When a company expands into new markets and conducts business abroad, its tax footprint also grows. Navigating a more complex tax situation requires a deep financial commitment and significant resources, which can distract the team’s focus away from growth. For example, the HR department will be required to keep pace with reporting requirements as well as statutory contributions for both the company and the employee.
Not only do tax reporting requirements vary country to country, the code within a jurisdiction is subject to continuous legislative updates over time. The Employer of Record (EOR) solution can help simplify a company’s tax footprint and reduce liabilities around the globe.
Types of tax liabilities
Before exploring how an EOR can reduce global tax liability, it’s important to know the types of taxes a company encounters when expanding abroad:
Corporate Tax: When a company establishes a legal entity abroad, it will be subject to various tax liabilities and filing requirements.
Personal Tax: If an individual spends significant time in a country while working, it may trigger tax residency. This means he or she will be liable for payroll taxes, social insurance taxes and tax filings.
Consumption Tax: When a company or workers purchase products or services abroad, they may be subject to value added tax (VAT), goods and services tax (GST) or sales tax.
Avoid risks in permanent establishment
A company can become liable for corporate taxes in another country – even if they don’t have a legal entity there. To reduce fixed costs, a company may engage a worker as an independent contractor but this approach is not without its challenges.
Pitfalls of engaging independent contractors
Engaging independent contractors increases the risk of ‘permanent establishment,’ meaning the government deems the company to be operating within the country.
Permanent establishment can be triggered by merely signing or extending any form of a contract within a country, including an engagement with an independent contractor.
Engaging independent contractors instead of employees can become increasingly complicated and expensive in the long term.
Permanent establishment can present added tax liabilities and potential legal ramifications for both the company and the worker.
An EOR helps simplify your global tax footprint
The good news is that hiring through an EOR can reduce tax liabilities and streamline administrative tasks for a company, as well as its workers.
As part of the arrangement, the EOR legally employs workers on behalf of the hiring company through its legal in-country entity. The EOR then assumes the responsibilities of administering payroll and filing taxes in the country. The expenses of taxes are passed onto the client as part of the solution service fee.
The EOR hiring model effectively protects both the company and individual by mitigating the risks of labor audits, worker misclassification, permanent establishment and tax audits.
Here’s how an employer of record reduces a company’s tax liabilities and bolsters the bottom line:
Minimizes the global tax footprint: By using an EOR, a company can reduce its tax liability in all jurisdictions except its home country. This means less time and money is spent on managing corporate and personal taxes on behalf of workers.
Mitigates risks of permanent establishment: By transitioning independent contractors into employees that work for the EOR, companies can build teams in another country without worrying about permanent establishment.
Ensures compliance: The EOR partner is responsible for maintaining compliance with local labor and tax laws. The EOR can also advise on benefits, visas, intellectual property and more.
Streamlines international payroll: All tax and filing requirements for workers are handled by the EOR, which frees the corporate HR team from having to learn another country’s tax laws.
Saves time and money: When a company’s tax footprint crosses borders, it entails more due diligence and resources. By working with an EOR to reduce tax liability, companies save time and money.
Put your global expansion journey on the fast track
Each country operates a unique framework for taxation, with business law and labor law directly impacting a company’s liability. An EOR partner with legal and HR experts – who know the “ins and outs” of hiring and managing taxation around the globe – can work with you to reduce your tax liabilities and ensure compliance with all local regulations.
By saving you time and money, a trusted EOR partner will help put your global expansion journey on the fast track.
Contact us to talk with an international HR expert and learn more about how partnering with an EOR can reduce your global tax liability.