Working away from a company office temporarily has become the norm for many employees, and this transition presents a range of tax complexities for employers. Where employees are working outside their home country, businesses, want to understand what tax developments may be coming and what to expect in order to plan effectively. With policy development and drafting of regulations some distance away, it’s necessary to consider the scale of the issue, what the objectives of policy makers are, and what outputs we could see.
The remote working landscape
Remote working has been estimated by the International Monetary Fund to result in displacement of tax revenues between countries of $40 billion annually – countries attracting remote workers may benefit by inflows of spending and tax revenues, while countries with industries more adaptable to remote working (creative industries such as technology, for example) may lose tax revenues if there is a net outflow of remote working employees.
How remote working may be regulated from a tax perspective has been unclear since initial guidance was issued in 2020, early in the COVID-19 pandemic. Now however, international organizations such as the Organization for Economic Cooperation and Development (OECD) and United Nations (U.N.) alongside country authorities (e.g. the U.K. government’s Office of Tax Simplification) are turning their attention to how to address taxation regarding remote working.
In doing so, businesses should consider the remote working questions below that policy makers are tackling to frame how key strategic areas such as organizational change, operating models, talent recruitment and retention may be impacted, and how they can plan and model future scenarios based on developments in tax rules.
- What is a remote worker?
- What are the remote working policy reviews aiming to achieve?
- What approaches might emerge to address taxing remote working?
What is a remote worker?
Defining what is meant by the term “remote worker” would seem to have a straightforward answer, yet identifying and defining the characteristics of a remote worker are, in fact, challenging. The definition will likely vary for organizations such as the OECD, U.N., and country tax authorities. In turn, this will affect how remote working policies and regulations are drafted.
The U.N.’s recent draft report suggests remote working is a temporary arrangement and the individual, “must be working in a country in which the worker’s employer or client(s) is resident or has a [Permanent Establishment] PE.” However such a broad definition captures a range of modes of mobility as shown in the below Mobility Spectrum which addresses what may fall within the scope of remote working:
While the 10 categories each require further defining, the key variables in how they differ is the intent of the travel, who the originator is for the employee being mobile, and in turn, the purpose. Those where the company instructs the mobility, its objective is in alignment to business strategy.
When an individual drives the mobility decision, the move is the preference and intention of the employee rather than a business imperative, the employer may have HR policies and procedures that allow for such cross-border working when it is not directly tied to a business need1.
Regulators and policy makers will also need to consider what future remote working arrangements may bring. Often perceived as employees physically moving from “Country A” to “Country B” and returning2 home, the continued evolution of digital collaboration and even greater digitization of work, such as within the metaverse, could pose new remote working challenges to address in the future.
What are the policy reviews solving for?
Faced with the challenge of defining remote working, policy makers also need to determine what they are attempting to solve and why. Objectives may differ for businesses and tax authorities, for developed or developing economies, for politicians and regulators, and for employees and employers. Some of the competing or conflicting factors are outlined below:
Facilitate mobility – The desire to work across borders should not be inhibited by tax complexities, compliance and cost burdens. Rather, tax rules should streamline such activity, potentially adjusting tax rules to allow for remote workers with minimal obligations and reduced or no tax obligations and risks arising for the employee and employing company. | vs. | Restrict/maintain immigration – While some developing economy countries have introduced digital nomad visas, a number of which allow employees to benefit from not being taxed. Those which do not may have robust immigration requirements for employees to work there. Facilitating mobility from a tax perspective would run counter to the physical ability of employees to work compliantly in the country. |
Attract talent via incentives – Tax incentives that benefit expatriate employees can be a factor in encouraging companies to relocate employees. For remote workers, countries that offer the ability to work in a desirable location overseas and reduce their personal tax burden may see higher inflows of workers. Countries competing for talent to stimulate growth may benefit from increased tax revenues (direct and indirect) as well as the ability to use that talent to upskill their own workforce. | vs. | Sustain tax base – For countries where remote work results in a net outflow of individuals, those who are no longer tax resident in their home country, or who are subject to tax in another country, may see a reduction in the income base on which that personal income tax is charged. With personal income tax comprising X% to Y% of tax revenues in OECD countries3 , this could have a considerable impact on government revenues in some countries. |
Increase tax revenues – Countries seeing an influx of remote working employees may take the opportunity to tax either or both the individual’s income and the company’s actual or deemed profits arising there, increasing the take from personal income tax and possibly also employment taxes. | vs. | Continue treaty mismatch – Under the majority of double-tax treaties, employees may spend up to 183 days working outside their home country without being liable to tax. Applying the existing rules to remote working employees could see increased employee mobility without incurring an individual, employer or corporate tax liability in the country in which they are temporarily working. |
Develop industries – Attracting talent through tax incentives for growth industries in a country could trigger tax competition between countries. In contrast to protective measures (see ”Bilateral status quo”), competing for specialist skills could mean reducing individual tax burdens taking tax revenues away from the country where an employee currently lives. | vs. | Prevent talent loss – To avoid losing talent and tax revenues, tax regulations may be changed to increase the scope of a country’s taxation rights. Taxation based on citizenship and permanent residence, while uncommon outside the U.S., could be expanded. Employees may be disincentivized to work in another country if any tax incentives or reduction in tax would be neutralized by protective tax regulations. |
Bilateral status quo - individuals working outside their home country who establish residency and are no longer resident in their home country could benefit from lower tax, tax incentives or no tax. Where residency is determined under a tax treaty, the current “tiebreaker” rules consider where an employee has a permanent home, where their closest personal and economic ties are, and where they live habitually. These criteria tend to allow for individuals who own a home, can afford to continue to rent a property, or who have financial investment in their home country to remain resident there and not be taxable in the country they are working. | vs. | Taxation equality (residency) – changes to tax treaty models or rules could change the criteria and ordering or tiebreaker criteria, making residency in their home country “stickier” across all employee demographics. Employees who do not own a home or do not have financial ties to their home country could find it easier to remain a resident and taxable only in their home country and as such, not become taxable while working remotely in another country. These are often younger, less senior, and lower compensated employees. |
The draft U.N. report considers how tax regulations can “facilitate” remote working. For employers and advisers, the ability to have more seamless remote working without the associated tax risks would be a desirable outcome. However, with the conflicting priorities of the various stakeholders in remote work, any output of multilateral or bilateral efforts is likely to be more reflective of the tension among the differing priorities.
Approaches to address remote working taxation
Though remote working is already well established, how tax authorities are responding to its widespread use is still at an early stage—so projecting the output of reviews and recommendations is speculative. Still, U.S. employers want to know what policies and procedure should be pursued in their long-term workforce planning and tax compliance management. Five potential approaches (albeit not necessarily aligned) can be described:
1. Transferring the tax compliance and liability burden to employers
Currently, when employees exceed the days threshold in another country or their activity gives rise to a corporate presence (a “permanent establishment” (PE) in treaty countries), they become subject to tax on income related to their work there. In some countries this confers a payroll withholding obligation on employees rather than their employer or requires they file a tax return and pay tax directly. The tax cost and administration sits with each individual, some of whom may not comply.
Alternatively, the tax burden, both compliance and cost, could be transferred from employee to employer. In the country where the employee is working, the company would assume a reporting requirement and become liable for corporate tax on an attributed amount of income. Some proposals suggest achieving this by limiting the company deduction for employment costs and as such generating higher profits subject to corporate tax. In a cross-border context, however, this will be complicated as existing tax treaties may prevent such differences in tax treatment.4 While individual taxation accounts for a much higher percentage of tax revenues across developed economies, focusing on companies may encourage increased compliance than when individuals assume the obligations.
2. Change tax treaties
Current tax treaties allow employees to spend up to 183 days in another country, and where other criteria are met, they are not subject to income tax in the other country, thereby allowing longer periods of remote working without a tax liability arising. Similarly, this should remove the requirement for a foreign employer to register and operate a payroll in that country.
To manage remote working arrangements, proposals have suggested that the days counted be workdays only rather than all days of presence. Alternatively, a new treaty article could be introduced to specifically address remote working employees to mitigate tax burden for those whose working arrangements are a personal preference rather than business-driven. Such an article would be in addition to those that focus on employees, directors, self-employed contractors, athletes and artists, and in some treaties, academics.
3. Simplifying tax compliance and increase employer reporting
A current challenge for companies whose employees trigger individual or corporate tax obligations while working remotely is the complexity and administrative burden of compliance.
For employers, the need to know where employees are working and the ability to track this for tax compliance purposes has increased in importance since the pandemic. This data may be used to report the employees working in an overseas country to tax authorities and assert where they meet treaty exemptions such that they and the company are not liable to be taxed there. A long-standing policy in the U.K. provides a template, where the more time an employee spends working there, increased information must be shared by the employer when an employee exceeds certain days of presence thresholds.5
For companies, tax developments that would mitigate the risk of creating a corporate presence, or PE, and establish simplified processes for compliance would generate greater clarity on potential tax exposure from remote workers and confidence in managing compliance.
4. Defining remote workers
The effectiveness of the aforementioned approaches will be driven by a business’s ability to accurately define remote workers, including when new or changed regulations affect how that definition applies to particular employees. This is already a complex undertaking, further complicated when considering future modes of working and changes in global workforces.
Any effort by tax regulators to define remote workers may be hampered by the potential need for employers to designate and report on those remote workers, increasing a company’s compliance burden. Similarly, there’s risk that where tax reliefs are applied to remote workers under a specific definition, this effort could be open to misinterpretation, misapplication or abuse.
5. Aligning income tax and social security
Social security accounts for over a quarter of tax revenues in OECD countries6, however the majority of current tax treaties are specifically concerned with income taxes in cross-border arrangements. Few current tax treaties address countries’ social security systems and other social taxes, which are managed in bilateral “totalization agreements”—or in the case of the European Economic Area/EU, region-wide regulations. These bilateral agreements address cases where an employee is sent to work overseas by their employer, in contrast to remote working which is at the employee’s choosing with the employer’s consent.
There are, additionally, far fewer totalization agreements in comparison to tax treaties. This can result in a lack of alignment—for example, a case where an income tax liability may not arise when an employee works remotely, but social security may become due for both an employee and employer.
This complexity can make compliance practically difficult to navigate and achieve for employers. As an alternative, incorporating social security into tax treaties could help align contributions between more countries and simplify an aspect of cross-border working.
The above policies could be the result of changes in individual country tax rules, amendments to bilateral treaties and agreements, and broader agreements such as a “multilateral instrument” to change tax treaties on a far broader scale, as seen with the efforts implementation procedures for base erosion and profit shifting and a global minimum tax rate.
Remote working in the near term
Whatever the future of remote work, practically, for businesses and their employees, its increased use has been a positive development and, consequently, one that country tax authorities and international organizations like the OECD and U.N. are committed to addressing through new tax regulations and guidance. Without having a crystal ball to identify what will change, businesses will need to stay close to developments and wait for the initial scope of some reviews until they are published in late 2023.
This article also appears in the Bloomberg Tax's Tax Management International Journal.
1 Some companies operate entirely virtually or encourage remote working as a normal working arrangement. This may be tied to the culture and organizational structure of the business. Such arrangements are not within the scope of this discussion.
2 With the notable exception of “digital nomads” who, under the various differing visa schemes countries offer that do not require sponsorship from an organization resident in that country, may spend periods of up to 1 year in different countries without having a fixed “home” country.
3 Table 1.1. Revenue Statistics: overview. Revenue Statistics 2022: The Impact of COVID-19 on OECD Tax Revenues. https://www.oecd-ilibrary.org/sites/8a691b03-en/index.html?itemId=/content/publication/8a691b03-en
4 Article 24(3) on Non-Discrimination states that, “The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favorably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.”
5 PAYE Manual, PAYE8200 – PAYE operation: international employments: EP appendix 4: criteria for short term business visitors. https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye82000
6 See OECD Revenue Statistics 2022 above
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