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 UK 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.
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.
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.
Obligations to operate payroll are often linked to whether there is a permanent establishment or other corporate entity. However, this isn’t always the case and in many countries this obligation can apply without a corporate presence and at an early stage of an individual’s working arrangement. Associated obligations, for example superannuation in Australia, can also apply without permanent establishment.
Social security is generally due in the country where the work is performed. However, it is possible to remain in home country social security coverage if the arrangement is temporary, but an application must be made to the relevant authority and monitored.
An individual 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 individual is not a national of the country, immigration obligations should also be reviewed.
There are numerous other considerations, including practicalities such as different time zones and how this will impact working. Other taxes may be impacted such as VAT and transfer pricing arrangements, not to mention health and safety considerations.
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.