The tax implications of interrupted assignments

As Coronavirus sweeps the globe, Dinesh Jangra outlines how employers can manage the unplanned repatriation of employees

For businesses with a global workforce, security and health scares are scenarios that need to be planned for. The Coronavirus is a recent example of a health-related event with widespread impact on the movement of people. Many HR and mobility teams may now be at the forefront of facing numerous operational and logistical questions arising from the unplanned repatriation of employees.

In addition to responding to important people-centred issues surrounding the wellbeing and whereabouts of employees, HR and mobility professionals will also need to be prepared to face often complex changes to compliance and tax obligations.  

What are the compliance and tax implications?

The unplanned repatriation of employees will affect taxation, social security and payroll. Payroll and taxes are likely to have been set up in home and host countries based on certain planned assumptions such as the length of the assignment, the number of days to be spent in the home and host countries, and the qualitative links and connections the employee has in the home and host country. Examples of qualitative links include where the family is, where the home is and where centres of vital interest are. 

If an assignment is cut short, interrupted or even cancelled because of an emergency evacuation, then there will be implications for the set of assumptions upon which the original compliance was set up.

Tax residency of the employee drives both the level of taxes due by the employee, and the employer’s payroll reporting and payroll taxes. With tax equalisation, the employee tax liabilities due in the home and host shift to the employer, and the changes in tax liabilities becomes an employer issue.

Interruptions to the assignment may also change the tax residency of the employee; payroll taxes may need to be altered and the individual may need to understand how their tax position and filing obligations have been affected. When this aspect is left unreviewed, underpayments (non-compliance) and overpayments (cash flow issues) can arise.

What steps should employers take?

  • Determine enterprise-wide ownership. While several functions may be looking at this, it is possible that no one person or group has taken ownership. Tax, finance, HR/mobility, country manager and HR business partners are the right community with whom to agree who owns this issue.
  • Communicate the need to know where assignments are being interrupted. All assignment interruptions or delays will not be visible to HR and mobility teams. Local management may well make their own decisions and employees also may act independently. Convey a message that the business and employees should share where assignments are being interrupted, delayed or even cancelled.
  • Compile the data. An understanding of the planned assignment together with the current status is essential to analyse the implications for employees and the organisation. Key data includes: where is the employee now? What is the expected period of that stay?
  • Consider the tax implications. In-house tax teams or mobility tax advisers will be able to review the data and assess any changes to the taxes due and employer compliance obligations. The immediate and careful analysis of this information will help identify whether there are thresholds of presence in the home country, which trigger taxation and help HR professionals identify changes in costs and compliance to the business where tax residency does change.

It is worth exploring whether a different host location can be used for the assignment interruption. This can sometimes be more cost-effective and better from a teaming perspective.

  • Communicate with key stakeholders and proactively monitor the situation. Maintain regular communication and ensure any data sets are kept up to date.  
  • Speak to corporate and local management teams to understand the business continuity and communications plan that is in place.
  • Establish contact with insurers and understand their directions, and establish ownership of business travellers. 
  • Connect with the people managers of the assignees to ensure they are being provided with practical and emotional support. 

Dinesh Jangra is a partner and head of global mobility at Crowe UK