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Remote faculty and students can trigger tax issues

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June 2021

In brief

The COVID-19 pandemic forced many universities to implement virtual learning models practically overnight. As universities continue to review returning to on-campus instruction, implementing virtual learning models at scale is proving to be achievable in many cases and may be viewed as desirable by faculty and students alike. Many universities are beginning to rethink their long-term curriculum strategies to incorporate virtual learning arrangements. 

However, there could be significant unexpected implications for both individuals and universities within the global virtual learning environment. The presence of one faculty member in a location outside of the country where the university is located might result in unanticipated tax, immigration, and payroll reporting obligations.

Action item: Stakeholders now are turning their attention toward mitigating risk and establishing a governance model in light of global compliance requirements. With appropriate planning, universities are seeking to implement effective global learning models, bringing in more talent and students while managing global cost and administrative complexities.

In detail

Benefits

Many potential benefits can be available to universities that offer remote teaching and learning options. With attracting qualified students and faculty in developed markets becoming increasingly competitive, expanding beyond a university’s geographical base may provide access to a larger pool of students as well as teachers with available skills in developing markets where costs remain relatively low. Faculty who may have not been considered for a teaching position in the past due to their location now may be able to instruct from anywhere.

Collaboration tools also have developed significantly over the past few years, accelerating remote learning and teaming capabilities. Universities, along with their faculties and students, now have greater flexibility and agility in their remote learning environments.

Risk considerations

With virtual learning models increasing, universities need to monitor where faculty and staff are spending time outside of the university’s physical location, as there are potential payroll, tax, and immigration consequences — among other implications — which should be reviewed.

Payroll reporting and employment tax: Changes in withholding may need to occur based on an individual’s new work pattern and location. If the individual is working outside the United States, social security alignment should be reviewed along with any potential for double taxation.

Employers generally have a withholding obligation based on an employee’s primary work location, or the location where the employee is regularly assigned. Withholding, however, also may be required in the location where the employee is a resident, in the location where the employee’s activities exceed a certain level of income or activity, and/or in the location where an individual is paid. 

In cases where withholding may be required — either domestically or internationally — the university often would be required to register within the state or country and potentially remit employment taxes. While a limited number of states and countries have been providing temporary relief from employer withholding requirements when an employee is displaced due to ‘stay-at-home’ orders, the majority of jurisdictions have not issued any guidance to employers related to withholding obligations on remote workforces.

Observation: Universities, therefore, should determine whether a change to employee payroll taxation is appropriate. Absent formal guidance from states, unemployment and income tax exposure may exist in states where employees are physically performing services.

Corporate tax issues:  When engaging in remote teaching and learning, an unintended permanent establishment (PE) may be created in foreign jurisdictions. This is particularly important for tax-exempt higher education institutions that may face potential corporate-level taxation as jurisdictions outside the United States may not recognize the same tax-exempt status.

A PE generally exists through (1) a fixed place of business at the disposal of the taxpayer through which the business of an enterprise is wholly or partly carried on or (2) the activities of an employee or other agent acting on behalf of the enterprise. Consideration should be given to the activities performed.

Observation: In addition to entity-level tax implications, universities should be cognizant of unintended reporting requirements — such as for global pension plans — that may occur by having a presence in other countries.

Individual tax issues: Individuals risk triggering tax residency when living and working in more than one jurisdiction. This potentially could lead to double-tax issues and filing requirements in more than one location. Consideration should be given as to which party ultimately will be responsible for any additional tax costs.

Some countries — the United States included — have implemented various temporary relief measures. The IRS issued Rev. Proc. 2020-20, which allows the exemption of a maximum 60-day period when determining if an individual should be classified as a US tax resident for federal income tax purposes under the substantial presence test or with respect to income from dependent personal services. Similarly, Rev. Proc. 2020-27 provides relief to US citizens living abroad who expect to meet the bona fide residence test in 2020. This provision enables certain individuals potentially to qualify for an election to exclude their foreign earned income and housing cost amount from gross income. Both Revenue Procedures have specific rules that must be reviewed for each situation in analyzing whether they apply to an individual’s fact pattern.

The Organisation for Economic Co-operation and Development (OECD) also issued guidance which aims to avoid tax complications triggered by a worker’s unplanned presence. In cases where a double tax treaty applies, an individual may be able to mitigate unplanned income tax liabilities; however, there may be increased overall tax costs or administrative complexity.

Other considerations: While payroll, tax, and immigration remain top concerns among universities, there are potentially more impacts upon staff. Other areas on which universities should maintain focus include:

  • Benefits — compensation inequality for remote faculty receiving a work-location salary while potentially living in a location with much lower cost of living relative to equally paid peers; access to healthcare, especially where staff are in different countries; availability of retirement or pension plans; severance and acquired rights based on faculty location; expense policy considerations.
  • Research and intellectual capital — remote teaching may be limited to roles that can be performed without a physical office/laboratory and/or do not present regulatory, licensing, or intellectual property considerations.
  • Scholarship/grant issues — certain grants limit the funds to research performed in specified locations.
  • Digital service fees — certain countries charge service fees for students learning remotely.

Addressing these issues

Many universities are finding their current processes and controls are inadequate in the new virtual environment. Universities should evaluate whether internal policies and procedures are sufficient with respect to remote learning.

For higher education institutions that are moving to a remote learning model for the first time, we recommend the following steps:

  1. Start by framing your overall strategy. Leverage multiple business functions (HR, Global Mobility, Corporate Tax, Legal, Employment Tax, and Total Rewards) to address compliance risk, right to work, and regulatory permissions.
  2. Develop a policy and process framework. Create a governance model which includes applicable rules and procedures, including how to process remote teaching requests. Confirm who will own remote teaching requests. Communicate this to faculty and staff.
  3. Assess costs related to individual requests (payroll, legal, entity-level taxation) and impact to the faculty/staff (reporting structure, compensation, pension, social security contributions, travel expenses). Consider any alternative employment structures such as a Global Employment Company/Central Employing Entity.
  4. Decide whether to approve the request and if there will be any restrictions, such as the duration of the remote teaching arrangement, role and responsibility limitations, etc. Document the decision.
  5. Implement the remote teaching arrangement by changing the employment contract, updating payroll arrangements, and confirming tax or immigration support (e.g., work visas, Certificates of Coverage) where needed.
  6. Continuously monitor remote teaching activities, travel patterns, performance, well-being, and productivity. Adjust arrangements where needed.

The takeaway

Universities considering a long-term transition to a virtual learning model need to be aware of the regulatory implications. While there are significant advantages available to universities, it is important to examine whether policies, procedures, systems, and related controls are adequate to meet compliance and risk thresholds.

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Travis Patton

Partner, Exempt Organization Tax Services, PwC US

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