7 Key Issues to Consider When Providing Services Outside the U.S.

Increasingly, even small companies are moving outside the U.S. — including the provision of services (such as consulting, tech services, project management).  Providing services outside the U.S. is the fastest growing type of export, but companies need to consider a number of aspects that make providing services in a foreign country different than providing them in your home country.

Here are 7  key issues you need to think about before sending your employees or contractors overseas:

(1)   Immigration issues – passports, visas & U.S. residency requirements

• Host country issues — visa matters in particular vary significantly from country to country, including the need for a work visa, the ease, formalities required, and length of time it takes to obtain one.  In addition, it will be important to have a system to monitor compliance with the various visa requirements (number of days/months permitted, scope of the visa, renewals, local registration requirements, etc.) placed on employees working OUS.
• U.S. immigration issues — the requirements for non-U.S. citizens (U.S. permanent residents as well as those working in the U.S. on a visa), as well as those with multiple-country citizenship can be quite complicated and will need to monitored carefully.

(2)   Triggering of local taxation of the individual worker’s income

• Working in a foreign country for more than short assignments may trigger the obligation to pay income, social security, and other local taxes, complicating the individuals’ tax returns and potentially creating double taxation in both the host country and in the U.S.  Although tax treaties exist to try to ameliorate double taxation, in some jurisdictions, the individual’s compensation would need to be increased to make them whole to the extent double taxation cannot be avoided.  In addition, companies normally provide tax assistance to individuals preparing their returns because of the additional layers of complexity, including IRS rules on the individual’s ability to deduct certain expenses.

(3)  Triggering local taxation of the U.S. legal entity employing the individuals

• Depending on the country where services are performed and the tax treaties in effect between the U.S. and this country, carrying on certain activities for more than a proscribed period of time could result in the inadvertent creation of a permanent tax establishment of the employing legal entity.  If the individuals are employed by the primary U.S. legal entity, this could potentially subject that entire entity to tax scrutiny by the foreign tax authorities, which most company auditors wish to avoid.  A good practice is to understand these triggers in each applicable country and provide guidelines to the employees and affected business leaders to proactively avoid these issues.

(4)  Understanding legal issues around the service contract

• Since the customer contracting for the services will most likely be a non-U.S. company (even if it is a subsidiary of another U.S. company), and the services will be performed in another country, aspects of the service agreement may be governed by local laws.  In some countries, even agreement that the contract will be governed by U.S./Illinois law will not prohibit the customer from taking local legal actions.  This means that the service contract template should be reviewed to address these aspects, and may well need to be reviewed by local counsel.

(5)  Ensuring & communicating medical/health coverage outside the U.S.

Benefits for OUS workers should be reviewed to ensure there is adequate coverage.  The needs of employees working for longer periods of time outside the U.S. will be different than for those making occasional trips who simply need emergency medical assistance.

(6)  U.S. export restrictions on controlled technology

1. There are several U.S. export requirements that could be triggered by the business.  Exports of technology, such as transporting laptops and software programs, will need to reviewed and a process established so that the company doesn’t inadvertently trigger U.S. export violations.

(7)  Setting up a good network of advisors to support both business and individual needs

• In general, these will be local advisors, such as local counsel and local tax advisors for the company, but thought also needs to put into a good support network for the employees working outside the U.S., for even mundane things such as traffic accidents, passport replacement, and disputes about housing or other local services.  If spouses or other family members can accompany the employees, this will create additional complexities.  For example, adequate international travel support (a true specialty among travel agency services) will be essential, as the travel headaches that are merely an annoyance to the occasional overseas traveler can quickly become a major source of employee dissatisfaction for the “road warrior.”  Finance and treasury also need to ensure the company’s T&E and financial reporting systems can easily accommodate foreign currency transactions, and that they or other advisors are able to assist employees with local banking issues (setting up a bank account outside the U.S. is a real headache these days).

Doris Nagel

Principal

Blue Sky Consulting

847 984 2816
doris.nagel@blueskyconsultingservices.com