Addressing business traveler riskDecember 6, 2013
Short-term business travelers (STBTs) continue to be a key focus area for many tax authorities. These individuals may be employees who take occasional business trips to a variety of locations, employees who take regular business trips to a few locations or employees who go on an extended business trip to one single location.
These employees are not on a formal assignment to a different work location and are not seconded to a host entity. The risks associated with these STBTs continue to grow, and the attention paid by tax and immigration authorities to these individuals has not lessened.
Why the focus on business travelers?
While tax and immigration authorities continue to focus on this population, multinational companies are actually increasing their reliance on this population. Several factors are contributing to this trend: companies continue to face pressure to keep up with the pace of globalization, using a globally mobile work force, but at the same time, need to manage and reduce costs. For these reasons, short-term business travelers are seen as a growing necessity in today’s business world.
What are the risks?
There has been and continues to be a clear focus by tax authorities on collecting revenue through personal and corporate income taxes. Multinational companies also know that the risks they face with regard to these short term business travelers do not end there.
Companies can face fees and penalties, or other negative consequences, even when an employee’s travel does not cause a personal or corporate tax liability. These negative consequences are not limited to direct tax costs and can include:
Business reputation risk: The general public is more in tune and critical of companies that are perceived as not fulfilling tax obligations or not adhering to immigration laws. Negative press about a company alone has the ability to tarnish a brand. Some jurisdictions, however, have gone even further and created limits on an organization’s ability to do business if that company is not in compliance with local laws and obligations. This risk of business interruption continues to grow.
Employee dissatisfaction: When an employer does not address the tax and immigration requirements of their traveling employees, and employees face negative consequences as a result, the employees may place blame on their employer and expect the employer to rectify the situation. This will take time from the focus of an employee and can result in reduced productivity and potentially even the loss of an employee.
Budgetary risk: When an employee’s business travel causes a company to incur unexpected tax or penalty costs, those costs will typically not have been properly accrued for. As a result, there will be a negative impact on financial results.
Risk of prosecution: Failure to report income, withhold income taxes, pay taxes or adhere to immigration policies can result in criminal prosecution for the individual and officers of the company.
Employment law risk: Employees working in different jurisdictions without the associated control and visibility from the corporate level could subject the employer to the employment law of that jurisdiction, without the employer being aware of it.
Are the risks real?
More and more often, authorities are taking action and companies are paying the price. Further, the risks extend to domestic and foreign travel, as evidenced in the examples below:
USA: US$20m assessed in under-withheld taxes, penalties and interest for domestic short-term business travelers.
UK: A company pays more than £40m in back taxes and penalties for failure to accurately report home paid income in the UK.
UK: Of 407 immigration investigations in the UK, 72% resulted in prosecution and criminal sanctions, of which 46% included jail sentences of seven to 12 months.
India: A European multinational was assessed €5m in penalties for failing to report full home paid compensation for employees assigned to work in India. Indian authorities then opened a fuller three year investigation.
China: A manufacturer was the subject of a payroll audit in China, resulting in the requirement for payment of approximately US$25m in back taxes and US$8m in penalties.
France: Social security authorities led a raid and criminal investigation on a multinational company, resulting in a US$8m assessment of back social security tax and penalties.
Germany: An enquiry into a related matter uncovered an internal control breakdown requiring a multinational company to restate previously published financial statements by €100m to correctly report employer paid tax expense.
Japan: A global financial services company had its entire foreign retirement plan retroactively disqualified for Japanese tax purposes, requiring the payment of back taxes of US$8m and US$1m in penalties.
How are companies responding?
Compliance with the law is a black and white issue. Companies must address risk issues in a more proactive manner. Multinational companies are not only assessing the risk, but are increasingly quantifying that risk. Companies are reviewing their processes, ranging from how a business unit approves business travel to how employees book travel arrangements and what activities the employees are carrying out while in the host location.
Companies are also reviewing their corporate structure, transfer pricing strategies and chargeback positions and assessing how all the different moving parts may together impact business traveler risk. The effort to broadly assess these risks can be complicated by the fact that the assessment, and any action plan to address the risk, must be cross-functional in nature.
Tax, Finance and Human Resources, and even the payroll and travel departments must be involved, some of which may have been outsourced to different vendors and some of which may reside in different geographical locations altogether.
No longer satisfied that the risk can be managed within long-established processes, many companies are either revisiting their processes or creating new ones designed to identify and manage the risks earlier in the life cycle.
Where does it go from here?
Organizations should expect continued focus by tax authorities on the short-term business traveler population, particularly as leading practices are shared and technology continues to enable a higher level of enforcement. Just as so many companies are in the early stages of addressing this topic, so are the tax authorities. In this regard, the benefits of acting sooner rather later should outweigh the costs in the long term.
Organizations are focused on how to manage the risk and minimize the costs of short-term business travelers, while tax authorities around the world are focused on how to target this population and be more efficient in collecting revenue. All organizations, even those who have addressed this issue, need to remain proactive and focused.
EY Tracer technology for smart phones helps globetrotting workers manage tax surprises
EY has released a smart phone application that helps business travelers and their employers avoid global tax traps and immigration violations. This technology helps companies to manage the increasing risks associated with employees crossing borders, the conflicts they create and, in extreme cases, keeping executives out of jail. The new app works in conjunction with EY’s existing Traveler Risk and Compliance (TRAC) service, which assists organizations in navigating the myriad of personal and corporate tax and immigration rules for more than 100 countries. Employees who download the app can use it to report their location to a central tracking system, allowing travel data to be analyzed by employers to avoid tax surprises and comply with immigration laws. The app tracks current location, home location and whether time spent abroad has been a work day, travel day or vacation day — no personal identifiable information is transmitted.
This article was first published in EY´s November 2013 Tax Policy and Controversy Quarterly Briefing.
- Jay Sternberg, Human Capital, +1 713 750 1528, firstname.lastname@example.org
- Kim Crowley, Human Capital, +1 617 585 0437, email@example.com
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