Businesses have been going mobile for quite some time now. While expanding their operations requires them to get people with the right skills in the right place at the right time, frequent business travel to other countries is becoming an everyday reality.
At the same time, immigration and tax department technology is becoming increasingly connected – allowing information in immigration to be delivered to the tax man.
As if the corporate travel business wasn’t complicated enough, tax laws on the ‘transient employee’ are now set to change.
Countries have all kinds of rules to determine whether a foreign enterprise doing business in their country is subject to taxation. These all exist under “taxable presence” or “permanent establishment” (PE) rules governed by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” for short).
What are “taxable presence” or Permanent Establishment (PE) rules?
In November 2016, over 100 jurisdictions finished negotiations on the Multilateral Instrument which implements a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational corporations. The Multilateral Instrument covers more than 100 jurisdictions and came into force on 1st July 2018.
A traveller’s remuneration is now taxable in the country he or she travels to if the travel is borne by what is termed a Permanent Establishment (PE) according to that jurisdiction.
These new regulations will classify more and more companies as PEs than there were before and thus, more and more road-warriors may be liable to taxation. Countries facing revenue constraints will also press for more of the tax pie allocated to their own jurisdictions, particularly the countries developing and deploying sophisticated technology tools aimed at capturing data about employee movement like credit card spending, and other indicators.
Before, travellers owed tax in a country other than their own if they stay in that country for more than 183 days or are employed by a company based in that country. These new rules will mean that, while the above still applies, each country will have their own sets of tax laws on transient travellers, making it less straightforward and needing constant oversight.
How do we know if these rules apply to our travellers?
The rules vary country by country but the tax thresholds are triggered by the following:
- Was a traveller doing business in a country for too many calendar days in a time-period that subjects them to a personal tax liability?
- Did the company, across all employees, do business or earn revenue for over a set number of days when there is no permanent establishment — making them subject to a corporate tax liability and potentially a fine?
This risk is separate from Visa requirements. In some countries it is dependent on the nature of the business being conducted, for example, training as opposed to selling or delivering services.
If undocumented activity is identified, fines can be in the millions and jail time is a possibility. Companies can also lose their license to operate in certain countries.
What about contractors?
In the case of contractor travel, it gets even more complicated. In Britain, HMRC’s IR35 legislation requires businesses to indicate whether the traveller is an employee for tax purposes or a self-employed person. If a company identifies their travellers as self-employed or ‘contractors’ yet books and pays for their travel via the same corporate tools or TMCs as employees – this could mean potential penalties if the breach is discovered.
“Tax authorities around the world are really starting to look at contractor arrangements because they see it as low-hanging fruit for the revenue,” said Kevin Cornelius, a tax partner in the people advisory services business at EY in London to Business Travel News.
The alternative – encouraging travellers to book and pay for the travel themselves and expense it later – can lead to a lack of oversight on spend plus the appropriate risk management may be loosened.
What do we do about it?
In all situations, just as countries’ immigration and tax departments are starting to communicate, so too should internal HR, tax and travel teams. Travellers who previously flew beneath the internal HR and tax department’s radar are now liable to fill out a tax return. The internal company HR and Tax department needs to know this.
How can travel managers help?
The internal tax department is probably aware of the laws. The problem is making sure traveller activity does not violate it.
The total time spent in another country is not just measured per traveller but also per company. Every bit of activity counts.
This means we have to watch traveller activity more closely while comparing it to the tax laws in each country – alerting internal HR and tax departments if a traveller, or the company, is nearing the threshold in a certain country and ensuring the tax laws are honoured.
Equally, this tracking should ensure companies don’t over-report and overpay. In pure booking data and traditional systems, activity such as split-ticketing, departure by off-GDS modes such as international rail or ferry as well as off-channel purchases can lead to employees being recorded as present in a country far longer than they were in reality. Keeping track of your off-channel spend recorded in the credit card, for example, will be a step towards ensuring this activity is correctly reported. In fact, improved tracking of spend will be able to overcome most hurdles provided by these new laws.
The solution: better data
While immigration departments become more technologically connected, business travel programmes need to do the same. The only way to do that is by tracking activity through better data. Many companies use their TMC data to track their travellers and some may use a data visualisation tool showing aggregated data after being inputted manually. Both these approaches are inadequate in the face of these laws and need to be upgraded.
First, TMC data misses any direct bookings not placed through them. Travellers paying on their card through commercial booking sites will not be tracked and many other situations, like expensed travel, for example, will fly under the radar. Secondly, placing a data visualisation tool while manually entering the data via spreadsheets is also not ideal as it takes time and is subject to human error. When the company or a road warrior is nearing their taxation threshold, we need to know now – not two months from now when thresholds have already been broken and liability incurred.
Countries are improving their systems so we need to make sure ours make the grade as well. Leakage is never a good thing but these laws make even less room for error. Complicated data analyses like one-way tickets, open-jaw tickets, multi-country trips and hotel stays with no air ticket need to be included. Also, some countries count the time travellers spend in them differently. Some countries count by the hour while others will count one hour spent in a country as a full day. The data analyses needs to be intelligent enough to take that into account.
The good news is these new taxation laws are easily managed. With better internal company communication between travel, HR and tax plus better travel data, these tax laws should be of no risk to any business. In the face of consequences like losing business licenses in countries and high-cost fines, better tools to track traveller activity is even more necessary. Just as any job function gets the minimum software and tools needed to perform their function well, so should travel managers get the ability to track all activity and not be limited to only one or two booking channels. After all, no company wants an unknown tax surprise!