Tax Policy & Controversy Briefing | October 2013
Addressing business traveler risk
Two years on, leading practices emerge
Tax authorities have increasingly stepped up their scrutiny on the movement of business travelers, not only on income tax and social security compliance, but also on whether they trigger issues such as the creation of permanent establishments. These focus areas have become even more prevalent as multinational companies (MNCs) implement practices in order to reduce their own risks.
Short-term business travelers (STBTs) continue to be a key focus area for many tax authorities. These individuals may be employees who take occasional business trips to a variety of locations, employees who take regular business trips to a few locations, or employees who go on an extended business trip to one single location. These employees are not on a formal assignment to a different work location and are not seconded to a host entity. The risks associated with these STBTs continue to grow, and the attention paid by tax and immigration authorities to these individuals has not lessened in the two years past.
Why the focus?
While tax and immigration authorities continue to focus on this population, multinational companies are actually tending to increase their reliance on this population. Several factors are contributing to this trend; companies continue to face pressure to keep up with the pace of globalization, using a globally mobile work force, but at the same time, need to manage and reduce costs. For these reasons, short term business travelers are seen as a growing necessity in today’s business world.
What are the risks?
There has been, and continues to be, a clear focus by tax authorities on collecting revenue through personal and corporate income taxes. Multinational companies now also know that the risks they face with regard to these short term business travelers do not end there. Companies can face fees and penalties, or other negative consequences, even when an employee’s travel does not cause a personal or corporate tax liability. These negative consequences are not limited to direct tax costs and can include:
Business Reputation Risk: The general public is more in tune and critical of companies that are perceived as not fulfilling tax obligations or not adhering to immigration laws. Negative press about a company alone has the ability to tarnish a brand. Some jurisdictions, however, have gone even further and created limits on an organization’s ability to do business if that company is not in compliance with local laws and obligations. This risk of business interruption continues to grow.
Employee Dissatisfaction: When an employer does not address the tax and immigration requirements of their traveling employees, and employees face negative consequences as a result, the employee may place blame on their employer and expect the employer to rectify the situation. This will take time from the focus of an employee and can result in reduced productivity and potentially even the loss of an employee.
Budgetary Risk: When an employee’s business travel causes a company to incur unexpected tax or penalty costs, those costs will typically not have been properly accrued for. As a result, there will be a negative impact on financial results.
Risk of Prosecution: In certain countries, failure to report income, withhold income taxes, pay taxes, or adhere to immigration policies, can result in criminal prosecution for the individual and/or officers of the company.
Employment Law Risk: Employees working in different jurisdictions without the associated control and visibility from the corporate level could subject the employer to the employment law of that jurisdiction, without the employer being aware of it.
Figure 1: Inherent risks of short-term business travel
Are the risks real?
The risks are very real. More and more often, authorities are taking action and companies are paying the price. Further, the risks extend to not just foreign travel, but to domestic travel as well. This is evidenced in the example noted below for the United States.
USA: $20m assessed in under-withheld taxes, penalties and interest for domestic short term business travelers.
Other examples span the world:
UK: A company pays £40m+ in back taxes and penalties for failure to accurately report home paid income in the UK.
UK: Of 407 immigration investigations in the UK, 72% resulted in prosecution and criminal sanctions, of which 46% included jail sentences of 7-12 months.
India: A European multinational was assessed €5m in penalties for failing to report full home paid compensation for employees assigned to work in India. Indian authorities then opened a fuller 3-year investigation.
China: A manufacturer was the subject of the largest payroll audit to ever occur in China, resulting in the requirement for payment of approximately $25m in back taxes and $8m in penalties.
France: Increasingly aggressive social security authorities led a raid and criminal investigation on a multinational company, resulting in an $8m assessment of back social security tax and penalties, even though the company had an agreement with another EU country to protect its position in France.
Brazil: A company was unable to collect $1m in employee debt because they were not able to enforce loan agreements not written in the local language.
Germany: An SEC inquiry into a related matter uncovered an internal control breakdown requiring a multinational company to re-state previously published financial statements by €100m to correctly report employer paid tax expense.
Japan: A global financial services company had their entire foreign retirement plan retroactively disqualified for Japanese tax purposes, requiring the payment of back taxes of $8m and $1m in penalties.
How are companies responding?
With more and more examples of companies being penalized, and a steady flow of companies being “named and shamed” for supposedly unethical tax policies, there is pressure to address risk issues in a more proactive manner.
Multinational companies are not only assessing the risk, but are increasingly quantifying that risk. Companies are reviewing their processes, ranging from how a business unit approves business travel to how employees book travel arrangements and what activities the employees are carrying out while in the host location. Companies are also reviewing their corporate structure, transfer pricing strategies and chargeback positions and assessing how all the different moving parts may together impact business traveler risk.
EY Tracer technology for smart phones helps globetrotting workers avoid tax surprises
EY has released a new smart phone application that helps business travelers and their employers avoid global tax traps and immigration violations. This technology helps companies to manage the increasing risks associated with employees crossing borders, the conflicts they create and, in extreme cases, keeping executives out of jail. The new app works in conjunction with EY’s existing Traveler Risk and Compliance (TRAC) service which assists organizations in navigating the myriad of personal and corporate tax and immigration rules for more than 100 countries. Employees who download the app can use it to report their location to a central tracking system, allowing travel data to be analyzed by employers to avoid unexpected taxes and comply with immigration laws. The app tracks current location, home location and whether time spent abroad has been a work day, travel day, or vacation day – no personal identifiable information is transmitted.
The effort to broadly assess these risks can be complicated by the fact that the assessment, and any action plan to address the risk, must be cross-functional in nature. Corporate tax, corporate accounting, Human Resources, and even the payroll and travel departments must be involved, some of which may have been outsourced to different vendors and some of which may reside in different geographical locations altogether. No longer satisfied that the risk can be managed within long-established processes, many companies are either revisiting their processes or creating new ones designed to identify and manage the risks earlier in the life cycle. Organizations are even developing formal short term business traveler programs, the goal of which is to manage and minimize risks, while allowing employees to remain mobile and to address the business needs of the company around the globe in a timely and efficient manner. Such a short term business traveler program may include the following elements:
- A pre-assessment process to determine immigration requirements and any personal, social, and corporate tax exposure, before an employee leaves on the short term business trip.
- A method of tracking employee’s travel on a regular basis.
- A method for collecting, and repository for storing employee demographic data.
- A means of analyzing the travel and demographic data on a regular basis in order to assess risk
Using such a process, the company can better assess at what point an individual may trigger a liability. At that time, an informed decision can be made to allow the employee to continue to travel, incur the liability, or to restrict the employee’s travel.
A short term business traveler program can also addresses employee satisfaction. An important component of any such a program is what the company will do for the employee when an employee does incur a personal tax liability in a jurisdiction other than his home. Multinational companies need their employees to be globally mobile. But companies must also make sure that an employee is not personally incurring a greater tax burden, or having to personally manage more complex tax filings on their own.
Finally, a company that has such a program will be able to better assess the costs associated with their business travel and correctly, and more timely, accrue for these costs. As is often the way, it is not the very fact that these costs are incurred, more the uncertainty and dislike of surprises that can be a driving motivation.
What does “compliance” mean?
An important goal of any company looking to assess and manage business traveler risk is compliance; the definition of compliance can be different for each company and is determined both country by country, and employee by employee. Each company, therefore, must review the risk/benefit analysis in line with their risk profile. Today, more than ever, companies must focus on the details. When looking to be compliant, a company must consider:
- Does the individual have the required immigration documents to enter and work in the host location?
- Is an employee subject to income and/or social tax in the host location?
- Does the employee have a tax return filing requirement in the host location?
- Does the company have an income reporting or tax withholding requirement in the host location?
- Do the employee’s activities in the host location create corporate tax implications?
- What are the potential risks and costs of non-compliance?
- Does the company have the required human resources in the various cross functional departments to implement the processes required to be compliant?
- Does the company have the needed technology and infrastructure to be compliant in the host location?
Many companies strive for full compliance regardless of cost, while others might have a higher risk threshold. Further, while some companies have progressed to implementing more sophisticated and formal business traveler programs, many company’s efforts in this area are still in the relatively early stages. These companies may be working to resolve current compliance issues while at the same time developing and implementing a more sophisticated program for the future. The need to move people around the globe continues to accelerate while organizations try to play catch-up. A company that wants to minimize and manage risk must be willing and able to attack this issue on these two fronts simultaneously.
Where does it go from here?
Organizations should expect continued focus by revenue bodies on the short term business traveler population, particularly as leading practices are shared and technology continues to enable higher level of enforcement. Tax is an ever changing landscape. Just as so many companies are in the early stages of addressing this topic, so are the tax authorities. In this regard, the benefits of acting sooner rather later should outweigh the costs in the long term. Organizations are focused on how to manage the risk and minimize the costs of short term business travelers, while tax authorities around the world are focused on how to target this population and be more efficient in collecting revenue. All organizations, even those who have addressed this issue, need to remain proactive and focused.
Figure 1: Inherent risks of short-term business travel