With global talent pools, it is critical to ensure that the right talent mobilises at the right time, to the right place, to ensure customers and clients receive the right service. It can substantially contribute towards creating a competitive advantage.
Global mobility is a multidisciplinary expert area; finance, payroll, tax, HR, reward and others have to collaborate and understand each others’ expertise and language. Over time, global mobility has also developed its own technical jargon. Below are some key terms and their meanings in the area of compliance and taxation.
Policies and process
- Tax equalisation – tax rates around the world differ. Employees working in a new location can trigger taxation in that location. Establishing the tax differentials can be a complex, time-consuming and costly process, which can become a barrier to employee mobility. Many organisations adopt a tax equalisation approach that broadly results in the employee paying no more, or less, taxes than they did when working in their home country.
- Tax protection – this is in some ways similar to tax equalisation, except the outcome and purpose is to ensure the employee is not worse off. If they are better off, this is allowed.
- Gross paid/local – this is the default position used with the vast majority of employees in an organisation, but can also apply in the globally mobile scenario. The employee is responsible for taxes arising (in all locations). This can be complex for the employee to understand and complex to administer, as tax advice and support is constantly required and can result in cash flow challenges for the employee.
- Local plus – a local plus is an employee who is largely paid as a local. The employee pays tax on salary and regular compensation. However, for a limited time, the employee receives additional support (for example, housing or education). The tax on these items can be settled by the employer.
- Net paid – in some globally mobile work arrangements, tax equalisation will apply. The effect of this can be to convert gross pay to net pay. As a result, the employee is entitled to an after-taxes ‘net’ amount. This person is now a net-paid employee.
- Shadow payrolls – payroll obligations can be triggered in the countries in which the employee is working. Salary and payments are made through payroll in the home country, but there is a need to meet payroll obligations in the new country of work. A shadow payroll is a payroll that does not pay the employee, but is a mechanism that allows the employer to meet their local payroll tax payments and reporting obligations.
- Gross up/net to gross – this describes the calculation process to convert net compensation to gross. The gross is required because it is the amount of compensation on which payroll taxes are due, and on which payroll tax reporting should be based. Not all payroll systems have the ability to perform these calculations, so tax advisers often assist.
- Permanent establishment – this arises where a business has a presence in a location that has corporate tax implications. Corporate entities can either be present, or not present, in a particular country. In the context of employee mobility, the nature of duties performed in a new country, or the concentration of lots of employees over time, can result in a permanent establishment of their employer. The consequences can be costly and complicated. The employer may have to file corporate tax returns and action-associated tax obligations. If employees are being deployed to a country where there is no local entity, or the work being performed is not for the local entity, this issue should be prioritised for review.
- Trailing compensation – this is compensation paid after an employee stops working in a location, but in respect of which tax reporting is still required in that location. Bonuses and share incentives are two examples. The performance or earnings period for these types of compensation often relates to duties or tax residency in the country of work. As a result, even if they are paid after the employee has left the country, taxes (and therefore payroll) still arise.
- Certificate of coverage – this document usually confirms the country in which social security is payable. It is usually issued under the provisions of a social security totalisation agreement between two countries. In Europe, these forms are called Form A1. These are important documents as they are the basis on which double social security contributions can be avoided.
Dinesh Jangra is a partner and head of global mobility at Crowe