When an employee works in a country different to that of their ‘home’ for employment purposes, there can be a number of tax, social security and regulatory issues for both the individual and their employer. This isn’t a new issue but the coronavirus pandemic has created many more instances of this scenario, accelerating changes that may have arisen over 10 years into 10 days during late March 2020.
Even if an issue hasn’t been created to date, employees have realised they can work remotely from anywhere in the world. This has meant that many employers have seen requests for longer term arrangements to be agreed, but how can the individual and company manage the risks around this?
Turning temporary arrangements into formal policies and processes
Many countries temporarily relaxed their rules for either individual residency or corporate obligations, such as payroll and other registrations, for scenarios triggered by the coronavirus.
Employers need to be mindful that any relaxations as a result of coronavirus may not apply, where employees have elected to remain in, or specifically relocated to a different tax jurisdiction.
Many organisations also adopted their own thresholds for practical purposes to manage work anywhere arrangements, often using the 183-day rule set out in the global network of tax treaties as their basis.
But as the effects of the pandemic extend beyond the 183-day threshold and with tax potentially due from day one, organisations must properly formalise how they manage work anywhere requests.
Each organisation needs to decide on a strategy; will requests not be allowed at all, allowed on an exception only basis, or allowed for only certain types of employees or regions. The risks of such arrangements should also be balanced with positives of this flexibility and its impact on employee engagement and staff retention.
A policy and process should be put in place and communicated to the business, to ensure that an international Work Anywhere request is reviewed by the relevant individuals before approval. This will ensure that all of the tax, risk and legal implications are considered from both a risk and cost perspective, and the most appropriate arrangement put in place, which in some cases might be a local contract and local payroll if there is already a corporate entity.
What to consider when managing work anywhere arrangements
An individual working in another country can trigger residency for tax purposes, which might mean they will be liable for personal tax and need to file tax returns. This becomes even more likely if the individual is a returning national. If tax is due in the current work country and home employment country, who will pay the difference? The company or the individual?
Temporary arrangements of less than 183 days, where there is no permanent establishment, can usually be exempted from income tax using a tax treaty exemption. Often though, this needs to be claimed on a tax return and, for example in the US, this exemption is not recognised in all states.
Employees should be advised to seek their own personal tax advice locally, to ensure they remain compliant with local tax laws.
Tax and payroll
Even without a presence in the host country, the employer may have a local payroll tax withholding obligation, meaning the employer would be required to register with the local authorities and withhold foreign taxes on the employee’s earnings. In some countries, this may require a local bank account to make these payments over to the local authorities.
The longer an employee works overseas, the greater the risk they will become liable to local taxes in the host country and the greater the risk there will also be a payroll tax withholding obligation. The greatest risk will be when the employee remains overseas for more than 183 days, or their activities create a permanent establishment.
Special care should also be taken when an employee is working from a country their home country does not have a Double Tax Agreement (DTA) with, as a local tax liability may arise a lot sooner.
Permanent establishment (PE)
An employee of a company working overseas may create a corporate presence of the home employing company in the other country. This is called a permanent establishment. There are often registration and reporting requirements attached to this, for corporate, payroll and social security purposes.
As such arrangements are made more permanent, the likelihood of a permanent establishment may increase. A permanent establishment may also be more likely where sales teams negotiate and conclude contracts, and/or the individual is a senior executive.
Further detail in respect of potential PE risk can be found here.
Other taxes may be impacted such as VAT and transfer pricing arrangements.
Social security obligations for employees working overseas can be overly complicated. An employee and employer will normally be liable to social security contributions in the country in which they perform their employment duties.
However, where an employee is temporarily working overseas for their employer, it is often possible to stay in the home country social security system. This requires an application to be made either under the EEA rules or the networks of global reciprocal agreements for social security. These applications should be made to cover retrospective periods and be monitored for coverage dates. The EEA rules will be impacted by Brexit for UK working arrangements.
Where an employee permanently relocates overseas or it is not possible to remain in the home country system by making an application, a local social security liability would normally arise. In most circumstances, this would also create a social security payroll withholding obligation, even if there is no presence for payroll tax withholding.
Baked-in’ tax implications
Employment income earned equally over a set period (for example bonus payments or vesting share/RSU awards), may result in employment income continuing to be attributable to an overseas jurisdiction, even after the employee has returned to their home country.
For example, if an employee spent six months of a bonus period working overseas, half of the bonus may need to be apportioned accordingly, resulting in an additional overseas tax obligation in a subsequent year. Share/RSU vestings, that may vest over three to five years, may result in additional overseas tax obligations for the relevant vestings in the future.
An employee working in another country for a period might be covered by the employment law applicable in the country that they are working in, causing complexity in the event of any claims.
Where the employee is not a national of the country, immigration obligations should also be reviewed to ensure they have the right to work in the country.
We can help
Our specialist advisers can help you review your existing work anywhere arrangements to find out if any obligations have already been triggered. We can then advise you on structuring future arrangements, writing policies and designing processes, and handling your ongoing compliance.