Few business travelers to the U.S. are aware that under U.S. domestic tax law, if a business traveler to the U.S. spends 90 days or more cumulatively in the U.S. in a calendar year for any reason (i.e. work or leisure) or his / her income allocated to his / her work days in the U.S. is at least $3,000 (even though the person is on payroll outside the U.S.), (s)he may need to file a federal income tax return.
The employer may also need to withhold federal income taxes even though the company is a non-U.S. company outside the U.S. Each state in the U.S. also has its own rules which may differ from the federal laws. Similarly, most countries in the world have similar tax laws on business travelers with different criteria triggering income reporting, tax withholding and tax payment requirements.
Income Tax Treaties
Fortunately, many jurisdictions have income tax treaties with one another to provide exemptions to business travelers and their employers from withholding taxes, filing income tax returns and paying taxes for infrequent and occasional visits if certain specific conditions are met.
However, the conditions vary from treaty to treaty. The exemption conditions in the treaty between the U.S. and Canada are different from those in the treaty between the U.S. and the Philippines. Therefore, an international business traveler needs to know the specific tax exemption requirements for each destination country.
The common factors considered for application of an income tax treaty exemption are:
- home destination countries of the business traveler
- income
- number of days in the destination country in a given period (e.g. calendar year, fiscal tax year or 12-month period)
- who bears the cost of the traveler's income
- who benefits from and controls the work performed by the traveler in the destination country
Example 1 - U.S. to the People's Republic of China
John is a U.S. tax resident and works for a U.S. based company. He traveled to China numerous times for work (in Shanghai) and sightseeing at the Great Wall (in Beijing) in 2008. He spent a total of 150 days in China in 2008. None of his compensation is charged to or paid for by an entity resident or with a permanent establishment outside of the U.S. Pursuant to the current income tax treaty between the U.S. and China, he is exempt from Chinese income taxes.
Example 2 - U.S. to Hong Kong
Same as Example 1 except that John did not travel to Shanghai and Beijing. He went to Hong Kong and spent 150 days in the city for work and sightseeing in between April 1, 2007 and March 31, 2008.
Hong Kong's tax jurisdiction is administered separately from that of China and Hong Kong does not have an income tax treaty with the U.S. Under Hong Kong domestic tax law, a foreigner who spends more than 60 days in a Hong Kong fiscal tax year (from April 1 to March 31) may be subject to Hong Kong income and tax reporting. Therefore, depending the income level and personal allowances available, John may need to file a Hong Kong tax return and pay Hong Kong taxes for Hong Kong's fiscal tax year ended March 31 2008. His employer in the U.S. may also be responsible for filing a Hong Kong employer tax return declaring his wages apportioned to his work days in Hong Kong to the Hong Kong tax authority.
Example 3 - U.S. to Canada
Same as Example 1 except the John did not travel to China. He went to Canada and spent a total of 150 days in Vancouver for business meetings and in Whistler for skiing during the course of 2008. The portion of his wages earned over the year of 2008 related to his business meeting days in Vancouver amounts to C$50,000.
Compared to the U.S.-China Income Tax Treaty, there is an additional income threshold in the current U.S.-Canada Income Tax Treaty of $10,000 in local currency. Since John's income related to his work days in Canada in 2008 exceeds C$10,000, he will likely need to file a Canadian income tax return and pay Canadian income taxes. His U.S. employer technically also has a Canadian tax withholding responsibility as well on his income earned in Canada to the Canadian tax authority.
Example 4 - U.S. to Germany
Same as Example 1 except that John did not travel to China. He went to Germany and spent a total of 150 days there for work and leisure in 2008. His work in Germany was under the direct supervision of the German subsidiary of his employer and will benefit the business of the German operation.
Although all income tax treaty requirements may be met for tax exemption purposes for a business traveler to Germany, an "economic employer" concept under German domestic tax law may render John subject to German income taxes on his wages earned while in Germany.
Trends of Income Taxation on Business Travelers
None of the above regulations are new. Many of the regulations have not, however, been enforced for many reasons such as political reasons and enforcement challenges. However, many government authorities around the world are seeking ways to increase revenues and taxes are easy targets.
Immigration authorities in some parts of the world have already begun sharing information with the corresponding tax authorities. For example, issuance of a work permit will trigger a request from the tax authority to the local entity of the employer who sponsors the work permit application to withhold local taxes from the individual.
Although the C.I.S. and the I.R.S. in the U.S. are not currently sharing information, the Government Accounting Office continues to make recommendations for such information exchange, according to an article by Maria Waiss dated December 3, 2005.
Pre-Business Travel Planning to Minimize Income Tax Exposure
In addition to acquiring the proper visas and making travel accommodations, it is important to understand the income reporting and tax payment requirements of the destination locations. Human resources and tax departments of many corporations offer and liaise tax guidance and assistance to their globally mobile employees, especially those in sales, marketing, customer support and training.
Joseph Leung - Joseph began freelance writing and working as an independent consultant in early 2009 upon returning to Vancouver, British Columbia after ...
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