual tax filings and tax changes in response to the economic effects of the coronavirus. While a handful of countries have extended tax filing deadlines to ease the compliance burden for taxpayers during this challenging time, many more have yet to announce changes. Tax-payers should, therefore, continue to take steps to meet their normal tax compliance obligations. For internationally mobile employees who may have tax return filings in more than one country, normal compliance obligations should be assumed for each country. Where there are significant obstacles to obtaining the information required to complete a tax return, it may be possible to extend the filing deadline by application or, alternatively, to review whether there is reasonable cause for a late filing and request the appropriate tax authorities abate possible penalties.

Restricted travel from the UK and the closure of many borders around the world has prevented certain individuals from leaving the UK and prompted others to return when they would previously have remained oversees. This could have a potential impact on their residence status under the Statutory Residence Test. The UK government have recently updated guidance in relation to exceptional circumstances which may discount the days present for determining tax residency. However the circumstances which qualify are still relatively narrow and it is unclear how this may be applied in practice and in conjunction with the double tax treaties. Whilst further guidance from HMRC is sought, it is recommended that this continues to be reviewed on a case by case basis.

For those choosing to return to the UK from overseas, HMRC have confirmed this will not be considered exceptional, and therefore. this may have a tax impact. For example, if employees regain UK residence before they had previously intended to, or do not in fact break residence at all due to their early return to the UK.

Summary of tax measures in certain impacted countries*

Country

Extended tax filing deadline

Other tax measures and considerations

China

Monthly filing for March extended to 23 March. April deadline pending update.

Tax residency in a foreign country for individuals unable to leave China or unable to re-enter from another country due to significant travel restrictions. The social security authority has provided a payment extension for all companies for the period from February to May 2020.

Hong Kong (China)

Yes, to 3 August 2020 for certain represented cases.

The 2020 Budget announced a one-time reduction in tax of HKD 20,000 (about USD 2,550) and one-time payment to permanent residents of HKD 10,000 (about USD 1,250).

Italy

730 Tax Return Filing deadline extended to 30 September 2020 for employees.

Tax withholding and related obligations are suspended throughout Italy for a defined period for employers . Further updates are expected. Tax payments falling between 8 March and 31 May 2020 are suspended, except for the filing of the CU (Certificazione Unica) 2020. Indeed, Deadline and payments will be due by 30 June with no penalties applied.

Japan

Yes, one month to 16 April 2020.

Measures include financial assistance for employees unable to work from home and go on unpaid leave due to containment measures. Government subsidies offered to businesses that invest in information communication technology or implement human resource policy changes to allow employees to work remotely from home are gaining traction.

South Korea

No

None

Singapore

Extended to 31 May 2020.

None. Work permit arrangements should be reviewed for employees absent from and going to Singapore. Employers are responsible for all new and existing foreign employees, including finding accommodation, arranging food and a SIM card.

United Kingdom

No

Individuals prevented from leaving the UK may be able to discount days of presence for determining tax residency if they qualify as being subject to “exceptional circumstances.”

United States

April Federal deadline extended to 15th July 2020.

State deadlines for most have been extended to follow the Federal extension however a few remain unchanged pending further update. Payroll tax relief is also proposed but pending.

* As of March 30, 2020

Source: Grant Thornton

The mobility landscape during the coronavirus outbreak

Many employers have announced, or are likely to announce, changes in working arrangements over the coming months. Initiatives being deployed by UK companies include:

  • allowing employees to work remotely
  • limiting business travel domestically and internationally
  • cancelling events
  • relocating employees to new international locations

The increased flexibility has the potential to create new challenges for mobility professionals, expanding their responsibilities and increasing the complexity of managing tax risks during the coronavirus response.

Finding and managing ‘stealth ex-pats’

Outside a company’s formal employee mobility program, UK companies had already seen that employees will sometimes choose to relocate themselves and their families in “response-based” events. Not surprisingly, employees in both China and other Asia-Pacific nations have moved out, ahead of the virus, to less-affected countries. Taking the “work-from-home” policy beyond its intended result, employees may take precautions with little or no visibility to their employers, particularly where travel is arranged outside corporate travel booking systems.

Mobility professionals will need to work closely with human resources business partners and business units to find and manage employees who move without authorisation to a new country to work. While businesses are responding to the virus with their own travel guidelines, employees may move without formal approval.

Risk of a permanent establishment

Where employees work from a country remotely, or in a country in which the company does not have an existing corporate entity, they put the business at risk of creating a corporate taxable presence in that country. This may result in the profits of the employing company being pulled into corporate taxes in the country where that employee relocates. The facts and circumstances of each situation should be reviewed in turn. But where an employee is located in a country outside where he or she is employed for a period of time, a permanent establishment could be created there as a de-facto fixed place of business or based on the role they are performing in the country.

While many double-tax treaties provide protection, in countries where there is no treaty or there are longer-term relocations, it will be important to review whether these “stealth ex-pats” are creating corporate tax risks and, if so, to determine how businesses should prepare to take appropriate mitigating action. This may involve relocating the employee or even requiring a leave of absence in some cases.

Individual tax

When employees relocate to a new country in response to the spread of the virus, they may also trigger personal income tax liabilities. Employees will need to understand the individual tax implications of their presence in a new country, and whether they can plan travel to mitigate taxation under a double-tax treaty. For stealth ex-pats, UK companies may want to extend tax assistance to these new ex-pats where it helps manage tax compliance.

Payroll withholding and reporting

UK employers may also find they have payroll reporting and tax-withholding obligations for these employees, whether through a local entity or as a non-resident employer. The associated obligations that fall on the business need to be understood to ensure continuing global compliance, but they could result in additional complexities and tax costs, particularly where local employment tax liabilities are considered.

Social security

While the UK has an extensive double-tax treaty network, it and other countries have a more-limited number of bilateral “’totalisation” agreements that allow for employer and employee social security to be made only in an employee’s home country. Employees working in new country locations may therefore trigger additional social security liabilities for themselves and their employer, which can be very high. Depending on how long the situation remains, the end of the transitional period of Brexit may bring additional complexities and liabilities that should be considered.

Double taxation

Employees should also be mindful of the law of the country they relocate to or from. Some countries, Brazil and China for example, may regard locally paid income as wholly taxable in that country, irrespective of where the individual physically works. To the extent a stealth ex-pat becomes taxable in another country, that employee may face complexities and unexpectedly higher tax burdens.  A company needs to determine what support, if any, these types of situations warrant.

UK companies should be reviewing the impact of the virus on their business, their suppliers and their customers. It may be advisable to relocate teams of employees in strategically important roles in out-of-risk areas, or to keep them in place for a longer than expected period of time. Formal assignments may increase for some employers as a result of these relocations, resulting in assignments arising that do not fit the parameters and intention of a company’s mobility policy. Agile and pro-active actions will be useful to identify the appropriate benefits employees and their families should receive, to determine the range of tax and payroll issues at stake and to effectively manage these assignments over an unknown period of time.

Sick pay costs for UK employers

The Chancellor announced in his March budget that statutory sick pay will be extended to those who are advised to self-isolate following the NHS guidelines. In addition, any eligible businesses of less than 250 employees directly impacted by the coronavirus will be reimbursed with any statutory sick pay costs by the government. Businesses should consider the implications for employees not within the scope of UK NIC, or those currently working oversees who are entitled to UK SSP.

The role of mobility professionals

Human resource leaders play a critical role in ensuring businesses execute their global growth strategy. Accordingly, these professionals increasingly have a seat at the C-suite table. For mobility professionals, too, global growth requires strategic engagement with the business to enable talent to deliver globally. The coronavirus outbreak presents a range of unique and complex challenges to businesses -- from the wellbeing of employees to their benefits and taxes. With pro-active engagement with the business, mobility professionals can help navigate the uncertain path ahead as UK companies plan and act, identifying tax risk, managing complexity and cost, and enabling employees to continue working wherever they are located when possible

For support on global mobility issues, get in touch with Katy Bond.

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