Global staff mobility: why teamwork is the way forward
Over the last few years, tax compliance risks related to global employee mobility have grown rapidly. Scrutiny of international postings by tax authorities has become far more prevalent and deep-reaching, with both the number and sophistication of risk-based audits increasing significantly. Tax authorities exchange more information with one another, and they view globally mobile employees as an attractive source of additional revenue in a time of growing fiscal deficits.
As a result, the incidence of penalty demands has shot up dramatically. Recently, a European company was fined close to one million euro for under-withholding tax due on the share-based remuneration of one employee on an international assignment.
The results of Ernst & Young's 2010 Global Mobility Effectiveness Survey show that many companies are aware of these tax-related risks and are taking appropriate actions. When asked for the main areas in their global mobility process where they saw compliance risks, 59% of respondents mentioned "income tax reporting and withholding," the highest percentage of all. How can companies best mitigate these increasing tax compliance risks?
Outsourcing tax and legal compliance to external providers is one of the answers. In the often complex world of global staff mobility, even big multinational companies will find it hard to keep up to date with all developments across all the countries in which they have compliance obligations. Because of that very complexity, leaving income tax issues to the international assignees themselves to resolve is a very risky option indeed, especially at a time when corporate reputations are under more scrutiny than ever.
However, outsourcing to experts is only one part of the solution. Within the company itself, the current risk environment requires close collaboration between tax, legal and HR teams. Only close collaboration between internal and external people involved will enable a company to define and implement solid processes for its global employee mobility strategy, processes that take into account all the relevant tax, legal and HR issues. Such an integrated approach by the company itself is a necessary condition for efficient cooperation with external experts.
Unfortunately, many companies do not adopt such an integrated approach. All too often, there is a clear disconnect between tax, legal and HR. In some companies, each department resembles a silo, relishing its "splendid isolation." As a result, knowledge and experience regarding global employee mobility is scattered, partial and incomplete.
For instance, according to the same Ernst & Young 2010 Global Mobility Effectiveness Survey, 57% of organisations have achieved cost savings in global mobility during the last year, but 56% said they have only rough estimates of the savings and another 35% stated that they did not know what had been saved. At a more anecdotal level, we recently asked an HR manager, responsible for global mobility at a large company, in how many countries the company had employees. The answer was 120. When we asked his counterpart from the tax department in how many countries the company had entities, the answer was 91. Both managers were clearly puzzled by the significant difference between these two numbers.
Too often, different departments ignore each other's legitimate concerns until it is too late. As HR still typically "owns" the global mobility program, examples abound where HR drafts and signs contracts for international assignments that are high risk from a tax compliance point of view. We also know examples, however, of tax and legal departments minimizing their "own" compliance risk at the expense of an increase of other risks. For example, if tax and legal "dictate" that all contracts with a group of international assignees should be exclusively with the company in the host country, this may raise exchange rate issues, social security issues and tensions between local employees and expatriates in the host countries.
The only way forward is teamwork: collaboration between tax, legal, HR and the outsourcing partner. Since thinking only of the interests of one department at a time can be engrained in an organization, there is a clear task here for top management. They must insist on the formation of interdisciplinary teams to deal with global employee mobility in an integrated and comprehensive way.
Some companies have already taken this path. They are showing in practice that working together is more fruitful for tax, legal and HR than ignoring each other. Other companies should quickly follow their example, especially now that the tax and legal compliance risks of global staff mobility are rapidly increasing.
A full copy of the Ernst & Young 2010 Global Mobility Effectiveness Survey can be downloaded at www.ey.com/GMES2010