8 minute read 28 Jul 2020
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How workers stranded by the crisis are creating inadvertent tax issues

By EY Global

Multidisciplinary professional services organization

8 minute read 28 Jul 2020

With mobile workers stuck in nations outside their country of tax residence, businesses face multiple challenges, including immigration.

Mobility has long been an accepted part of modern business, which relies on global talent moving across borders for client meetings, conferences, deal making or long-term assignments. Then a virus abruptly changed everything.

As the COVID-19 pandemic spread, international flights were grounded and visa applications in many countries were suspended or canceled. In some cases, this stranded both short-term business travelers and those working overseas on longer assignments. The simple travel freedom that businesses had taken for granted vanished within weeks.

Now, even as flights tentatively resume after months of border closures in most jurisdictions, the picture for global mobility remains unclear.

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1

Chapter 1

The tax risks of stranded employees

An executive could trigger permanent establishment by continuing to work from a temporary location.

Those permitted to travel may now find themselves subject to health checks and quarantine upon arrival at their destination. But thousands of others – including short-term business travelers and those with work permits – are still stranded.

Some are stuck in a country beyond the expiration of their contract or visa. Others are locked down somewhere that isn’t their place of residence, or to which they’re not assigned, because they travelled there for safety or to support their families and simply haven’t been able to leave.

As the pandemic rolls on, many of these stranded workers are still performing work for their employers, triggering complexity and uncertainty.

As people become stranded, we’re seeing a lot of unintended consequences around tax. The issue of stranded workers will be absolutely critical in the next 12 to 18 months.
Timothy Dalton
EY Global Business Travel Leader

“To maintain a company’s corporate structure, certain actions are required to be undertaken by certain individuals in certain locations,” explains Timothy Dalton, EY Global Business Travel Leader. “So, as people become stranded, we’re seeing a lot of unintended consequences around tax, for example. The issue of stranded workers will be absolutely critical in the next 12 to 18 months.”

Unexpected penalties

One of the key tax risks is that of permanent establishment, a mechanism of judging a country’s entitlement to tax income from a foreign company. Permanent establishment used to be clear-cut – the country could simply point to a foreign-owned warehouse and factory on their soil to back up its tax claim. Yet in the mobile and digital age, businesses are concerned that a stranded executive may trigger permanent establishment simply by continuing to work from a temporary location.

“The first headache for any company is to determine whether there actually is a permanent establishment,” says Ian Scott, EY Asia-Pacific International Tax and Transaction Services Leader.

“The second is to determine whether that triggers a filing obligation. There could be very significant penalties for failure to file or for mistakes in filing, especially if the executive is senior and the company doesn't have a lot of substance overseas. You could create a sizeable taxable presence very quickly.”

Permanent establishment is one of the key tax risks, and can quickly lead to a large, unintended taxable presence.

Stranded workers can cause other issues. Immigration issues can arise, for example, when people are stuck in place beyond the terms of their visa or work permit. This could lead to possible deportation and subsequent bans from traveling to other jurisdictions.

“It may even result in companies being barred from bringing more people in,” says Shawn Orme, EY’s Global Immigration Leader. “In the African oil and gas sector, for example, governments are becoming attuned to the danger of being flooded with foreign workers on short-term assignments and are starting to ascribe real penalties to protect their local workforce. If you're running a multi-billion-dollar project and you can't get your workers in, that will be a very significant cost.”

“Most countries have been flexible and accommodating around visa issues,” says Linda Rowe, EY Global Immigration Asia-Pacific Leader. “The majority of jurisdictions in Asia, for example, have adopted rolling extensions for those individuals who are trapped. Thailand and Indonesia have sent out alerts saying they’ve automatically extended everybody's visas, while in China and Australia you still have to go through the process of putting in an application.”

The good news is that the unprecedented disruption created by the pandemic is being recognized. Guidance from the Organisation for Economic Co-operation and Development (OECD), for example, urges tax authorities to be lenient given the extenuating circumstances.

Yet it’s worth remembering that the OECD guidance is just that. It’s not a binding instruction. Nor does it cover every jurisdiction. Compared to immigration, the tax question is proving more uncertain.

“The concern would be as governments start to see revenue falling because of the economic downturn, they will need to pursue additional tax revenue,” says Scott. “And obviously if the rules aren’t clearly stated either way, it leaves the door open to do so.”

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Chapter 2

Four steps for dealing with stranded workers

Firms must prioritize high-risk situations and then develop long-term protocols for global working.

While the issue of stranded workers is complex and fast-moving, there is much that businesses can do to protect themselves. Here are four key considerations.

1. Companies must first accurately assess their immediate circumstances. Businesses need to understand which countries are providing relief and leniency and which aren’t—and make certain that information is up-to-date. This requires regular country-by-country monitoring.

2. Accurate assessment also includes knowing where workers are in the first place. And that’s not always as simple as it sounds. “A large organization will have people traveling for business all the time,” says Orme. “I travel hundreds of thousands of miles a year. It’s very difficult to track. I don't know any client who could tell you, within two hours, where all its people are.”

While many companies track employee location through travel approvals and processes around expense reimbursement, there are now sophisticated tools, including mobile apps, to manage personnel-related risk in this area. As well as tracking location, they can trigger alerts when the mobile worker nears permitted thresholds for remaining in that location.

3. Workers should be given protocols to help them avoid triggering permanent establishment. For example, companies could stipulate that workers shouldn't spend more than 30 or 90 days in a particular jurisdiction. Activities must be limited to those deemed appropriate by that jurisdiction and the company’s protocols.

4. As travel restrictions gradually lift, the issue of how to protect people will remain fundamental for organizations. Companies may be able to move stranded people out, but how will they approach it? Prioritization is key.

“Look at what is critical,” says Seema Farazi, EY Global Immigration Partner and EMEIA COVID-19 PAS Response Leader. “Where are your high-risk people stranded? Where do you have people with pressured family situations? Where are the business-critical people who need to be moved quickly? What are the key locations you need to travel to?

“You need to wrap your arms around that population, where they're moving, their travel history, and what their potential exposure is. Then focus on what can be achieved against current restrictions and agree on the right course of action for your people and your business.”

The next normal

With the virus under control in some countries, such as New Zealand, thoughts are quite naturally turning to what happens next. Yet with other countries bracing for a second wave, even New Zealand Prime Minister Jacinda Ardern acknowledges border controls will remain in place for some time. Restricted travel is likely to form part of the business world’s next normal.

“A lot of people see the issue of stranded workers as a temporary matter,” Dalton says. “But I think there will be a level of permanence to it.”

As the world finds its post-pandemic rhythm, some aspects of the business world will remain unchanged. Despite travel restrictions, global mobility – of new talent and executives alike – will continue to be the lifeblood of modern international business.

A lot of people see the issue of stranded workers as a temporary matter, but I think there will be a level of permanence to it.
Timothy Dalton
EY Global Business Travel Leader

As such, companies will need policies around contact tracing, health assessments, certification and quarantine – all likely to be requirements of global movement. To achieve this, they will need to integrate and coordinate various parts of their organization.

  • Case study: the stranded individual

    The issue of stranded workers doesn’t just affect the organization at an enterprise level. Many of those affected, and their families, are now experiencing anxiety, fear and uncertainty.

    Patrick Landers leads the 3,000 EY professionals at Global Delivery Services, helping companies with cross-border tax, immigration, payroll and other issues. In March 2018, he moved with his wife and four children to Bangalore, India.

    But they’re not there right now. In early April, ahead of India closing its borders, the family flew to Dallas to be closer to aging parents. At this writing, those borders remain closed, and Patrick and his family remain in a Dallas hotel.

    Hotel life has demanded new routines. Landers is in the hotel conference facility at 5am daily, trying to coordinate his team’s annual appraisal program. But the bigger picture remains complex and worrying. He’s unsure whether he’s potentially triggering a US filing requirement for the Indian entity, not to mention when the family will be able to return home.

    Landers and his family aren’t alone. On arrival at the hotel, they found several others in similar circumstances, including one South African who was in the US on a business trip. He’s now in limbo. He has to leave the US because he's overstayed his visa, but there's still no confirmation of when South Africa will be open to flights.

    “Everybody here has a story,” says Landers. “And we're all struggling to see what the new normal is going to be.”

“Mobility is now like playing chess on three different boards,” Orme says. “It's going to be harder to travel, so let's think strategically about who we deploy, where, and what we use as a balance to formulate that decision. Do the tax implications override the immigration consequences? Where does health and safety fit in?

“And when it comes to unintended consequences, like triggering permanent establishment, make sure your tax folks are talking to your immigration folks and your mobility folks. It's a leap. It's a whole paradigm shift. It's entirely different.”

It’s worth noting that evolving travel restrictions, while creating complexity and risk for stranded workers, are not necessarily entirely negative.

“The issue of stranded workers will be a bit of minefield, but even crises offer opportunity,” concludes Dalton. “Real estate and travel are two of the biggest costs for any organization, and this is a huge chance to make significant savings.

“If travel becomes restricted, and more people are working remotely, companies can reduce their travel costs and get rid of their corporate real estate. The opportunities and advantages that businesses can take from this crisis may well outnumber the landmines.”

Summary

The pandemic has created highly complex cross-border individual and corporate regulatory and tax risks. Tax, immigration and mobility teams must work closely together to address the challenges.

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By EY Global

Multidisciplinary professional services organization