Updated: Sep 28, 2022
Business Travel, Pre-Pandemic Times
In 2019, just before the pandemic began, many companies were heavily reliant on the ability to send employees anywhere in the world so that they could have the right person in the right place at the right time. Employees were sent for long-term assignments, short-term assignments, or frequent business trips to achieve corporate objectives. Then everything stopped.
Nearly two years later, global programs are largely still stalled while companies manage travel risks and COVID entry restrictions for their employees. That said, travel is slowly starting to come back as we learn to live in this post-pandemic world. Some of those companies who are beginning to "move" again have been preparing for this moment, building processes and policies that may have been long overdue.
Improving on Business Traveler Tracking and Reporting for Payroll Purposes
Employers have a rare opportunity to rethink and reexamine their global mobility programs and policies to make changes and improvements before business travel resumes in full again. Companies with business traveler populations require not only a safe and equitable travel policy and an immigration compliance process but also a firm understanding of the payroll and tax implications of having employees working in a country other than the one in which they are paid.
Payroll Compliance for Business Travelers
Employers should be looking at their current practice as it relates to payroll reporting and remittances in foreign jurisdictions and ensuring that this complies with local tax laws. The last thing any company wants is a target on their back from foreign tax authorities, which may impact their ability to carry on their business in that location and limit future employee travel.
One method for ensuring payroll compliance in foreign jurisdictions for business travelers is using "shadow payroll".
Understanding Home and Host Country Payroll
Each employee has a "home country", which is the place where they usually work from and, in most instances, where they regularly live. When an employee is sent to a country other than where they normally live and work, they are in a "host country", which has its own tax laws. This commonly occurs in an assignment scenario, when an employee is temporarily stationed in another work location but is expected to return to their home country after a certain amount of time.
Often, for consistency and simplicity, the employee remains on their regular home country payroll, where most of the employee's financial obligations continue. There still exists, however, in most cases, payroll reporting and remittance obligations in the host country, and this is where a shadow payroll is helpful. A shadow payroll put simply, is a parallel payroll in the host country that "shadows" the employee's actual home country payroll with modifications for host country taxation rules. This allows the company to appropriately report income and remit tax in the host country.
An Example of Shadow Payroll in Action
Let's look at a quick example. Here are some facts about a fictional company, ABC Co.
ABC Co. is a US-based company with entities in several other countries.
They need to send three US employees (the "assignees") to Canada for 2 years to help the Canadian entity with implementing a new service line that is already established in the US.
While in Canada, the assignees will help establish processes and train local employees.
The assignees will remain on their home payroll, that is, they will continue to be paid from the US company for the duration of their time spent in Canada.
Shadow Payroll in Canada
These assignees, being that they are physically working in Canada through their assignment, have an actual tax liability in Canada. Assuming no treaty positions are available, Canada has the first right to tax employment income that is physically earned there. Canada also has strict requirements for payroll, and regular remittances are required for statutory deductions.
While these assignees are paid from the US payroll (as they always have been), the US company will implement a shadow payroll in Canada, which will mirror the US payroll (although adjustments may be required to taxable income based on specific Canadian tax laws). The shadow payroll will help the US company to report taxable compensation paid to these assignees and to remit appropriate Canadian tax.
The Impact of Shadow Payroll on Employees
It is important to note that the assignees themselves do not get paid from, or even see (with the exception of a tax reporting form and tax return), the parallel shadow payroll. It is a payroll that is run in the background with the purpose of keeping the company compliant from a payroll perspective in the host country.
Often, companies aim to minimize the tax impacts of a foreign assignment on their mobile employees. Part of this is keeping the employee on their home country payroll and keeping their home pay and deductions similar to the level they would have been at pre-assignment. This is usually achievable through a combination of tax gross-ups and the withholding of hypothetical tax rather than actual tax. This is a complex balance and is one that we can discuss further in a future article. The main point is that when a shadow payroll is done correctly, the employee will not notice that it is being run at all.
When to implement a Shadow payroll
A shadow payroll should be considered when there is expected to be a payroll reporting requirement and/or an actual tax due in the host country. In some cases, there is no tax liability expected, either because there are no employment or payroll taxes in the host country, or because an income tax treaty is going to be relied upon.
When an income tax treaty applies, often there is no tax ultimately due in the host country but payroll reporting may still be required. For example, in Canada, a tax waiver can be filed with the Canada Revenue Agency to allow a company to "waive" the requirement to remit tax related to a treaty-exempt non-resident employee. However, even without that remittance requirement, the employer still needs to issue a T4 for that employee showing the income that was exempt. This is a requirement, and not doing so opens the company up to the assessment of penalties, interest, and further scrutiny from the CRA. This is an example of where a shadow payroll can still help with compliance, even when there is no actual tax due in the host country.
It must be noted shadow payroll should also only be considered for employees of the company, NOT for independent contractors, which may have their own rules in the foreign jurisdiction. It is important to get in touch with a tax advisor during the planning stages of a potential assignment to discuss whether a shadow payroll should be implemented.
Requirements for Implementing a Shadow payroll
Implementing a shadow payroll for the first time can be confusing. It requires all of the following:
A solid understanding of the payroll obligations in the host country.
Appropriate set-up of the company in the host country's tax system (this may require setting up a business number, opening a payroll account, etc.)
A payroll system or understanding of how to report and actually remit in the host country
Timely data from the home country payroll in order to reconcile, report, and remit appropriately in the host country, among other things.
At Trowbridge, our Global Mobility team has helped hundreds of companies from all over the world implement and run a shadow payroll in Canada. We also have partners in many other countries that can assist with administering a shadow payroll, no matter where you need to send your employees. We would be happy to work with you to find the right way to account for your globally mobile workforce.
Director, Global Mobility Services
TEL: 416-214-7833 Ext: 108