By Zuzana Jasenovcova and Marius Tollenaere
Cross-border business travel is nothing new and most multinational companies have traditionally always had their fair share of internationally mobile workers. However, what has now changed significantly is that traditional assignments, whether short- or long-term, are being replaced by alternative approaches, with the prevalent choice being short-term business travel.
At the same time, short-term business travel has become one of the most debated approaches to carrying out business abroad in recent years. On the one hand, short-term business travel is perceived as a convenient solution to cost and regulatory challenges compared to traditional long-term assignments. On the other, with clamping down on business travelers high on the agenda for many governments, as well as tightening regulatory and enforcement oversight, the business travel-related compliance challenges and risks are higher than ever before.
In today’s economic environment, defined by a high degree of volatility, uncertainty and significant regulatory changes rapidly transforming the legal environment, companies are reviewing their policies and processes to address and manage the challenges in the best possible way while remaining cost-efficient.
The times when international business travelers were free to move around the globe with a minimum set of requirements to comply with are long gone. Today, most countries, irrespective of the short-term duration of business travel, have strict requirements that all business travelers are asked to follow in order to be compliant. This has implications in a number of areas, such as immigration, corporate and personal income tax, wage tax and labor law, wich should be carefully assessed, as discussed below.
Personal income tax
Many companies sending their employees abroad for short periods believe that there is no risk of tax obligation arising in the host country because the business travelers only spend a couple of days, weeks or months in the host country and are therefore protected by the provisions of the relevant bilateral treaty on the elimination of double taxation.
Even if such short-term business travelers are not officially recognized as being on a short-term assignment (or any other type of assignment) and only work continuously or intermittently on different projects in a number of different countries, if they are going to a country that uses the economic employer concept, the sending company – the employer – might not be recognized as the legal employer by the host country for taxation purposes. Depending on the features and scope of the work carried out, and whether the payroll costs are recharged, it is important to note that personal income tax obligations might arise in the host country from day one.
The sending company should be prepared for these situations and design policies to manage the process of potential host country liabilities – mostly related to timely assessment and comprehensive consistent compliance required by the applicable local laws.
Each country has its own payroll tax rules, but generally wage tax is payable in the country in which the employee works. However, the country of tax residence is entitled to tax worldwide income irrespective of where the employee physically performed the activity, which in turn may lead to double taxation. In accordance with the applicable bilateral treaty on eliminating double taxation, the relevant method of alleviating double taxation has to be applied. Considering this complexity, companies should make sure they are familiar with the local personal income tax consequences prior to sending their employees, irrespective of the actual duration of the trip.
Corporate income tax
There are also potential corporate income tax implications related to cross-border short-term travel. Most importantly, depending on the type of activities pursued by employees, business travelers’ presence in a specific country could lead to the creation of a permanent establishment (PE) in that country for corporate tax purposes.
More specifically, if the employees on business travel are signing contracts on behalf of the sending entity, or if there is a fixed place in the host country where the work activities are carried out, the risk of PE is very high. However, most countries do have local rules for triggering PE creation, and the threshold is generally higher than for wage taxes. Thus, while a short business trip is unlikely to trigger a PE obligation, wage tax could theoretically be due from day one.
In a situation where a PE was triggered, and corporate income tax would be due, as in the case of personal income tax, where applicable, treaties on the elimination of double taxation typically allow for a method of alleviating potential double taxation. This can usually be achieved by exempting the income allocated to taxation in another country or by simply allowing for deduction of the corporate income tax paid via the PE in another country.
One of the important developments in tightening governmental oversight is a recent initiative led by the Organization for Economic Cooperation and Development (OECD), fully supported also by the G20. In 2015, the OECD agreed upon and issued an action plan known as Base Erosion and Profit Shifting (BEPS). The main goal of this action plan is to ensure that profits are taxed fairly. This means that governments are looking to make sure profits are taxed in the country where actual business activity is performed and value is actually created. Naturally, this action plan impacts the way companies manage their globally mobile workforce including, importantly, short-term business travelers. This triggers a need for careful mobility planning to avoid inadvertent corporate tax consequences, which may lead to noncompliance in the worst case by both the employee and the sending entity.
Social security represents yet another set of rules companies with an internationally mobile workforce, irrespective of the duration of travel, are expected to comply with.
The basic rule of social security is that an employee contributes to the social security system of the country in which he or she performs the work. However, this might lead to dual contributions being due in the case of short-term business travel (and assignments in general). Thus, where applicable, EU legislation and bilateral totalization agreements override this principle to ensure payment of social security to one system or country only – in most situations the contributions would be due in the home country.
As proof of adherence to the home country social security system, a special certificate of coverage usually needs to be requested and approved by the local authorities. Theoretically, this is valid also for short-term business travel, since many treaties and EU regulations do not indicate any de minimis threshold for the duration of cross-border travel.
In the absence of a contractual social security arrangement between the home and host country of business travel, the local legislation in both countries needs to be reviewed but may in some cases lead to dual social security obligations.
Depending on the contractual arrangement of the employment contract, usually the labor law of the home country applies to short-term business travel. This, however, implies that irrespective of the shorter duration of the travel, all employers (both originating in the EU and non-EU) sending their employees across borders around the EU are bound to observe Directive 96/71/EC (Posted Workers Directive), as it was transposed into the local legislative systems of most EU Member States.
As defined by European legislation, a posted worker is an employee who is sent by an employer located in one of the EU Member States to carry out a service in another EU Member State on a temporary basis. All EU countries (and some EEA countries) already have formalities in place for posted workers, but they differ considerably from country to country.
Thus, in addition to the locally applicable labor law, employers sending employees on short-term trips still need to assess, balance and observe the regulations applicable in the destination country, most importantly regarding:
- Minimum pay conditions
- Limitations on maximum work
(and rest) period
- Annual paid leave conditions
- Possible limitations on the hiring out of workers via agencies
- Safety and hygiene regulations
- Equal treatment of men and women
In many countries, the European rules are already present in the local employment law and are often more stringent than the working conditions indicated by the European rules. In Germany for example, the local legislation Posted Workers Act requires employers in some industry sectors to make use of collective bargaining when negotiating salary agreements, especially regarding minimum salary.
Immigration rules are a main component of business traveler compliance. Countries protect their borders and their labor markets by limiting both travel periods and the scope of activities that business travelers are allowed to perform. In most countries, the allowable business visitor activities are only the exception to the general rule that any gainful activity requires a full work permit.
It is therefore key to track travel days in all countries a business traveler visits and diligently review whether the intended activities fall within the boundaries of the permissible business visitor activities of a particular country. If they do not, a lengthy work visa process is required.
Travel requirements also derive from a person’s citizenship. While some citizens may be allowed to enter another country just with their passport, others may require a business visa to be obtained from a foreign consular post of the destination country. If a visa is required, mobility managers must take into consideration appointment and visa-processing times in their planning.
Immigration noncompliance can have severe consequences for both the employer and the traveling employee. Employers can be prosecuted for illegal employment and forging documents, firms and their signatories can also be blacklisted in databases which can ban them from further favorable immigration treatment or lead to denials of future visa applications for their employees. Employees who have been caught traveling in breach of immigration rules may be subject to reentry bans. Using the example of the Schengen Area, a reentry ban from one Schengen Area Member State is valid for the entire Area, which may prohibit an employee from traveling to almost all of Europe for several years. In addition to reentry bans, they may also be personally prosecuted for their noncompliance and could face criminal charges or fines.
The cornerstone of successfully dealing with these multifaceted risks and challenges is to have a structured approach to short-term business travel management backed by robust technology and accompanied by a transparent and consistent business travel policy, which is continuously communicated to all stakeholders.
If the know-how or technology is not available in-house, as is very often the case with business travelers, it is advisable to involve external providers who can offer a solution for business travel when it comes to policy, structuring the process and tracking it, and assessing the related immigration, tax and social security risks.
Other than the expected benefit of being compliant and mitigating exposure risks, the above will help to ensure the cost and managerial efficiency of short-term business travel and, in turn, manage and shape the employee experience and help increase engagement and talent retention in today’s globalized workplace.