What is international tax compliance?

International tax compliance refers to tax responsibilities businesses that hire workers in other countries must address.

Businesses that hire workers in other countries, or send employees to work overseas, have significant tax responsibilities to address. To avoid costly penalties, individual workers must also be aware of international tax compliance rules.

3 tax challenges for companies hiring overseas 

When a company hires someone who lives and works in another country, there are three tax issues to consider.

1. Corporate taxes

Hiring internationally could create an international presence or permanent establishment (PE) that subjects the company to that country’s corporate income tax and compliance laws.

2. Employer taxes

Companies may need to register with the foreign tax bureaus, calculate tax withholdings, and submit tax and social security payments. 

3. Employee taxes 

Employees may have different tax burdens and arrangements in their home country that need clarification or create additional obligations for their foreign employer. Working with a global tax compliance service can reduce the burden and ensure accuracy with varying rules while also ensuring the most favorable tax position for the organization.

Tax compliance for international employees 

Any company that employs workers in a foreign location must comply with the tax regulations of the host country. Nearly every country has a version of income tax and social program contribution rules that require employers to withhold and report income and adhere to filing requirements. Failing to comply with international tax compliance regulations can result in costly financial penalties. 

It is the responsibility of an employer hiring a global workforce to identify and comply with the tax laws of their host countries. Working with a global tax compliance and reporting provider or platform can help prevent mistakes and ensure the business and its employees contribute what they owe to their respective governments. 

Employer responsibilities for international tax compliance

Any company that hires overseas workers in any capacity becomes an international employer and is thus responsible for international tax compliance. There are two main ways companies can achieve success and avoid running afoul of the law.

Understanding employer responsibilities

Because most countries tie taxes to the work location, companies need to know whether hiring a foreign worker or workers means they now have an establishment in the country and must, therefore, adhere to local tax rules. Working with an employer of record (EOR) in the country is one way to streamline this issue.

Classifying workers correctly 

Properly classifying workers as employees or independent contractors prevents legal and financial implications later on. While classifying individuals as independent contractors has some tax advantages and eliminates the need to establish the company as an entity within the country, workers must meet strict requirements around when and how they work to qualify.

Options for managing international tax compliance 

Organizations have several options for managing global tax compliance: 

• Establish an international entity and assume the responsibilities that entails with help from international tax compliance software and experts.
• Work with an EOR to hire international workers.
• Shift the tax compliance burden to the employee.
• Hire independent contractors. 
• Work with a professional employment organization (PEO) to handle employment and tax obligations. 

Choosing Oyster to help manage international tax compliance

Alternatively, you could work with a Global Employment Platform (GEP) like Oyster to help manage international tax compliance. Oyster offers a compliant hiring and payroll solution in over 180 countries, enabling you to scale your team with privacy and security standards around the globe, including GDPR and SOC Type II. Find out more about international compliance with Oyster.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.