What is international tax compliance?

International tax compliance refers to the legal obligations businesses face when hiring workers across borders. It encompasses everything from corporate tax responsibilities and payroll withholdings to employee tax obligations and regulatory filings; in Australia, for example, employers face numerous employment obligations, including Pay-As-You-Go (PAYG) withholding, superannuation contributions, and state payroll taxes. For companies building distributed teams, understanding these requirements isn't optional—it's essential to avoiding costly penalties and operational disruptions.

When you hire internationally, you're not just managing one set of tax rules anymore. You're navigating multiple jurisdictions, each with its own regulations, filing requirements, and enforcement practices. This guide breaks down what international tax compliance means for your business, the challenges you'll face, and practical solutions to manage it all without losing sleep.

Employer responsibilities for international tax compliance

So, what exactly are your responsibilities when you hire internationally? Simply put, any company hiring overseas workers must handle tax compliance in those countries. Here's what that means for your business.

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, workers must meet strict requirements to qualify, with authorities like the U.S. IRS using a list of twenty factors or elements to determine if enough control exists to establish an employer-employee relationship.

💡 Check out this webinar on global hiring and compliance with Oyster's HR and legal experts.

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 a permanent establishment (PE) that subjects the company to that country's corporate income tax, although a PE is often not considered to exist if a business presence is maintained for less than six months.

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 in their home country that create additional obligations for their foreign employer; for example, in South Korea, reporting requirements depend on which entity bears the costs of the remote employee. 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.

Global minimum tax compliance

Here's something new on the international tax scene: the global minimum tax. This framework, based on the Global Anti-Base Erosion (GloBE) Model Rules, ensures large multinational companies pay a minimum effective rate of tax of 15% on profits in every country where they operate.

While this mainly affects very large corporations—specifically those with consolidated group revenues of at least EUR 750 million per year—it signals where global tax enforcement is heading. Even smaller international businesses should keep this trend on their radar.

Common international tax compliance challenges

Navigating global tax compliance can feel overwhelming. Companies often face a few common hurdles when they start hiring across borders. Understanding these challenges is the first step to overcoming them.

• Permanent establishment (PE) risk: Accidentally creating a taxable presence in a foreign country, which can trigger corporate income tax obligations.

• Worker misclassification: Incorrectly classifying an employee as a contractor can lead to significant fines, back taxes, and benefit liabilities.

• Navigating different tax laws: Each country has its own unique rules for income tax, social security contributions, and payroll deductions, making manual management complex and prone to error.

• Cross-border payroll: Managing payroll withholdings, filings, and payments accurately and on time across multiple currencies and regulatory systems is a major administrative burden.

Tax compliance for international employees

Here's the bottom line: hire someone in another country, and you're now subject to that country's tax rules. Nearly every country requires employers to withhold taxes, make social contributions, and file reports on time.

The stakes are high—non-compliance leads to hefty penalties and legal headaches. That's why many companies work with specialized tax compliance providers to handle the complexity and keep everything above board.

Options for managing international tax compliance

Feeling overwhelmed by all these tax obligations? You're not alone. Here are the main ways companies handle international 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.

International tax compliance best practices

Staying compliant doesn't have to be a constant worry. By adopting a few key practices, you can build a strong foundation for managing your global tax obligations with confidence.

• Partner with local experts: Lean on in-country legal and tax professionals who have deep, up-to-date knowledge of local regulations.

• Use a centralized platform: A global employment platform can help you standardize processes, automate calculations, and maintain a single source of truth for your distributed team.

• Maintain clear documentation: Keep meticulous records of all employment contracts, payroll runs, and tax filings to ensure you're prepared for any audits.

• Conduct regular compliance checks: Proactively review your worker classifications and tax processes to catch potential issues before they become costly problems.

Streamline global tax compliance with Oyster

Alternatively, you could work with a global employment platform 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.

Managing international tax compliance doesn't have to keep you up at night. With the right approach and tools, you can hire globally with confidence while staying fully compliant.

Ready to simplify your global tax compliance? Start hiring globally with confidence, knowing that Oyster handles the complexities of international tax obligations while you focus on building your team.

FAQs

What is the difference between tax compliance and tax reporting?

Tax compliance means following the rules correctly—calculating taxes, making deductions, and adhering to local laws. Tax reporting is simply submitting that information to tax authorities through official forms.

When does international tax compliance apply to my business?

Tax compliance kicks in the moment you hire someone in another country, whether they're an employee or contractor. It's tied to where the work happens, not where your company is based.

What are the penalties for international tax non-compliance?

Penalties vary by country but typically include hefty fines, back taxes with interest, and potential legal action. Beyond the financial hit, non-compliance can damage your reputation and disrupt operations.

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.