Tax Considerations for Employment Lawyers

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact

Okay, let’s admit it—plenty of us had absolutely no interest whatsoever in becoming tax specialists when we started law school. And so here we are, all these years later, serving as employment counsel to our corporate clients. But as many of you in-house attorneys know, your corporate “clients” consider you responsible for every possible legal aspect of the employment relationship between your company and its thousands of employees. So when an issue comes up and you—“Legal”—get brought in, the last thing your management team will suffer is, “that’s not my area of expertise.” We get that. Multiple disciplines get triggered when an issue hits your desk. And when that happens, the last thing you want to do is call multiple outside experts just to get a sense of the basics. That’s where these tax considerations can help.

Example? You find out an employee has been hired to work from home . . . from another country. There are so many good business drivers for this—the employee is a key person with special expertise who happens to live in Denmark; we’re exploring the market in Brazil; we’re sending someone to help manage our partners in Canada. So now it’s your job to make sure the company takes care of all the compliance issues. You know how to assess the employment law issues here—find out about the statutory rights and benefits, work through the extent to which you’re ready to subject your organization to those obligations, figure out whether there are alternatives, etc. But on the tax side, what’s the deal?

Even though we’re not tax lawyers, you’re not tax lawyers, and none of us ever envisioned being tax lawyers, we thought we’d give you a little crib sheet starting you out with some basics to help you issue-spot this situation. This will help you know when to call in the experts. It also will help you to partner up with your finance and tax team, so they can help you deal with issues other than the pure employment law issues in your wheelhouse.

Bilateral Tax Treaties 101

A bilateral tax treaty (sometimes called an “income tax treaty” or just a “tax treaty”) is a tax agreement between two countries that may apply when companies from one country do business in the other. The United States has entered into these types of treaties with nearly 70 countries.  A primary goal is to avoid “double taxation”—having to pay taxes twice on the same income.

From an HR perspective, why should I care about bilateral tax treaties?

Tax treaties become important when a company does business abroad via a services arrangement, like an employment relationship. Generally, if you are generating revenue and employing people in a foreign country, you can expect that country’s revenue authorities to want a piece of your revenues and to want to ensure you are contributing to its social insurance systems (although social insurance is a subject for a future post—stay tuned!). A tax treaty between your country and the other country (which we will refer to as the “host country”) will determine:

  • whether the host country can tax your company’s profits, which were generated in the host country;
  • whether the employee or independent contractor working in the host country is subject to income taxes in the host country; and
  • whether the employee/contractor and/or the company must file a tax return in the host country.

Where a company fails to comply with host-country taxation requirements, host-country tax authorities may initiate an audit or investigation, which could result in administrative burdens, back taxes and interest, and penalties. In some countries, like China, even if your company is not actually generating revenue, the Chinese revenue authorities may just “deem” a certain amount as taxable income. This is why your partners in finance and audit get so agitated.

If no bilateral tax treaty exists between the two countries, the items listed above will be determined by local law in the host country. Without a tax treaty, there is a higher risk of double taxation for both individuals and companies. Moreover, while tax treaties generally limit corporate tax liability to just the income generated in the country with which we have a treaty, without a treaty the company’s worldwide income could be subject to taxation. So it’s really important to know whether we have a tax treaty with the country where the solo employee is going to be working, in order to quantify the extent to which that country is going to claim a stake in your company’s revenues.

How do I find out whether there is a bilateral tax treaty between my country and the host country?

This is the best kept secret in town. Finding out about whether there is a tax treaty and what it says is not only easy; it’s free. The Internal Revenue Service (IRS) maintains a list of all current tax treaties to which the United States is a party with links to the full text. You can find it here.  Tax authorities in other countries keep similar lists and we are happy to help you navigate those.

How do I read a bilateral tax treaty?

Each bilateral tax treaty is different, but here are some key terms to look for:

  • Definition of “Resident”: Usually only “residents” of one of the two party-countries may benefit from the treaty. A company or individual is usually “resident” of a country when it is subject to taxation in that country because it (or he or she) lives, is domiciled, or is incorporated there. This definition becomes important where a person is a “resident” of both countries. Under the United States-China treaty, for example, the U.S. and Chinese tax authorities must determine of which country a dual resident will be deemed a “resident” for treaty purposes—and if they cannot, the person will not qualify for benefits under the treaty (see article 4 of the United States-The People’s Republic of China Income Tax Convention (effective January 1, 1987)).
  • Definition of “Permanent Establishment”: This is a big-ticket issue for your internal and external audit team. It is generally the key to whether the company is going to be subject to corporate taxation for doing business in the host country. In general, under bilateral tax treaties, the host country only taxes a foreign company’s business profits if such profits are generated by a “permanent establishment” in the host country. What is a permanent establishment? The simplest and most obvious example is a host-country subsidiary. But even if the company does not have a subsidiary in the host country, it may still be deemed to have a “permanent establishment” there. How? Although the definition of “permanent establishment” is treaty specific, here are some general patterns for which you should keep a lookout.
    • A company will probably be deemed to have a permanent establishment in the host country where an employee (or independent contractor fully devoted to the company) has the authority to enter into contracts in the host country on behalf of the company (for example, see Article 5 of the United States-Mexico Income Tax Convention (effective January 1, 1994)).
    • A place of business devoted only to storage, advertising, marketing, or purchasing on behalf of the company, is not usually considered a permanent establishment (for example, see Article 5 of the Convention Between the Government of the United States of America and the Government of the State of Israel with Respect to Taxes on Income (effective January 1, 1995)).
    • Taxation of Business Profits: Even if there is a permanent establishment under the treaty, the host country usually only taxes profits attributable to that permanent establishment.  This is important because it means that, for example, a company with a subsidiary in China can file tax returns on behalf of the subsidiary only and pay taxes only on profits that the subsidiary generated (provided that the subsidiary is independent and deals with the company at arm’s length). On the other hand, a foreign company with an independent contractor later deemed a “permanent establishment” may find itself required to file returns showing the entire company’s profits—and the amounts the host country may ultimately tax will be less clear.
    • Income Taxation of Employees and Independent Contractors: Many treaties provide that the host country taxes income only where the employee or independent contractor in question is present in the host country for 183 days or more in a 12-month period. Look for the articles in the treaty titled “Independent Personal Services” (contractors) and “Dependent Personal Services” (employees) (see, for example, articles 18 and 19 of the United States-Republic of Korea Income Tax Convention (effective January 1, 1980)).
    • Other Provisions: Treaties generally provide for taxation of income from real property, royalties, capital gains, dividends, and interest and may contain other specialized provisions.

Nothing in this post is intended to be tax advice. When dealing with specific tax matters in connection with a contractor or employee abroad, we strongly recommend consulting with attorneys and financial professionals well versed in international tax matters. The Ogletree Deakins International Practice Group can help you navigate all aspects of global mobility and can work with experienced tax professionals on your behalf. Please feel free to contact us.

Bonnie Puckett is an associate in the Atlanta and Boston offices of Ogletree Deakins.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ogletree, Deakins, Nash, Smoak & Stewart, P.C. | Attorney Advertising

Written by:

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
Contact
more
less

Ogletree, Deakins, Nash, Smoak & Stewart, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!