Most countries have a domestic or standard rate of withholding tax established for payment of income to nonresident recipients. The domestic and standard rates of withholding tax vary by jurisdiction and often may be reduced or eliminated under an applicable income tax treaty between the payer and recipient home countries.
- Evaluate the activities of remote employees. Determine whether the employee is working part-time remotely in a nonresident country and occasionally in the company’s home country.
- Establish procedures to continually evaluate withholding tax risk. Even if your organization has established an arrangement with the employee that mitigates cross-border tax implications for an employee working remotely, your organization’s needs may change, resulting in the employee working part-time from a different location.
4. Determine Transfer Pricing Implications
A growing number of countries have regulations requiring transfer pricing. Tax authorities around the world have intensified their focus on the issue.
Transfer pricing may be implicated in a cross-border remote work arrangement if the employee’s activities benefit more than one company within a controlled group. If the employer implements an offshore employee holding company, transfer pricing is implicated.
- Document the activities of the employee. Be sure to include how these activities impact the entire organization.
- Evaluate the need for intercompany contracts. These may be needed to compensate the company that pays the employee for the benefit provided to other controlled companies in group.
- Apply benchmarking. This is useful to determine the range of prices or profit levels.
To be respected by tax authorities, transactions between related parties may require the following:
- An actual cash payment as opposed to solely an accounting entry
- Payment before the year closes to ensure current deductibility
5. Follow US Reporting Requirements
US companies with employees working abroad should consider US tax reporting obligations arising from the activities performed by its employees outside the United States.
Depending on the US tax classification of an organization’s overseas business activities, various information returns may need to be filed with the organization’s US income tax return. Noncompliance with the information return filing requirements carries at least a $10,000 penalty for each missed filing and may result in the statute of limitations for the organization’s US income tax return remaining open indefinitely.
Form 8858 Requirements
Beginning with tax year 2018, the IRS established new filing requirements for Form 8858, Information Return of US Persons with Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs).
These filing requirements rely on a facts and circumstances analysis of an organization’s cross-border activities to determine whether a Form 8858 should be filed. Depending on the nature of an employee’s activities and level of authority, a remote work arrangement could establish the basis for a Form 8858 filing requirement for the organization.
- Determine the tax classification. If the organization has established a legal entity in the country from which the employee is working, determine the tax classification of the entity from a US tax standpoint.
- Decide if an information return is needed. Based on the tax classification of the legal entity, or lack thereof, evaluate whether a US information return is required to be filed.
- Document relevant fact and circumstances. If a legal entity doesn’t exist and the organization is taking the position that an employee’s activities don’t give rise to an information-return filing obligation, the position should be documented including the relevant facts and circumstances supporting the analysis.
We’re Here to Help
If you have questions about the impacts of your employees working oversees remotely, please contact your Moss Adams professional.
For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: