Authors: Shannon Lemmon, CPA, Partner, Director of International Tax Services and Jared Johnson, EA, Senior Manager
One hundred and eighty-three. In the world where individual tax meets cross-border business, the number appears to have a magic appeal. Some believe so strongly in the number that they rely on it to send an employee overseas to work and count the days that they are gone without further question. Some believe that its magical powers allow them to come to the U.S. to work without tax consequences until they have reached 183 days. In this “What Not to Do” article, we dispel the magical properties of 183 days.
The origin of the legend and where the magic ends
The 183 day rule, (the rule), has some powerful origins. In the U.S. and OECD model double tax treaties, 183 is the number of days that a person may work in another country without causing a personal tax liability. For instance, if an employee is being sent to provide a service or training to a customer in a treaty country, the rule allows for the employee to do so without paying individual income tax on the income earned in the treaty country. The U.S. and a number of other countries have a similar rule in their domestic law allowing for easier global mobility.
But, the magic ends under certain circumstances, like:
- Working for a related party.
One common mistake is relying on the rule when the individual will be doing work for, or on behalf of, a related party located in the foreign country in which they will be working. Reading the model treaty more closely you will find that in order for the rule to apply, the cost of the services may not be borne by a related party located in the foreign country. Under transfer pricing principles adopted by most of the world, providing services to, or on behalf of, a related party will require remuneration by the related party and thus the cost is borne by the related party. Therefore, the rule will not apply in the related party context.
- Applying the rule to corporate taxes.
Without a full understanding of its origin, many companies try to apply the rule to corporate taxes. They mistakenly believe they don’t need to worry about whether the work performed by the employee will create a taxable presence for the company until they have reached 183 days in the country. On the contrary, the determination is made by applying either local law or through the permanent establishment and/or business profits articles of a tax treaty. This analysis is very fact dependent and should be undertaken at the outset of a project.
- Minding local compliance.
When the rule does apply, many companies and individuals falsely believe there is no filing requirement or withholding in the country where work is being performed. Although sometimes the case, this is more the exception than the rule. Two examples of this are in Canada and the U.S. For instance, Canada requires the non-resident employer to withhold on wages attributable to services performed in Canada. The employee will need to obtain a Canadian tax identification number and file a Canadian tax return to retrieve a refund of withholding. The non-resident employer will also need to obtain a tax identification number and file withholding tax returns. In some instances, a waiver may be requested to avoid withholding but it must be obtained prior to work being performed. In the U.S., the withholding is not required, however, an individual is required to obtain a tax identification number and file a treaty-based tax return to properly evoke the exemption. Failure to withhold or file in either jurisdiction can result in significant penalties and disallowance of the rule.
- Self-employment income.
Entrepreneurs often provide services in their own company’s name thus creating self-employment (SE) income in a foreign country. Unfortunately, SE income is not covered under the treaty article that provides for the 183 day exemption and is typically not covered in domestic law either. Therefore, whether the income is taxable for the entrepreneur will be determined based on the permanent establishment, business profit and/or independent personal services articles of the treaty or domestic law. Both are typically based on facts and not on number of days.
- Counting days.
So if the magic happens and the rule applies, you still need to mind your Ps and Qs. Each treaty and domestic law prescribes how days are counted and when the counting starts and stops. For example, some are based on the calendar year and some on a rolling 365 day year. A travel calendar should be kept and closely monitored by the employer and employee, counting the days on an aggregate basis.
- Social taxes.
Don’t forget about social taxes such as the U.S. social security program. The rule may not apply to exempt social tax obligations and will need to be confirmed on a country by country basis and whether a totalization agreement applies.
Although there remains importance to the 183 Day Rule, there is also some myth behind its impact. Working with international tax professionals before, during and after entering the global market is important to reduce tax liability and ensure compliance.
About the Authors
Shannon Lemmon, CPA, Partner Director of International Tax at Eide Bailly LLP, has more than 15 years of public accounting experience and a diverse background in both the consultative and compliance service areas of international tax. slemmon@eidebailly.com, 303.459, 6750
Jared Johnson, EA, Senior Manager, has more than 10 years professional experience with helping individuals and business with global mobility services. Jared.Johnson@eidebailly.com, 801.456.5452
About Eide Bailly’s International Tax Services
Our international tax professionals, along with trusted advisors from our HLB International network can advise you about relevant international tax considerations, both before and after you enter a new market, and can provide you the effective guidance you and your business deserve. Visit www.eidebailly.com/InternationalTaxServices to learn more. Eide Bailly is a Top 25 CPA Firm in the nation with over 1,600 talented professionals in 29 offices located in 13 states.
