Strategies to Manage the Risks and Costs of Short-Term Business Travel

International business expansion is a complex process that must be done strategically in order to minimize risk, limit potential tax liabilities and maximize profits. Our Doing Business Globally series is designed to give Canadian companies the advice they need to reduce risk, limit exposure and successfully expand into global markets. The final part of our 4 part series reviews strategies available to manage the risks and costs of short-term business travel.

Many Canadian companies face unexpected employment challenges when expanding operations beyond our borders. Tax concerns, issues with immigration laws, and unanticipated costs can all complicate expansion plans. Whether you are selling south of the border, opening a foreign office, or setting up production overseas, there are a number of critical areas your company should consider related to employee mobility during your expansion.

Creating a mobile workforce

There are multiple reasons why Canadian employees may need to travel short-term to support a company's international expansion. For example, as a company expands operations into new markets, experienced employees are needed to meet with potential clients, conduct fact-finding missions, and scope out areas for local operations. During the expansion, Canadian employees may be in the foreign jurisdiction to help set up local operations, transfer knowledge, and train and develop the local staff. The business may also wish to fill key positions from Canadian staff members on a temporary basis.

Each of these cross-border activities creates complex tax and risk exposure. To help mitigate these risks, employers can take a number of proactive actions. One important action is to review and ensure compliance with the immigration and employment laws in the foreign jurisdiction. In practice, many short-term business travellers generally do not register with the local authorities; however, companies should ensure that all required work permits and other legal agreements are in place before the start of the assignment. Failure to abide by immigration rules may result in significant delays at the border, refusal of entry, hefty fines, deportation or even imprisonment for the individuals.

Other ways to protect the company are through the implementation of formal short-term international assignment policies and through the use of formal assignment letters. By standardizing its short-term international assignment policies, the company can manage its mobile workforce and related costs more efficiently, enhance compliance with tax and immigration laws, and help develop and retain top talent. It is important not to overlook the fact that the assignment needs to work for the employee too. Whether the employee is travelling with family, or they have obligations at home and need to return semi frequently, or the relocation is for career development reasons or for fulfilling a business need – a full assessment needs to be done to make sure that the employees are good candidates for an international assignment, even if it is only on a short-term basis. If it's a bad experience for the assignee, the whole project or mission would be at risk and so could the employer-employee relationship. Assignment letters typically state the terms of the assignment, and the employer and employee responsibilities. As such letters are signed by both parties to confirm agreement to stated terms and conditions, they form a valuable barrier to exposure for the company and help clarify the understanding of the short-term assignment for both the employer and employee, which would increase the likelihood of a successful assignment.

Once a company has employees travelling to or working in a foreign jurisdiction, it is also important to have a process to identify the employees who are working abroad. Many organizations have difficulty tracking their short-term business travellers, which can lead to both tax and immigration difficulties down the road. A business can significantly reduce its risk exposure by identifying and monitoring its mobile employees, and implementing processes and procedures to ensure that the employees and the company comply with tax and immigration laws.

Navigating Personal Tax Challenges

Foreign and cross-border activities can create complex and potentially severe tax issues for employees. Ensuring the employees' compliance with individual tax laws in both Canada and the foreign jurisdiction can be difficult, but it is one of the most important areas that should not be overlooked, as reactionary clean-ups could be costly for the company.

Many companies assume that employees are only taxable in the jurisdiction where they regularly report to work. This is simply not true. Most countries, including Canada, will tax an employee who performs employment service while physically in their country, even for a short stay. In many cases, the only relief from income tax on this employment income in the foreign jurisdiction is under the terms of a tax treaty between Canada and the foreign country – which usually provides that these employment earnings are not taxable in the foreign jurisdiction if the remuneration for these services is less than a fixed amount ($10,000 in the Canada-US tax treaty) or a series of tests are met that ensures that the employment income is not borne by a taxable entity in the foreign jurisdiction.

To complicate matters, even if the employee does not owe taxes, some foreign jurisdictions may still require the individual to file a tax return. Failure to file a tax return can result in penalties and interest—and in limited circumstances, even criminal penalties, including jail time.

To address some of these risks, it is critical for the company and its employees to take a proactive approach to compliance with the tax laws. Companies should have a global mobility tax specialist review the Canadian and foreign tax consequences of “high risk” employees working abroad, so as to identify and communicate appropriate tax implications and tax planning strategies, and to help promote and enforce compliance with the tax laws.

Establishing an International Assignee Payroll

Upon going global, the company must address payroll delivery. Many companies struggle in this area due to the complexities of Canadian and foreign tax regulations. Not only are there no “cookie cutter” approaches to setting up an international payroll structure, but many Canadian and foreign payroll vendors are inexperienced in international payroll delivery and associated issues. As a result, the best approach is often to seek the assistance of a global mobility tax specialist to assist with international assignee payroll matters.

At a minimum, an international assignee payroll should be set up to ensure that the proper payroll withholding, remitting, and reporting requirements are met in Canada and in the foreign country. An optimal payroll delivery structure not only ensures compliance, but also helps minimize global payroll costs and adverse cash flow issues for the employee and the company. Care should also be taken to ensure that assignees' personal objectives can be maintained during the assignment, such as providing payment in a certain currency, remaining within the Canadian social security system, or paying into a Canadian company-sponsored pension plan.

Addressing Corporate Tax Challenges

A risk that few companies are aware of is that sending an employee to work in a foreign country on behalf of a Canadian entity may inadvertently create a taxable presence in the foreign location. As a result, both the Canadian employer and the employee can be subject to tax and burdensome reporting requirements—a complication that many employers do not discover until after employees have gone on assignment. A review of the nature of the employees' activities in the foreign jurisdiction is important when assessing whether a taxable presence has been created.

One way to help insulate the employer from certain negative tax consequences is through the creation of a secondment agreement. In addition to protecting against the inadvertent creation of a taxable presence and certain corporate withholding requirements on intercompany payments, a secondment agreement can also help the company comply with the payroll reporting requirements in both the home and host country.

Other corporate tax issues to consider include:

• Corporate tax filing positions
• Transfer pricing implications
• Allocation of compensation costs for the services being rendered
• Managing cross charges and associated potential corporate withholding tax
• Value added tax (VAT/GST) considerations

In Canada, there is a lot of information sharing between immigration, CRA, and labour boards and enforcement activities such as payroll audits and transfer pricing audits are on the rise. Non-compliance in one area would directly impact the company's ability to act in another. As the global market is getting more connected, so will the information sharing over borders, so compliance worldwide is critical for international operations.

Taking the right approach to talent mobility when expanding to foreign territories

Companies can efficiently manage their tax risks associated with cross-border travel while supporting business strategy and minimizing costs by establishing and implementing proper policies and processes. Whether assignments are long or short, international or cross-border, a well thought out process will help facilitate timely and successful transfers, while keeping costs and risks in check.

In addition to employing some of the risk mitigation strategies discussed above, companies are also encouraged to have a person responsible for ensuring that the controls and processes are consistently applied. This person should bring together key influencers within the organization—especially from HR, Legal/Immigration, Tax, Payroll, Finance, Accounting, and operating units—to discuss global mobility matters and help drive necessary changes.

International talent mobility is a complex issue that requires care and foresight. Taxes, immigration, and rising risks and costs are often beyond what companies expect or budget for, and can a have a long-term impact on the business' foreign operations. For advice and support on navigating through these challenges, please contact your BDO advisor.

For more information contact:

Debra Moses
Partner, Expatriate Tax Practice Leader

Contributors:

Joanne Sun
Partner, Expatriate Tax Services