The international expansion of business is inevitable. It used to be reserved only for international oil companies (IOCs), which span the entire oil and gas value chain. This, however, is no longer the case. More and more, middle-market companies can sell their products and services internationally. These middle-market firms often start selling into the various markets from their respective countries and, eventually, send their personnel to those markets to continue penetrating and growing the business.
Thus, the globalization of business creates more opportunities for companies to go from dipping their toes in the market to establishing a presence through a branch or a subsidiary. Ultimately, they send the best and brightest to plant these flags and bring in more business.
These international assignments come with a host of business implications, and taxes are among the top priorities. Depending on the size of their budget, they may send one or two individuals with their respective families or a team of people.
If you are one of these middle-market companies, you probably want to know how to compensate these people while ensuring you, and they remain compliant with home-country and host-country laws. The global mobility of the workforce brings a litany of tax, immigration, and accounting issues that must be run to the ground to avoid unpleasant surprises, such as missed filings and related penalties and interest and, worst of all, an unhappy employee.
U.S. Payroll Tax Obligations
Generally, a U.S. employer generally must withhold U.S. income taxes plus Social Security and Medicare (i.e., FICA) taxes from wages paid to an employee. Also, the employer must pay FICA and unemployment (FUTA) taxes on such wages. The employer must deposit these taxes timely and, in most cases, file quarterly employment tax returns reporting the wages, income tax, and FICA taxes paid and file an annual FUTA return. Additionally, the employer must file and pay state unemployment taxes. The employer must also provide the employee and file a Form W-2, Wage, and Tax Statement with the Social Security Administration and the IRS showing the wages paid and taxes withheld from the employee. To do all of this, an employer must obtain an employer identification number or an EIN.
For an international employee, these US tax obligations raise many questions, and depending on how your business is structured, the answer to those questions may differ every time. Thus, it’s important to establish the facts and circumstances while understanding what international assignment entails.
For example, a foreign company may be unwilling to obtain a U.S. employer identification number simply to payroll its employees working in the US. If the foreign company already has a subsidiary in the US, it may be able to utilize the US subsidiary EIN for these purposes.
Typical Scenarios Driving the International Assignment Complexities
In comparison to a well-established multinational accustomed to the exchange of personnel from across the world through an expansive network of affiliates, a growing middle-market company often finds this process to be a growing pain. Nevertheless, like the large multinational, the middle-market company must comply equally and must involve the various departments or teams in the company, which may include the following:
Department: Function/Tasks
Executive (CEO and Business Development): The decision to penetrate a foreign market or serve a foreign customer is made.
Legal (Corporate Counsel): Input is needed to understand customer contracting.
Finance, Accounting, & Tax (CFO, Accounts Payable, & Tax Director): Create the expansion budget, understand financial reporting implications, and comply with U.S. and local country corporate and payroll tax reporting and withholding requirements; it involves tax experts to manage tax risks associated with going global.
Human Resources (HR director, Payroll, Employment, and Immigration Attorney): Find and recruit candidates, formulate compensation packages and terms and conditions, coordinate with payroll for tax reporting, obtain work permits and visas, try to gain an understanding of the global workforce requirements and establishes related policies and procedures,
Insurance (Risk Management Function): Provides clients with security in terms of delivering products and services.
The typical scenario involves a chain reaction involving internal and external advisors who can provide guidance for a successful project or one without surprises. Also, it is possible that the responsibilities described above often rest on a few people representing a middle-market firm’s entire management.
Finance, Accounting, Tax & Human Resources – Collaborate Throughout the Entire Process
It might seem that there must be one single best way to structure the international assignment to help meet the company’s goals. But there is not. Different ex-pat assignments need to be structured differently depending on the business circumstances. For example, you may send someone to a jurisdiction with an up-and-running affiliate, but your next expat may be going to a place without on-the-ground infrastructure. As you can see, this can instantly turn into a complicated planning scenario. Whether you are a US business sending a US citizen to work abroad or a foreign business sending a non-US citizen to work on US soil, the time and effort must be invested to prevent incorrect taxation for the business and the employee, payroll reporting, and noncompliance, which all translate into higher costs to the company in addition to the compensation package negotiated with the employee.
US Employees Working in a Foreign Country
A US citizen or resident alien (green card holder) is subject to worldwide taxation regardless of where the individual earns the income. Thus, if he or she relocates to a foreign country, you and they must understand the US withholding and reporting requirements. For example, the company and the employee must understand if the foreign-earned income exclusion will apply so that US withholding is reduced. Furthermore, taxation in the US and foreign countries may also depend on whether there is a tax treaty between the countries. The tax treaties may often provide additional wiggle room to work with as the operation is defined.
What about social security? As discussed above, US or foreign employers are still responsible for complying with relevant social security systems unless they can avail themselves of a totalization agreement. Thus, the preplanning process will require this consideration and understanding of what documentation needs to be in place to receive benefits under either a double tax treaty or totalization agreements.
Foreign Employees Working on US Soil
It’s not rare for a foreign company with a US subsidiary to assign someone to assist the US operations in some form or fashion without first addressing how the employees will be taxed. As mentioned above, these requirements still apply to those foreign workers in the US with a few exceptions.
A foreign employer generally must withhold income taxes unless the employee is a non-resident alien who is present in the US only for a short time (90 days or less) during the tax year and earns only a small amount ($3,000 or less), or unless there is evidence that a tax treaty provides some protection.
To make matters more complicated, the foreign employer’s audit risk grows significantly when employees already in the US try to file in the US to report their wages. This creates a matching issue with the IRS because there is no evidence of a form W-2 (wage reporting statement) properly issued by a US employer.
Payroll Processing and Related Mechanisms to Ensure Tax Compliance
Again, the employer and the employee must understand specifically how the payroll reporting will take place in each relevant jurisdiction to remain compliant. For example, if an international assignee is paid by a foreign country payroll and is subject to US taxation, the foreign employer may need to use a “shadow” payroll to ensure that the US tax withholding and reporting requirements are met. If a US subsidiary is in place, the foreign parent and the US subsidiary must determine who will pay the employee as part of this consideration.
Permanent Establishment Risk (Economic Nexus that May Result in Unexpected Taxation)
Another important question is whether you are deemed to be doing business in the country due to the activity your employee is engaged in in the foreign country. If so, the employee may have just caused you to have to register your business and file and pay income taxes plus other local taxes such as VAT (which exists in almost all non-U.S. jurisdictions). This concept of permanent establishment risk alone is worthy of executive-level attention and is beyond just how to pay the employee. Again, a treaty may provide protection if one between the jurisdictions is at play.
In the eagerness to operate “freely” and cross-border throughout multiple jurisdictions, companies and their employees often find the world filled with countries looking to protect their tax base and ensure that local immigration and labor laws, among other things, are complied with. International business continues to grow nonetheless.
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