Business travel has become far easier in many ways, from globally enabled smartphones to ubiquitous Wi-Fi connectivity. But the taxman is also employing the latest technology, aiming to extract payments from business travelers who spend as little as one day in a government’s jurisdiction.
“It’s a change of focus,” said Marc Burrows, the UK head of audit, tax and advisory firm KPMG’s global mobility practice. “The authorities are now more focused on international business travelers and the tax and social security exposure that they might be creating by spending time in their country.”
Business travelers to New York City and New York state, for example, are now required to file state and city tax returns after spending just 14 days per year within their borders. Britain, meanwhile, routinely questions business travelers about whether they own property in the UK or have children in school there, which could make them liable to tax.
Most firms rely on existing tax treaties, which preclude double taxation, to protect their executives. But several US states, including California, don’t accept the US government’s treaties, insisting on their right to tax business travelers.
“When it comes to the sort of locations business travelers are visiting these days, if you travel to a non-treaty country there is a potential that one day is enough to cause tax liability,” Burrows said.
Anupam Singhal, co-founder of Monaeo, which sells technology that tracks executives’ movements for tax purposes, says that India, China and, most recently, Canada have become aggressive in seeking income tax payments from business travelers. Firms also could face corporate taxation if they have “permanent establishment” status in a country, so a number of firms have set up offshore subsidiaries in Ireland, which has the lowest tax rates in the European Union.
“A lot of rules haven’t changed; it’s compliance that has changed,” said Jay Sternberg, Global Human Capital leader for Technology Markets, Sales & Branding at global accounting firm Ernst & Young. “It’s probably a combination of one, this is a great way to capture revenues because governments know companies are running afoul of the law; and two, companies are being more aggressive in making sure they are in compliance.”
“IF YOU TRAVEL TO A NON-TREATY COUNTRY, THERE IS A POTENTIAL THAT ONE DAY IS ENOUGH TO CAUSE TAX LIABILITY.”MARC BURROWS
UK HEAD OF AUDIT, TAX AND ADVISORY, GLOBAL MOBILITY PRACTICE, KPMG
It’s about to get even tougher to fly under the radar. More than 100 countries have joined The Global Forum on Transparency and Exchange of Information for Tax Purposes, which is working toward automated exchange of immigration reports, hotel stays and airline reservations. Better-informed enforcement bodies will have an easier time catching non-compliant firms and individuals.
Some countries, led by Britain, also require filing of tax returns as obligations are incurred. Companies that don’t withhold taxes and social security payments from a traveling executive’s pay and file a return immediately after a trip ends could face stiff financial penalties.
THERE’S AN APP FOR THAT
Increased surveillance has created a business opportunity for app developers. Monaeo, for example, was set up by Singhal and his partner, Nishant Mittal, after they both faced tax issues in India and the US state of Massachusetts. With venture capital, they are transforming their smartphone app, which tracks an executive’s travels using cellphone data and GPS, from a tool for the very rich to a solution for companies scrambling to document their executives’ travel for tax purposes.
KPMG and global consulting firm PwC (formerly PricewaterhouseCoopers) have similar mobile solutions. So does Ernst & Young. “It’s a red or orange warning light to employees that they have spent a certain number of days in a country and they only have a few more days of travel left if they want to curtail the trip (and avoid taxes),” Sternberg said.
Singhal said a mobile app likely would not be sufficient to prove a tax case; executives may need to back up the app’s records with hotel receipts or other documentation. But Monaeo has been used as evidence in tax cases three times in New York, Singhal said. Each time, the traveling executive avoided additional tax.
The mobile apps’ tracking capabilities do raise privacy issues. Most of the apps therefore indicate only the city, not specific addresses, and require employee consent before tracing is activated. The newest systems permit employees and travel departments to upload itineraries in advance and then receive automated warnings that a visa may be required or that a tax filing will be necessary.
“The whole idea of tracking is that you no longer need to know which states and countries are aggressive,” Sternberg said. “The technology does it for you.”
Hear about taming travel-tax complexity