Virtually Overseas

JONATHAN LACEY ACA, ATII and NICHOLAS YASSUKOVICH explain the concept and tax consequences of international virtual assignments.
However overused the term 'globalisation' is, it is responsible for the advent of a new kind of expatriate assignment, which we refer to as the virtual international assignment. Like all new employment models, it has employee, corporation and indirect tax implications.
A typical virtual assignee is assigned to manage a project or work in a group based in a country other than the one where the individual lives and has his normal work base. This is different from a remote manager who has management duties over a region. Virtual assignees are typically at mid-management level, are given a specific set of objectives in the host location and a pre-determined period in which to achieve them. However, unlike normal expatriates, the assignee remains living in and attending a workplace in his home country. The work he performs in his home country is in respect of the work going on in the host location and this is supplemented by frequent business travel to the host location. Typically this is between one and two weeks every month.
This type of assignment requires us to consider the normal tax issues for expatriates in subtly different ways.
General principles
International virtual assignments raise a number of special tax issues, which generally centre on employee income tax, but also involve considerable corporation tax and VAT planning/compliance. For the traditional assignment, the focus is on properly administering the usually inevitable host country tax liability, and minimising it through effective planning techniques. For the virtual assignment, the focus is different. Helping the assignee avoid a tax liability in the host country, and minimising any incremental home country employee tax are key. This sounds simple enough, but the standard techniques needed to avoid a host country tax liability may clash with the objectives of corporation tax management. This is typically seeking to ensure that over an extended period of time and across multiple taxing jurisdictions, an employee's costs are correctly deducted for tax purposes.
Understanding this dichotomy requires knowledge of bilateral tax treaties. Most home/host country combinations involve a tax treaty between the two countries. Frequently, such a treaty will allow an employee residing in one country to visit and work in the other country for up to 183 days in any 365-day period without incurring a tax liability in that other country. This ground rule is the very foundation on which tax managers stand when they advise tactics for the international virtual assignment. However, many tax authorities insist that in order for the 183-day exemption to be awarded, the costs of the employee must not 'be borne by a fixed base or a permanent establishment' of the home country employer in the host country. While, historically, companies with subsidiaries in the host location did not need to worry (subsidiaries are not a permanent establishment or fixed base of their parent company), today the 'economic employer' concept is being used increasingly to deny the exemption whenever costs are recharged to the host country subsidiary. In countries that adopt this approach, the home country entity must bear the costs to obtain income tax relief under the treaty. To further complicate matters, each country has a tendency to interpret these rules and the economic employer concept in its own way.
Also, as mentioned, any attempt to prevent the employee's costs from being borne by the host location company may clash with the corporation tax objectives. Transfer pricing legislation typically mandates that where an employee is providing a service for an entity in one country, the costs are borne in that country. This usually necessitates a transfer of costs to that entity in the inter-company books and such transfers must be at arm's length and so may require some form of mark-up. The overseas company benefiting from the service may typically claim a deduction for the cost of the employee in its corporate tax computation including the costs of the mark-up paid to the home country employer. Given the treaty requirements discussed above, this can, in some countries, deny the exemption from personal income tax for the employee afforded by the double tax treaty.
Not surprisingly, every set of circumstances generates its own individual planning opportunities. Some broad guidelines for considering the corporate and personal tax issues that virtual working across borders follow:
 The activities of the employee in the host location may create a permanent establishment of the home company in the host country thus potentially exposing it to a host country tax liability. They may also create a permanent establishment of the host company in the home country.
 Different rules sometimes apply between transfer pricing and employee income tax. The former is required whenever the employee works for the host country irrespective of the employee's actual whereabouts. For the latter, the tax charge is mostly tied to where the employee sits while he works, although it is also important to establish the identity of the employing entity for which he works.
 If the employee's activities on an international virtual assignment require a cost recharge, it is necessary to calculate that recharge amount and formulas can sometimes be found that will minimise employee income tax exposure by reference to host country tax authority practices.
 Many countries have special tax relief for travel and subsistence costs associated with short-term business trips. Structuring the assignment such that these rules can be applied over a long period of time to a series of trips is key to minimising the incremental home country tax cost of the assignment and any host country charge where treaty exemption has been denied.
 Where income tax is payable in both locations, foreign tax credits must be managed to minimise the cost of poor cash flow.
Implications in the United Kingdom
Travel and subsistence
The changes to the employee taxation of travel and subsistence in April 1998 are integral to the reduction in the tax charge arising from a virtual assignment both inbound to and outbound from the United Kingdom. Some points to note in this area are as follows.
Travel costs
Tax relief for travel and subsistence costs is available where they are incurred in respect of attendance at a temporary workplace. Such a workplace is defined as one where attendance is not expected to last longer than 24 months. For a virtual assignment that is not properly documented or planned, each trip to the host location will typically be seen as a separate trip for these purposes. But if, for the sake of sound human resource practices, the expected duration of the assignment is set out properly before it commences, each host trip will be seen as part of a longer period of attendance at that workplace equal to the expected duration of the assignment. If the period is longer than 24 months, tax relief may still be due if the attendance at the host location is less than 40 per cent of the employee's total working time (see Inland Revenue booklet 490 at paragraph 3.12).
The sixty-day test
On a virtual assignment, the assignee's family stays at home while the assignee travels abroad. Sometimes the temptation will be to break the monotony of endless business trips to the host location by flying out to the host location with the spouse and family. However, unless the trip passes the sixty-day test, tax relief will not be due if the employer bears the family-related costs of this trip. For outbound assignments (where the employee is typically domiciled in the United Kingdom) the sixty-day test requires the assignee to be absent from the United Kingdom for a continuous sixty-day period (section 194(2), Taxes Act 1988). For the inbound assignee not domiciled in the United Kingdom, the assignee has to spend sixty continuous days in the United Kingdom. (The Revenue has historically allowed for some minor relaxation in the strict letter of the law as it applies to inbounds – see section 195(6).)
Avoiding double taxation
For inbound assignees, the Revenue has, since 1995, adopted an economic employer approach to interpreting dependent services articles in double taxation treaties. This treats the host country entity as the employer of the assignee for the purposes of the treaty, thereby denying income tax relief in the host country even if the travel pattern of the employee would otherwise allow it. For short trips to the United Kingdom, there is plenty of opportunity to argue that the economic employer concept is inapplicable, because the assignee has not had the time to be integrated into the United Kingdom entity.
However, this argument may not hold for a true virtual assignment where the employee is directing or participating directly in host entity operations for an extended period of time, albeit over a number of short business trips. Furthermore, the assignee is likely to fall under section 203C requiring that pay-as-you-earn be operated on emoluments usually still being paid by the home entity. In these circumstances, as with many traditional expatriates, application for a ruling under section 203D to have pay-as-you-earn applied to only Case II emoluments can improve cash flow costs.
For outbound assignees where there is a host country tax liability combined with a continuing liability to tax in the United Kingdom, a credit for the foreign tax paid will be available on the United Kingdom return either under a double taxation treaty or unilaterally under section 790. Pay-as-you-earn regulations give the Revenue powers to operate hybrid pay-as-you-earn schemes to account for this foreign tax credit at source (paragraph 102 of Statutory Instrument 1993 No 744). Unfortunately the Revenue uses them sparingly and usually only allows foreign tax credit relief at source against pay-as-you-earn if the foreign tax is, by law, deducted at source and also borne by the employee. This latter requirement will rarely be the case for a virtual assignee, who will remain on a home based remuneration package that typically requires the company to pay the foreign tax liability.
Social security
Liability to National Insurance will frequently be governed by a bilateral or multilateral totalisation agreement that the United Kingdom shares with the other jurisdiction in an assignment. Where this is not the case, the 52-week rule will apply giving the outbound assignee a continuing Class 1 National Insurance liability (primary and secondary) for only the first 52 weeks of the period abroad, and an exemption during the first 52 weeks in the United Kingdom for the inbound assignee. For traditional assignments, the Revenue has always argued that the 52-week period for an inbound assignee could not be said to restart whenever the assignee went abroad for a business trip. Whether the Revenue will appreciate the subtle but important difference between traditional assignments and virtual assignments, and recognise that each business trip to the United Kingdom should start a new 52-week period has, to our knowledge, not been tested. A powerful argument for this position is that a virtual assignee will rarely be considered to 'reside' in the United Kingdom if he spends his time here staying in hotels.
Corporation tax
The key United Kingdom corporate tax issues regarding international virtual assignments are:
 whether or not a taxable presence of the home entity arises in the host country;
 obtaining tax relief for the costs of the assignee; and
 transfer pricing considerations.
Inbound assignees
An overseas company which does not have a subsidiary in the United Kingdom will not, under section 11, be within the charge to United Kingdom tax, unless it carries on a trade within the United Kingdom through a branch or agency. In ascertaining whether or not a trade is being carried on, it is necessary to draw a distinction between 'trading within' and 'trading with' the United Kingdom. There is no statutory definition of 'trading within' and therefore it is necessary to refer to the significant body of reasonably old case law that exists in relation to this issue.
If a non-United Kingdom resident company is a resident of a country with which the United Kingdom has a double taxation treaty, then the provisions of the treaty as well as United Kingdom domestic legislation have to be considered before it can be decided if there is an exposure to United Kingdom tax. Under the Organisation for Economic Co-operation and Development model treaty, a non-United Kingdom resident will only be subject to tax in the United Kingdom if it is trading in the United Kingdom through a permanent establishment. Essentially, a permanent establishment requires either:
 a fixed place of business through which the business of an enterprise is wholly or partly carried on; or
 a dependent agent who has, and habitually exercises an authority to conclude, contracts in the name of the non-resident.
In the context of virtual assignments, an assignee who visits the United Kingdom periodically, working from hotels rather than an office while in the United Kingdom, is unlikely to create a permanent establishment of the overseas company unless he habitually concludes contracts in the United Kingdom.
Outbound assignees
The corporate tax issues in respect of outbound assignees are very similar to those for inbound assignees. Whether a taxable presence of the United Kingdom company is created in the host location will depend on domestic legislation of the host country, together with the terms of the tax treaty between the United Kingdom and the host country.
VAT issues
United Kingdom
Assuming that the home entity is a United Kingdom business, does United Kingdom VAT need to be added to charges for the assignment?
There are several possible classifications for the services provided, and these depend on the precise arrangements. The typical assignment would probably be characterised as either 'provision of staff' or 'consultancy services' and treated as outside the scope of United Kingdom VAT, so that no United Kingdom VAT is charged.
Foreign VAT
On receipt of a charge for services, the host entity may be required to self-account for local VAT under a 'reverse charge' or similar mechanism. This local VAT should generally only become a cost where the host entity is restricted from full VAT recovery.
The fact that the assignee may spend time in the host country will not generally give to the home entity a liability to register for VAT in the host country. However, this depends on the precise activities carried out, for example providing training, installing or assembling equipment and 'commission' type arrangements can present complex VAT issues in the host country.
On the increase
Virtual assignments are still rare but they are made possible with the growth in technology and so can be expected to increase in the coming years. It is said that technology brings us closer together, but in this instance as in many others technology can also keep us apart.
Nicholas Yassukovich and Jonathan Lacey are managers in Andersen's Bristol office. They are indebted to Phil Simmons for his help with the VAT issues. The views they express are their own and not necessarily those of their firm.

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