Graham McKechnie: Don't ignore tax when going global

Many small businesses harbour dreams and ambitions of expanding internationally.

Graham McKechnie, global tax director at activpayroll

Whilst the entrepreneurial spirit should be encouraged, it is critical that companies looking to “go global” fully understand all of the employment tax implications, obligations and responsibilities that may exist in the overseas locations into which they are looking to expand.

Here are some of the key items to consider before committing to any international growth plans:

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Overseas legal structure: Seek guidance, knowledge and advice on the different types of employment/legal structures available in the overseas territory to ensure that any legal entity established in the overseas jurisdiction is the most efficient, effective and appropriate structure for your business.

Depending on the nature of your business, the extent of your ambitions overseas and the employees you will hire or mobilise to an overseas location, it may even be that a formal legal entity overseas is not required and the UK entity can simply register for payroll tax purposes in the overseas location.

One example that springs to mind is a project that we recently completed for a UK-headquartered organisation looking to expand into various locations within the United States. Guidance was provided in relation to the requirement for a US entity, with our global mobility division working closely with the key stakeholders of the client to outline the immigration requirements for the UK personnel mobilising to the US. We then provided ongoing assistance with regards to the implementation and processing of a US payroll mechanism in order to ensure the appropriate US federal, state and local income tax liabilities and compliance obligations were managed effectively and efficiently.

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Immigration: Consider the work and/or residence permit/visa requirements that exist in the overseas location if you are looking to mobilise employees from the UK, or any other “foreign” jurisdiction to work in the overseas location. Applying for and obtaining the appropriate documentation allowing foreign nationals to work in an overseas location can be costly, challenging and time consuming – so care should be taken when identifying and selecting the people you want to work for you in the new location. 

Many overseas territories also place restrictions on the ratio of foreign staff to local nationals that can be employed to work for an organisation, so be prepared to consider hiring “locals” as well as mobilising foreign employees.

Employment tax: This is perhaps the most important aspect to consider when expanding internationally from a personnel perspective. Each overseas jurisdiction has its own unique income tax and/or social security legislation and regulations; therefore understanding the country specific implications and obligations in relation to the calculation, withholding, reporting and remittance of income tax and/or social security for any individual working in that location is critical in order to ensure full employment tax compliance in the overseas territory. 

Many organisations have fallen foul of foreign income tax and social security authorities as a result of failing to understand the employment tax compliance obligations whilst operating in an overseas jurisdiction.

• Graham McKechnie is global tax director at activpayroll