This blog is the third in a five-part series focusing on opportunity generated by volatility in today’s mobility profession. Here, we review Work from Anywhere (WFA)’s impact on tax. In the remaining two blogs, we’ll examine its impact on policy/programs, as well as the opportunities it presents for internal structural change and growth.
As pointed out at the start of this series on volatility and its attendant opportunities, volatility is commonly defined as “characterized by or subject to rapid or unexpected change.” Given all that is occurring in our world pandemically, socially, politically, culturally, and economically, it is fair to conclude that we are living in volatile times.
One of those changes in which we’ve all been collectively participating is “working from home,” which in reality means working from anywhere (WFA). So much so that social media, legacy news outlets, and family get-togethers (with appropriate social distancing of course!) are rife with discussion of this “new” WFA concept and what it means for the future of work.
WHAT IS WFA?
As noted in a recent KPMG and Aires sponsored webinar “Applying a “Work Anywhere” Culture for your Organization: Navigating through International and Domestic Issues.” definitions vary:
- Definitions differ from organization to organization
- Definitions may change over time with the organization’s goals
- WFA may be an ongoing work strategy or a short-term response to external factors such as COVID-19
- WFA may involve all or only portions of your workforce
- WFA may involve both domestic and international components depending on the company’s locations and scope of “work anywhere” policies
- WFA may be established with differing structures, including free-form employee movement or company-approved movements
The WFA concept has gained popularity among employers and employees. Why? For many reasons, not the least of which is potentially reducing mobility cost by moving the job to the talent rather than the talent to the job. Better yet, from an employee’s perspective, “move the job to the talent which has just moved to [insert ideal global location here].” Swiss Alps? Check! Remote South-Pacific island? Check! Greenland? Well … OK, so maybe there’s an exception or two, but, hey, one person’s permafrost is another’s paradise. (For a real invitation to WFA from the island of Barbados, see our second installment of this blog, “Work from Anywhere? Immigration Compliance and Employee Location Tracking in a Volatile World”)
Apres-ski, sugar-white beaches, or frost-bitten fingers aside, the longing for a perfectly balanced work-life scale in one’s destination of choice has great appeal. It also poses very real challenges to employers forced to navigate complexities of domestic U.S. and international taxation, not to mention a myriad of other considerations:
- Duty of care benefits
- Company culture
- Regulatory impact
- Employment law
- Potentially increased costs
- Immigration documentation updating
While cost often sits atop the list of corporate considerations, a less anticipated challenge for employees and their employers has been mental health. Employees are experiencing stress from being locked down at home. Those with children or other family caretaking obligations are particularly challenged. To address this, some companies are offering a range of additional benefits such as assistance payments (mindfulness, meditation, yoga, etc.), additional PTO awards, child and adult care resources, and mental health support/counseling, just to name a few.
TAX & FINANCIAL IMPLICATIONS
Let’s return to tax and financial implications of WFA. As one tax advisor recently shared, “In short, companies need to completely reevaluate how they manage and track compliance requirements across the entire enterprise, whether domestic (U.S.) or globally.”
Tax and immigration come to mind for international employees, but within the U.S., state considerations must be addressed. Some immediate areas of potential impact to employees and/or employers are:
- Individual income tax
- Employment and payroll tax
- Social Security
- Individual payroll tax
- Corporate tax
- Permanent Entity and individual state nexus issues. In other words, will the employee’s work in certain U.S. states potentially create Permanent Entity status for the corporation and if so, at what point?
A state-by-state analysis to determine WFA impact – financial or otherwise – is merited. Some states resolved during the pandemic time period to offer tax relief in certain areas, but this varies from state to state.
There are also non-tax issues that are critical and may or may not impact cost for the employer:
- Immigration and employment law
- Talent management
- Health and safety (Duty of Care)
- Regulatory and exchange control regulations (e.g., do you have the right licensing in states/countries where individuals are working)
Let’s use an international example. An employee (let’s call her Jane) is a U.S. citizen working in the U.S. for a large U.S.-based company. She is a financial analyst with seven years of experience. Jane has decided that she wants to move to the UK in this new WFA environment.
From a personal perspective, an immediate consideration is that she likely cannot file her taxes with ubiquitous off-the-shelf tax software due to the complexity. Foreign tax credits and income exclusions need to be considered as well, and the employer must decide whether to support her in this.
Jane has been paying into U.S. Social Security. Now she will have to pay into the UK program unless she gets a certificate of coverage. Will her employer support that?
From where will Jane now claim retirement benefits? The U.S. and UK coordinate well in this area but not in every situation. Will her employer now be required to register, report, and withhold payroll tax in UK?
Perhaps one of the greatest concerns her employer may have is corporate tax exposure. In other words, does Jane’s service to her employer generate value for the company, and if it does, will the UK want to tax part of the company’s revenue to which Jane’s work contributes? Given her role as a financial analyst, this may not be the case. However, if Jane were a board member or head of research and development, it could have a dramatically different impact on the company’s liability for tax on revenue generated in the UK as a result of her efforts. This is especially sensitive relative to guidelines on base erosion and profit sharing (BEPS) given by the Organisation for Economic Co-operation and Development (OECD) and proper allocation for service performed and value generated by employees.
While the above considerations are not necessarily new to mobility professionals, they may challenge other internal stakeholders involved in WFA administration, particularly if a decision to move to WFA was made without these stakeholders’ involvement. A high number of people wanting to take advantage of a WFA scenario exacerbates the situation.
Volatility has clearly provided an opportunity for companies to rethink their work cultures, processes, and procedures, not to mention their mobility programs. As companies consider WFA among many potential changes, they will want to do so in conjunction with a review of its potential impact on many areas.
Similar consideration must be given to policies and programs, which is the topic of the fourth installment in our five-part series on volatility and opportunity.