“Top global mobility issues facing Tax Directors” series – Cross border employment structures

 

Episode 62: “Top global mobility issues facing Tax Directors” series – Cross border employment structures

Release date: January 21, 2014
Guest: Jennifer Sinstead
Running time: 08:55 minutes

In the first episode of our “Top global mobility issues facing Tax Directors” series, Jennifer Sinstead discusses the need for Tax Directors to be engaged in the process of structuring an international work assignment.

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“Top global mobility issues facing Tax Directors” series – Cross border employment structures

You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Chantal: Hi, this is Chantal McCalla of PwC Canada and this is the first podcast of our multi-part series addressing the top global mobility issues facing tax directors responsible for expatriate tax programs globally.

Here with us today is Jennifer Sinstead a Senior Manager in our PwC Oakville office. Jennifer specializes in helping companies and their employees manage the complex financial, tax and benefit matters associated with international assignments.

Welcome Jennifer.

Jennifer: Thank you Chantal.

Chantal: Jennifer, as you know, cross border employee mobility is exploding and companies are struggling to keep up with the demand for global mobility and the compliance issues associated with it.

Jennifer: Yes, that is a reality facing many companies today. Human Resource departments are implementing global mobility programs designed to manage complex international relocations often at a moment’s notice. The activities of employees in foreign countries can create a variety of both individual and corporate level tax issues. Although corporate tax departments may not be responsible for the overall global mobility program, they need to be engaged in the planning in order to manage the corporate level tax issues.

Chantal: On that note Jennifer, how can corporate tax directors become engaged in global mobility planning?

Jennifer: Great question Chantal. One of the basic foundations of a global mobility program is designing the proper structure of a temporary international work assignment. Where corporate tax directors can be, and should be, engaged is in the initial decision-making surrounding these cross border employment structures.

Chantal: Could you provide examples of common cross border employment structures used for temporary international work assignments?

Jennifer: Sure. Many companies adopt a so-called home country model that attempts to maintain a “common law” employment relationship with the home country employer and the home country loans or “seconds” the employee to the foreign entity. This allows the employee to continue their employment relationship with the home country employer for continuity and consistency of benefits. It also provides a link to the host country employer to facilitate the assignment related activity such as wage withholding and reporting and related assignment benefits.

Other companies may opt for a home/host agreement, with salary delivered by both the home and host entities. In either example, the employment structure should be clearly documented to substantiate the employee-employer relationship.

Chantal: So, why is it important to identify the employee-employer relationship in these cross border employment structures?

Jennifer: Identifying the employee-employer relationship can help determine which employee benefit programs apply and which employment laws apply. It can also have an impact on various individual and corporate tax issues. For example, identifying the employee-employer relationship is a consideration when looking at risks around creating a permanent establishment. It also comes into play when interpreting double tax treaties that are in force between Canada and various foreign countries. Some unintended results may occur if the employee-employer relationship is not properly identified. My colleagues will be addressing some of these issues in upcoming podcasts.

Chantal: Jennifer, you mentioned the word “document” earlier. Should companies be documenting their cross border employment structures?

Jennifer: Absolutely Chantal. It is vital to document these structures through an inter-company agreement. The documentation should make clear what the inter-company service relationship is between the home and host country as well as the relevant employment relationships. It should also identify the entity benefiting from the services and the process by which inter-company charges should be facilitated. Proper inter-company documentation of the facts could help to eliminate any misunderstandings that might otherwise exist with respect to whether the employee’s activities create corporate tax exposure.

Please note, however, that whatever inter-company agreement is put in place, it is not a substitute for the international assignment letter.

Chantal: Could you expand on that last comment? Perhaps, can you give us an idea of what an international assignment letter is and how it differs from an inter-company agreement?

Jennifer: An international assignment letter is issued directly to the employee. Typically it documents the duration of the temporary work assignment and may explain the assignment benefits being offered and the global mobility policy being applied. What it does not necessarily document is the individual’s relationship with the host country entity or even state who the employer is.

Although the international assignment letter and the inter-company agreement serve different purposes, they should be in harmony and should not contain any conflicting statements.

Chantal: What type of documentation should be put in place?

Jennifer: Contemporaneous documentation is always the best practice. It enables companies to be better prepared in case of an audit. As an example, this documentation often serves as a beginning roadmap for auditors that are seeking substantiation for deductions and proof of compliance with transfer pricing requirements.

Chantal: So, Jennifer, what do companies need to think about when considering cross border employment structures?

Jennifer: Companies need to choose and document efficient cross border employment structures to meet their tax, business and other compliance needs. An upfront analysis should be done by corporate tax departments to manage the tax-related risks. This process begins by asking questions like…

Which entity should be treated as the employer of the assigned employee and for what purposes?

What is the expected compensation and benefits cost allocation between the related entities during the assignment period? and …

What entity will ultimately bear the labour costs and claim the corporate tax deduction?

Chantal: These are great questions and, hopefully, these will launch some meaningful discussions between global mobility teams and corporate tax departments. What would you say is the key take away for corporate tax directors listening to this podcast?

Jennifer: If they are not already involved with their company’s global mobility planning, then they really should get involved. At a minimum, gaining an understanding of current cross border employment structures in place will be required. This can be facilitated by reviewing existing inter-company agreements and employee assignment letters. This will provide an opportunity for tax directors to weigh in on potential exposures should any exist.

If there are no existing agreements in place, then perhaps the question is “why not?”

Chantal: Thank you for joining us today, Jennifer, and providing insights on the importance of employment structures and teaming between HR and corporate tax groups.

Jennifer: My pleasure Chantal.

Chantal: For any questions, Jennifer’s contact details are available on our PwC podcast website www.pwc.com/ca/taxtracks

I encourage our listeners to stay tuned for upcoming podcasts in this global mobility issues series.

The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation.

Copyright 2013 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. For full copyright details, please visit our website at pwc.com/ca.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.