Tax implications for expat staff you should know about
With globalisation, staff transferability have become common place and expat employees can offer their invaluable expertise in many countries where a multinational may have a presence. But the tax implications of both intellectual and physical staff mobility are significant and complex.
When employees render services to group companies in other countries, it should be a key part of corporate transfer pricing policies to accurately match the costs of the assignee's services to profits earned.
There are two key questions that companies need to consider in assessing the tax impacts of their expat programmes - firstly, what are the people costs incurred, who benefits from their activity and who should pay, and secondly, what profits do these people generate and where should they be taxed?
Expat programmes give rise to both personal and corporate tax issues and a number of regulations and laws are applicable, including local laws, tax treaties and international principles. It is key that corporates get their transfer pricing relating to these services correct otherwise instead of reducing the group's overall tax burden, they could find themselves under scrutiny and even subject to double taxation. There are various methods of determining transfer prices between group companies and the most appropriate one must be used.
The tax considerations depend on the specific circumstances. When an employee remains in his home country and provides services to another ‘host' country, from an individual taxation perspective he would be taxed by his home authorities. From a corporate taxation perspective, one would need to consider several issues - such as if the host country is not charged for these services, there cannot be any deductions in the home country. The host country also needs to consider factors such as being able to demonstrate a benefit was received from the employee's efforts.
In the situation where the employee provides support services to a host country from the home company but in addition visits that host country, one then needs to consider if any personal tax liability arises in the host country and whether there is any available double taxation relief available. From a home country corporate tax perspective one additionally needs to look at who pays the related costs of travel and accommodation and whether these are reimbursed. Both host and home countries need to consider whether any ‘permanent establishment' considerations arise and this means looking at the amount of time spent by the employee in the host country.
In a third possible scenario, the employee may be seconded from the home to the host company for a period of time and this can have an impact on several factors such as administration, incentives, bonuses, share options, salary apportionment, other benefits and social security. For the home country, this may mean the employee moves across to the host payroll. Some costs may still remain with the home company and would need to be reconsidered in terms of which of them can be deducted for tax purposes. The host usually becomes responsible for the PAYE of that employee but this can be complicated as some of the salary burden may remain with the home company.
All of these factors impact on the resultant profits or losses of both home and host entities and in turn will impact on transfer pricing. These issues may give rise to challenges from the respective tax officials on a number of fronts. Tax authorities may question whether the expense the host company has to bear for that secondee may be exceptionally high. They may query whether the activities of the secondee even relate directly to trading activities and they could ultimately challenge the appropriateness of the transfer pricing methodologies used.
Multi-jurisdictional groups should consider the possibility of ‘cost-sharing' through service centres where employees who render services to host countries can be ‘housed' and then allocated out. The problem then is how best to allocate their associated costs and on what legitimate basis?
Which ever transfer pricing methodology is used, companies must be able to demonstrate that all inter-company transactions meet the standard of being arms-length. Otherwise there could be substantial negative consequences. Entities may fall short because they are not aware of all the issues involved, they may not even be aware that intercompany transactions are taking place, there may be differing perceptions of the same transaction from the home and host countries, and transfer pricing supporting documentation may not be appropriate.
For companies to stay on the right side of tax authorities, they need to carefully consider the role of that particular employee both at home and in the host country and the reporting lines followed, who bears his costs and who receives the benefits he generates, and whether the employee actually works in the country he is servicing. Otherwise a transfer pricing issue may be about to surface.
*Keith Sparkes is a PricewaterhouseCoopers tax director
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Comments
What happens when a Church sends missionaries to work overseas. For examle they are working in Paris as missionaries. They are paid from South Africa and they are there for a continous period of 12mths. Must the church deduct tax in South Africa? This is . .more
by Ramesh Sheodin on November 03 2008, 12:23
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I doubt it. Their salary is exempt is in terms of section 10(1)(o)(ii). (http://www.sars.gov.za/LNB/MyLNB.asp) On the other hand, France has the right to tax them in terms of the DTA. (http://www.sars.gov.za/home.asp?pid=3919)
by Anoter Tax Guy on November 03 2008, 13:54
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