An Accidental International Mess

international-blogIt starts out simple enough: your assistant director of marketing’s wife receives an offer to work in her company’s London office for the next three years. “Wonderful,” you say, as you wonder what’s next. You don’t have to wait long.

“Can I work from the U.K.?”

Without pondering the issue sufficiently, you blurt out, “Sure.” So with passport in hand, your employee joyfully heads off on his new adventure.

It has been 18 months since that conversation. Technology has enabled the employee to continue his work seamlessly and all seems well.

But that is about to change.

Your employee emails you that he had a bicycle accident and the hospital would not accept your company insurance card. In fact, they demanded a $3,000 deposit before they would treat him. He also received a tax letter from the Revenue Department asking for payment on his prior year’s income and a letter from Immigration Services asking for a meeting at their offices. As you finish reading his email, the CFO storms into your office with a letter from HM Revenue & Customs in London informing you that you now have a “permanent establishment” in the province, and as such, corporate taxes are due!

How could this happen? The answer is actually simple, and the situation could have been avoided entirely.

Let us start with the first conversation. Global expansion has opened many opportunities for companies, and technology enables us to work from home, even if that home is in another country.  

When faced with this situation, consider the reverse scenario. Would we permit this to happen in the United States? Each country has immigration laws similar to ours. In order to work in another country, employees need a work permit and/or a work visa. A travel passport is not acceptable and could create an ethical or legal issue for your employee.

Governments are funded with tax dollars from both individuals and organizations. If a U.K. citizen works in the U.S., their income is subject to U.S. tax law and vice versa. Employees can inadvertently create a taxable entity in a foreign country through a series of actions that seem harmless. Having an office or signing contracts are just two examples. Whether intentional or not, a “permanent establishment” is a taxable entity potentially subjecting the whole organization to taxation in the foreign country.

So what should the manager have done? Investigate before committing, go to HR, and/or call MSEC. The solutions to these issues vary by country and level of organizational commitment. They can be straightforward, for example, using a Global Employment Organization (GEO), “seconding” an employee to another organization, or creating a full in-country presence. If this situation arises in your organization, call MSEC for guidance.