Key Considerations for Companies Navigating Global Remote Work, Part 2: Taxes and Benefits

Transcript

INTRO 

For U.S. companies that allow employees to temporarily work abroad, it is critical from a compliance perspective that employment policies take into account these flexible work arrangements. 

On this episode of We get work®, we explore scenarios involving short-term international assignments, including tax treaties, employee benefits obligations, digital nomad visas and the importance of remote work policies and agreements.

Today’s hosts are Chris Anderson and Melissa Ostrower, principals respectively, in the Greenville and New York City offices of Jackson Lewis. 

Chris and Melissa, the question on everyone’s mind today is: What steps do U.S. employers that allow temporary remote work abroad need to take to remain compliant with U.S. employee tax and benefits policies, and how will that impact my business?  

CONTENT

Chris Anderson

Principal, Greenville

I'm Chris Anderson, principal here at Jackson Lewis in the International Employment Group. Remote work is a huge part of what I do on a daily basis. It's not the only thing, but it's something that's been coming up increasingly, especially after COVID hit. Then, the outworkings of that in the last four years is that I deal with this issue from many different angles on a weekly basis and can anticipate continuing to do that based on those past clients I've already been working with. 

I'm here today with Melissa Ostrower, one of the co-leads of our Employee Benefits Group. Welcome, Melissa.

Melissa Ostrower

Principal, New York City

Thank you very much, Chris.

Anderson

Glad you're with me because I needed to bring in a heavy hitter on this topic. We're talking about part two of our series on global remote work. This is on tax and benefits, an area where I don't pretend to know it all by any means. I'm just good at issue spotting and calling out things for clients, so thank you for being here to talk about it.

As we get going, Melissa, I really wanted just to start off really broadly with, because I think it'd be great for all the listeners out there who happen to hear this. In your practice, let's just start with how this comes up: global remote work. Just to give it a little bit of parameters, we're talking about global remote work of U.S. employees. Whether they are non-immigrant employees in the U.S. on a J-1 visa, an L visa, an H-1B, or a U.S. citizen who asks their employer, or maybe they don't ask, maybe they just go. The employer finds out they're, for personal reasons, in some other country, or they want to work for a short-term period of time. We'll define some parameters around that as we talk, but just for the short term, with an intent to return. The idea is to stay on the U.S. payroll, continue paying everything in the U.S., and they want to go overseas for vacation or otherwise.

How have you seen this come up the most in your practice from a tax and benefits perspective?

Ostrower

Thank you. This definitely has come up frequently. This is really the logical extension of the question that we get in the domestic context when employees go and work in different states. Well, also, employees leave the United States to go and work in different countries. That raises a whole host of issues for employers and risks. 

The first thing is that employers have to understand where the employee is going and for how long. Then, the employer needs to be proactive and take action. For example, some countries have income tax treaties with the U.S.. We’ll want to consult those treaties to see how the employee is going to be taxed abroad. We will also review how the employee is going to be taxed here. Often, if an employee continues to work for the U.S. employer and is abroad for less than six months, less than 183 days, there may be a treaty provision that will allow the employee to really just remain subject to income taxes in the U.S., but not always. 

Anderson

On that one, let me ask you one thing because that's something that comes up all the time. It’s a great spot where I don't know what I don't know. I'm issue spotting while dealing with clients, and I've done this hundreds of times now. Is it fairly safe to say, and we're not giving definitive advice here by any means, but is it fairly safe to say that when a country has a tax treaty with the U.S., a bilateral tax agreement, and it has that 183-day rule or any alternative rule, that as long as the remote work follows that rule and the person stays on U.S. payroll, that there's not going to be a personal income tax issue in that country. Is that fairly safe to say? 

Ostrower

No, I absolutely don’t think so, especially with the fact pattern that you mentioned, where some of these folks might actually be here on visas. Maybe they're going back to their country where they are a resident or a tax resident. It may be that the treaties don't apply in the way we expect that they would apply if it were a straight-up U.S. citizen.

Anderson 

That's a great point. If it's a national of that country going home, they may have citizenship, or a house there. There are still all those issues.

Ostrower

Right, so the treaty may apply differently. Why does the employer care? At the end of the day, we're representing employers here at Jackson Lewis. The employer cares from a tax side because the employer could have some withholding or reporting obligation with respect to the employee. Then, we'll get to this a little later, but could this employee be creating what we call a permanent establishment there? A business that could subject the company to company-level taxes. That’s why we care. 

Now, ultimately, the employee has some exposure as well, can be subject to taxes there, and we don't want our employees to be unhappy. Of course, in this situation, it sounds like the employees are going there because they want to, so that is an issue for the employee. There are different rules. 

 Anderson

One question on that real quick, do you think it's more risky? It's going to be case dependent, but just tell me from your practice, is it more risky for the employees themselves than the employer in the classic case of someone going on vacation or going back home for an extended holiday? Is it typically going to be more risky as long as that U.S. company doesn't have a presence in that country or other activities there? That kind of thing brings a bullet down to that simple, which is what I deal with for the vast majority of cases. Would you say that more risk is on the employee or the employer?

Ostrower

It depends on the duration, the employee and their level, and what they're doing. A vacation over the holidays for a few weeks is a lower risk. Again, with your fact pattern, where some of these employees may actually be residents of the country where they're visiting, they may already be paying taxes there, so perhaps it's not such a big deal for them. It depends on the country, the duration, and the person. The real risk comes when it's longer. When it's someone who wants to go there for more than 90 days, they're going to be really working from there.

Anderson

Right. Many of my clients will end up making six months their absolute. I always encourage one, is to get a tax opinion. Then, two, is to keep it as short as possible. That's practical advice. Not only from a tax standpoint, employment or immigration, all the things that we're talking about in this series, but just from a practical precedent-setting perspective as well. Once you create this precedent, you're going to have more employees wanting to do it, especially for these personal reasons.

Let me ask a little deeper on the initial question, really quick. The initial question you said no to, which was great, and it was absolutely right to say that, because it's nuanced. There are a lot of facts here. If it's a non-national in that country, so someone who's a U.S. citizen, there's a tax treaty, and they are going and don't have a home or other ties to that country. The treaty gives, let's just use the hypothetical 183-day rule, which typically they do have, and they stay underneath that six months. Can U.S. employers feel fairly confident, and can that person feel fairly confident that there won't be a personal income tax issue in the country?

Ostrower

Generally, yes, but there can be some nuances, like, are they doing something that could create a residency for them, which we don't know. What we always do here, at Jackson Lewis, we're part of the L&E Global Alliance. We, as the U.S. lawyers, review it from the U.S. side. We bring in foreign counsel because we don't know those rules as well as those nuances. We also make sure that we get their input because there could be some foreign aspect that we're not reviewing or considering that we'll want to get their input on. 

Yes, generally, I would say a U.S. citizen going over to a country to work for a U.S. employer with one of these treaties, where the employee is not doing anything to cause the employee to become a resident in the foreign country. Generally, that's going to apply, which means that we'll just continue withholding the U.S. income taxes like we were.

Anderson

That's a great point, Melissa, because, again, not trying to pin you down on that at all, but I want it just to be clear for listeners as far as in that case where it is a U.S. citizen. But a lot of these cases that I deal with are oftentimes someone who's here on a non-immigrant visa, who wants to go home to see their family, and they may or may not have their residence. Just an important point for anyone listening, to make sure you're looking at it from that deeper angle. That's a great point you raised. 

Thank you for raising that about L&E Global. As part of the international group, I deal with them and amazing colleagues around the world on a daily basis. That’s how we get our work done by liaising with them to go deeper as we need to in these areas. We always, always tell a client to get a tax opinion, whether through our L&E global colleagues or through another tax advisor as needed in a specific country. 

Let's talk a little bit about when there's no tax treaty. Just give your general overview advice on how to handle that and the additional risk it raises when there's not a tax treaty in place between the U.S. and the remote work country.

Ostrower

Again, it's country by country, but oftentimes, you become subject to income taxes based on where the services are being performed. The individual working abroad could be subject to income taxes in that foreign country, and we could have a withholding obligation in that country. 

Now, in the U.S. and our domestic tax code, if a citizen who works abroad is subject to mandatory income tax withholding in a foreign country, then we don't have to withhold the U.S. income tax, at least at the federal level. It’s important to know and understand, and then to withhold in the foreign country, like we have to, but then we won't have to do it here. Different rules for residents. 

Anderson

Would the withholding in the foreign country typically ride on whether what you're doing and what that person's doing, the activities, create a permanent establishment? Or could there be a withholding obligation just based on having a person there?

 Ostrower

It is just the fact that they're working there. Just like here, if someone comes over to the U.S. and starts working in the absence of a treaty and subject to certain exceptions, they're going to be subject to income tax here. Again, you have to be aware of it, and you have to actually be doing the withholding. With the employees who go over for a brief time, the employers probably aren't aware, but if you come to us with this question, it's probably because it's more than just over the holidays. They're probably asking for a longer-term assignment. In that case, for income tax purposes, we would bring in some foreign counsel to help advise us. Perhaps we could use a payroll company over there to help us, because we're not in a position really to do it ourselves if it is a U.S. company.

Anderson

I was about to say that we can't run payroll, right? Unless you have a firm established under a mortar presence, you can't run payroll. Getting an EOR involved, which is an employer record for anyone wondering what that means. That EOR, or in certain European countries, you can run a payroll and register as a non-resident employer in some other countries around the world, too, but that's definitely on a case-by-case basis. That's a great point there. 

Ostrower

I've been talking about income tax so far, but there are also Social Security tax issues to consider. There are some treaties that are called totalization agreements, and they're there to avoid double taxation so that employees are not paying Social Security-type taxes in more than one country. There aren't as many of those as income tax treaties, but typically, unless you are working for a U.S. company that sends you over on assignment to the foreign country for less than five years, you're not going to be eligible to qualify for an exemption. So, the employee working abroad could also potentially be subject to the Social Security or equivalent taxes in the foreign country and then also still be subject to our FICA taxes here.

Anderson

That's a great point to make because it is two sides of a coin, but often I found that many of the countries with which we have tax treaties, we may not have a totalization agreement or far less in general. We have many more tax treaties and totalization agreements from what I've seen. 

This has come up in my practice where clients might have applied for that totalization agreement based on the remote work, when they wouldn't do that for a two-week, or one or two-month period, typically, although there’s no hard and fast rule on that. Even for a four, five, six, or month-to-month remote work period, when they have applied for it, many of my clients have gotten the certificate of coverage, showing they are still covered in the U.S. and therefore exempt in the other country. I’ve had a few clients who have had a struggle getting it. Have you had particular clients who have struggled? 

Ostrower

That's a great point. I agree with you because in this fact pattern that you've mentioned, it is not the company that is sending the employee to work for the company on assignment. It's really more of a personal decision for the employee to work remotely. For the first time, I have been seeing clients come to us saying that their request for a certificate of coverage has been denied on the basis of this remote work. It does not meet the terms of the totalization agreement to be eligible to not be subject to the Social Security taxes of one of the countries. The employee could end up being subject to both. 

Anderson

At that point, you're in a bit of a pickle because you can't know definitively, which gets back to having a policy and enforcing it. It may be the listeners’ gating mechanisms that if we can't get that, we're not going to let you go, because we're in an unknown and ambiguous state of knowing whether we have exposure or not.

Ostrower 

It is rather that you have to pay in both places. If you're not exempt from Social Security in one of the countries, then it could be expensive for the employer, especially in some of the European countries. The employer has to pay quite a bit. In the U.S., too, there's the employer share of the FICA taxes.

Anderson

That's the same thing as with taxes, though, as well, because unless you have a presence and an entity, you can't pay it in many countries. I've actually looked at this probably in 50+ countries, both the tax and the Social Security and social insurance parts. Often, not always, but often, my global colleagues around the world in L&E Global, and in other countries as well, will say, unless you have a permanent establishment, there's no affirmative responsibility. Therefore, they take the position that there's no material risk for the U.S. employer, but mainly risk for the person. Then, when I press on it and say, what if the person doesn't pay their taxes? They always, almost always, say that we can't say this without risk. So, again, there's this exposure that unless you run that payroll and do the social insurance, that's the only way to be fully compliant, which means taking that step, unless you have the certificate. 

If they're there for less than six months, often countries, not always, but often they have a 183-day rule for their own tax residency. Even if they're non-resident, I've talked to some of the big four accounting firms and other local accounting firms around the world, and often, countries take the position that anything you make on that soil from day one, if there's no tax treaty, would be subject to income tax in that country. It's not your worldwide income. That happens after you become a tax resident, but it would be whatever you make on that soil.  

Have you heard that or dealt with that in your practice with other colleagues outside the U.S.? 

Ostrower 

That is the general rule. The general rule of most countries other than the U.S. and China, I believe, is that you're subject to tax in the jurisdiction where you earn it and perform the services. Just like you said, if there's no treaty, then the individual who's working in the foreign country would be subject to tax on the money earned there. Now, the U.S. is a little unique in that we tax our residents on their worldwide income, but not all countries do that. In the U.S., even when you're a non-resident, you are subject to tax. A non-resident would be subject to taxes on the income earned while performing services in the U.S. 

Again, since we represent employers here at Jackson Lewis, we're looking at it like, what does that mean from the employer's perspective? That means you have to withhold, report, and ask are you creating a permanent establishment? What's the impact at the employer level? Typically, your withholding obligations apply when the income is subject to tax. If the employee is subject to tax on that income from day one, then the employer may have had a withholding obligation from day one and a Social Security obligation. 

Anderson 

Right. Well, we could talk about this for an hour for sure. It goes so deep with permanent establishment, too. Maybe we'll have to do a follow-up podcast just on that alone because I've dealt with it so much, as I know you have, especially with the ins and outs of what can trigger that in every country. Tax treaties have different things. I've even noticed some of the tax treaties that we have with other countries have a services provision for permit establishments that says if you're there X number of days doing any kind of services, the tax authority could find that it is a permanent establishment. I've had to look into that with local colleagues many times before.  

Let’s pivot really quickly as we kind of get towards the end and talk just about your benefits experience of how global remote work for short term periods can affect benefits, medical benefits and 401(k), especially.

Ostrower 

Sure. There is the technical compliance aspect, and there's the practical aspect of whether an employee will get the desired benefit. The main benefit we all think of when we think of employee benefits is health insurance. If an employee is enrolled in your medical plan here and they're abroad, typically the U.S. plan is not going to have a network of providers abroad. So, unless that employee is fine coming back here for medical care, then it may not serve the employee's purpose. Now, again, if this is a situation where the employee is going over for their own benefit, sometimes employers may just not want to address it. However, there are international plans that employers typically offer when they're sending employees to work abroad, which is also a common situation. You may want to look into getting one of these international plans that's going to provide more useful coverage on that.

Then, you have to look at all the other plans, for example, you may have life and death, disability, and some of those plans. Typically, they're insured, and they do have exclusions for working outside the U.S. You want to look at those and understand the impact that someone working abroad has on the benefits.

Anderson

I'm glad you raised that about other plans as well and the exclusions that are there. If I could really sum up what I was thinking when trying to get a three-part series, it was looking at these things that have arisen with remote work that five or six years ago really weren’t things. It just wasn't there, so the law has to catch up with reality. We see it with the certificates of coverage that we talked about a minute ago. You see it with these plans where many, many plans that I've seen often will handle what will be a classic business trip historically, like two or three weeks. However, now, I have a client who came to me and said, we have someone who's demanding to go home three times a year for at least two months each time. That's half the years they want to be at home, and just stagger it all going forward. We had a very robust conversation about that, but the law hasn't caught up with that yet. 

One last thing from my side that I'll talk about, probably in every episode, is digital nomad visas or remote work visas that have been popping up. I want to ask your opinion, Melissa, on this. These visas allow for someone to work remotely, and it's the law catching up with reality. Many countries, by now, it's 70+ countries at this point, have some sort of a digital nomad visa. 

In your practice, Melissa, have you seen this come up? Do you think that the digital nomad visa, if someone gets it, typically would cover them from a personal income tax standpoint in that country, if you've dealt with that before?

Ostrower 

In that case, in the foreign country, we would rely on the foreign counsel, but we would still look at it in our practice here at Jackson Lewis from the U.S. side. So, what does that mean? Like I mentioned before, a U.S. citizen going to work abroad for a U.S. company would generally still have wages subject to income tax withholding. However, if the employee is subject to mandatory withholding in the foreign country, then you wouldn't have to withhold. In that case, you would need to know. Maybe that employee, if they're not subject to tax in the foreign jurisdiction and there isn't the withholding exclusion or also the foreign tax credit I didn't mention, but we would still have to withhold. We would look at that in the context of what the employer has to do, and how it could impact the treatment because of that visa.

Anderson

I've looked into this a good bit because it's something I'm doing all the time with our foreign colleagues. What I've started seeing coming up, and it really goes with your point, is that it's obviously a case basis. But what we're seeing is some of these digital visas very squarely address immigration. That's what they're there for: to allow you to come and reside legally and perform work for a foreign entity while you're there. But what they don't squarely address often is tax, social insurance and employment; they don't often hit it right on the head. There's some assumed coverage you get, but it's not always clear. I would just encourage our listeners to look at that, reach out to us, and we'll bring in the right foreign counsel to be able to opine on that more. Some of them do squarely address it. There are a few that I'm thinking about in some island nations that very clearly say you will not pay tax, since it's not towards residency. It is something that has to be addressed case by case, for sure, both for the U.S. and abroad. 

Just to close from my side, there are some risk mitigation strategies I'd love for you to chime in on any of these, Melissa, as well. I always recommend that my clients implement a remote work policy. I'll talk about that in every episode. Do a remote work agreement for setting expectations, making sure you have a defined time period, whatever that is, you're not going to allow it or if you do allow it, making sure that you've looked into the tax issues of it.

Melissa, have you dealt with remote work agreements or remote work policies with your clients?

Ostrower 

Absolutely. This is actually going back to how I started this, since we do this for clients working in different states as well. It could really be in the same policy. If you're working in a location other than where your home base is, you have to one, make sure that the policy permits it. Some employers say, you know what, we'll help our employees and we'll pick these 10 jurisdictions and we'll allow it, so we can make sure we're compliant, but otherwise, you can't work remotely. Other times, it is subject to approval. There are different approaches, but I completely agree. 

A policy sets the parameters, the expectations and makes it more likely that you're going to make sure you're in compliance because you told your employees what you're expecting, and they hopefully will give you the information you need to make sure you're compliant.

Anderson

Great word. Just to close this episode from my side, we always recommend, we said it throughout, just reaching out to us. Melissa and her team on the U.S. side will bring in our international team. We just love assisting clients in that way, but getting a tax analysis done, issue spotting, and then going as deep as you need to feel good. Ensuring all the stakeholders are on the same page, so that your eyes are wide open going into this, and we're able to move forward to say, no, we're not allowing it for XYZ reasons. Many of the things that we already discussed could be good reasons to do that, but definitely good reasons to an imperative to look into it. 

In longer cases or borderline cases, which are more than I've discussed, there can be many of them, right? Employers need to always be thinking about alternative options. One is not to allow it; You follow a policy for that reason, and if there's any serious doubt, you're not going to allow it. Or if you do, knowing that you can pivot towards things that will make it safer and no longer remote work, which will be employing them in the jurisdiction through an EOR, a payroll provider, if that's an available option in certain countries, or using a partner entity or setting up your own entity. Again, those are where you're going to fix it and legally. That would be only if you need to have someone there or need them so badly, you're willing to do that. 

Definitely reach out to us on any of those questions. Melissa, so glad that you joined today. 

OUTRO

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