As companies prepare to file for the upcoming tax season, businesses face uncertainty emerging from an enduring pandemic. Further, dealing with multiple jurisdictions’ changing laws, deadlines and requirements can often require a small army of specialists.
The choices made during this tax season can significantly impact future tax consequences, both domestically and internationally. Businesses must understand the intricacies of tax and compliance matters as they relate to them.
Tax challenges
A good place to start is by conducting a tax strategy health check. Where are you registered to do business? Where do you have property and/or employees? Look at various levels: city, state and federal.
On an international level, determine whether you have a tax nexus in a foreign jurisdiction. This could be based on business activities such as revenue thresholds, or having property, operations or employees.
When you have nexus in a foreign country, income taxes are only one part of the taxes you will be subject to. Usually, income taxes are paid just once a year; however, depending on revenue, certain jurisdictions may require quarterly estimated payments. Notably, payroll taxes, on the other hand, must be paid either at the time of payroll — usually at the end of the month outside the U.S., or within the next 15 to 20 days depending on the country.
Payroll taxation starts the moment you hire the first employee. Every employee is subject to tax withholding, triggering employer taxes and social charges; the combination of the two is to be paid to the government on a regular basis. It can be argued that paying these taxes in a timely manner is even more important than income taxes because missing these could spell prison time for the director of a company. Imagine not being able to go to London for business or pleasure.
Beyond payroll taxes, there are also sales and/or use tax in the U.S.; Value-Added Tax (VAT) throughout most of Europe; or Goods and Services Tax (GST) in most of Asia. In the U.S., a company can typically file for exemption of sales tax when purchasing goods as raw materials for their products. On the other hand, VAT and GST are input/output taxes and all transactions are subject to these. Although a company may have to pay tax on goods used for the business, that tax is then passed on to the consumer, so the business is recovering that charge.
The filing frequency for these taxes varies and is dependent upon the size of the company; it could be monthly for large businesses or annually for small businesses. The tax office determines the frequency of these returns.
Once you have done your health check and have determined where you need to file taxes, then you need to prepare and file your tax returns. This can be a complicated matter if you operate in a foreign country.
Compliance challenges
Tax compliance is a growing issue across the world. Every level, from local to federal, is facing challenges due to revenue shortages. Governments are enforcing tax compliance more and more, and the likelihood of being audited has exponentially increased.
Work from home no longer means people are working from their actual homes. According to a recent
Governments are starting to pick up on this pandemic-related movement and track it. The concept that states enforce, from a practical perspective, is if an employee lives in a different state for more than one pay period, they are subject to the taxation of the new state. Don’t expect them to look the other way because we are in a pandemic, but just the opposite, as they are under pressure to bolster revenue.
This can become extremely complicated as employers must register in every state where they have employees and, in turn, are responsible for their share of taxes. Hopefully, the employer was notified of the move, but this doesn’t always happen. Moving forward, employers should make it their policy for employees to report any location changes lasting longer than one pay period.
On a global scale, employees are also moving to new countries during the pandemic. All U.S. and Canadian employees are subject to double taxation in this case — paying taxes in the host country and their home country.
Adding to the complexity, if an employee moves to a country where the business does not have a legal entity, this creates massive problems for the employer. Employees could find themselves fired or converted into contractors. Otherwise, the employer must find a way to be compliant. There are real dollars and cents costs associated with this. Businesses could find themselves paying tens of thousands of dollars simply to maintain a foreign subsidiary because of one employee located there.
Preparation is key
The big question on everyone’s mind going into tax season was if it would be different this year due to the pandemic. First and foremost, companies must stay informed of dates and deadlines for filing as there may be extensions as there already have been for individual tax filing.
For payroll tax purposes, many countries are offering subsidies, so employees may have a lower withholding, and companies may be able to reduce or defer their contributions due to cash flow issues. The U.S. government has implemented the Paycheck Protection Program to offset costs. However abroad, there is nothing in place for VAT or GST, because it is passed to the consumer.
If you plan to
Reduce the likelihood of errors by preparing all documentation before filing. Make sure you understand the laws of where your people, property and operations are located as well as any changes. Finally, hire professional help early — don’t try to do it alone. The basic principles of gathering supporting data in a timely and accurate manner still apply. This is even more important this year when all governments are looking for new revenue — remember their revenue is your cost.
