Canadian businesses implementing new work arrangements during the COVID-19 pandemic may face heightened tax risks – particularly those with international employees. Flexible work arrangements may help a business remain operational during these turbulent times, but if your business includes Canadians in a foreign country, or international employees working in Canada, you should be aware of the complex tax issues that may arise.
Complexities of mobility during COVID-19
As the COVID-19 pandemic disrupts business routines, Canadian employers may face challenges managing global employees in affected areas. For Canadian For Canadian companies who have employees who have relocated across international borders – either as part of business continuity strategies or for personal reasons – additional tax issues have to be considered.
By keeping up with government responses to individual tax compliance, Canadian businesses can more effectively navigate the tax risks areas they should consider as they create policies for new working arrangements.
The tax response so far
The Canadian government has introduced several tax measures to provide relief to Canadians during the COVID-19 pandemic, including an extension of filing deadlines for individuals and trusts , and an extension of payment deadlines for most taxpayers until September 1, 2020. The filing deadline for corporations remains unchanged, falling six months after the taxation year-end.
The U.S. government extended both its filing and payment deadlines. The Internal Revenue Service is allowing taxpayers and businesses to file and make payments without interest or penalties until July 15. However, Treasury Secretary Steven Mnuchin has advised those expecting refunds to file as soon as they are able so they can get their money.
Other countries, however, have taken a “wait-and-see” approach and many have not implemented changes to individual annual tax filings. For internationally mobile employees who may have tax return filings in more than one country, normal compliance obligations should be assumed for each country. Where there are significant obstacles to obtaining information required to complete a tax return, it may be possible to extend the filing deadline by application or, alternatively, to review whether there is reasonable cause for a late filing and request the appropriate tax authorities abate possible penalties.
The mobility landscape during COVID-19
Many employers are implementing new working arrangements to allow employees to continue working amid government mobility restrictions, including allowing employees to work remotely from home, limiting business travel domestically and internationally, cancelling events and relocating employees to new international locations. The increased flexibility has the potential to create new challenges for mobility professionals, expanding their responsibilities and increasing the complexity of managing tax risks during the COVID-19 response.
Finding and managing ‘stealth expats’
Outside a company’s formal employee mobility program, Canadian companies have already seen that employees will sometimes choose to relocate themselves and their families in “response-based” events. Not surprisingly, employees in both China and in other Asia-Pacific nations moved out ahead of the virus to less-affected countries. Taking the “work-from-home” policy beyond its intended result, employees may take precautions with little or no visibility to their employers, particularly where travel is arranged outside corporate travel booking systems.
Mobility professionals will need to work closely with human resources, business partners and business units to find and manage employees who move without authorization to a new country to work. While businesses are responding to the virus with their own travel guidelines, employees may move without formal approval:
- Risk of a Permanent Establishment: Where employees work from a country remotely or in a country in which the company does not have an existing corporate entity, they put the business at risk of creating a corporate taxable presence in that country. This may result in the profits of the employing company being pulled into corporate taxes in the country where that employee relocates. The facts and circumstances of each situation should be evaluated, but where an employee is located in a country outside where he or she is employed for a long-term period it may create a permanent establishment there as a de facto fixed place of business or based on the role they are performing in the country.
While many double-tax treaties provide protection, where there is no treaty or there are longer-term relocations, it will be important to review whether these “stealth expats” are creating corporate tax risks and, if so, to determine how businesses should prepare to take appropriate mitigating action. This may involve relocating the employee or even requiring a leave of absence in some cases.
- Individual tax: When employees relocate to a new country in response to the spread of the virus, they may also trigger personal income tax liabilities. Employees will need to understand the individual tax implications of their presence in a new country, whether they can plan travel to mitigate taxation under a double-tax treaty. For stealth expats, U.S. companies may want to extend tax assistance to these new expats where it helps manage tax compliance.
- Payroll withholding and reporting: Canadian employers may also find they have payroll reporting and tax withholding obligations for these employees, whether through a local entity or as a non-resident employer. The associated obligations that fall on the business need to be understood to ensure continuing global compliance, but they could result in additional complexities and tax costs, particularly where local employment tax liabilities are considered.
- Social security: While Canada has an extensive double-tax treaty network, it and other countries have a more limited number of bilateral “’totalization” agreements that allow for employer and employee social security to be made only in an employee’s home country. Employees working in new country locations may therefore trigger additional social security liabilities for themselves and their employer, which can be very high.
- Double taxation: Employees should also be mindful of the law of the country they relocate to or from. Some countries, Brazil and China for example, may regard locally paid income as wholly taxable in that country, irrespective of where the individual physically works. To the extent a stealth expat becomes taxable in another country, that employee may face complexities and unexpectedly higher tax burdens. A company needs to determine what support, if any, these types of situations warrant.
Canadian companies should be reviewing the impact of the pandemic on their business, their suppliers and their customers. It may be advisable to relocate teams of employees in strategically important roles in out-of-risk areas, or to keep them in place for a longer than expected period. Formal assignments may increase as a result of these relocations, for some employers, resulting in assignments arising that do not fit the parameters and intention of a company’s mobility policy. Agile and proactive actions will be useful to identify the appropriate benefits employees and their families should receive, to determine the range of tax and payroll issues at stake and to effectively manage these assignments over an unknown period of time.
The role of mobility professionals
The COVID-19 pandemic is creating a range of unique and complex challenges for Canadian businesses, and human resource professionals will be key to responding effectively to these emerging issues. Through proactive engagement, mobility professionals can help businesses navigate the turbulence by identifying tax risk, managing complexity and cost, and enabling more employees to continue working wherever they are located.
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