International remote working – a new tax risk?

13 August 2020

As lockdowns were announced globally due to the coronavirus outbreak, many employers allowed employees to work remotely from their international home or holiday home. As the pandemic has progressed, these arrangements have continued and, in many cases, employees are asking for these to become more permanent arrangements. Does working anywhere globally really come without additional considerations and costs?

The issue

Where an individual engaged under an employment contract in one country works in another country, it can cause a number of tax, social security and regulatory issues for both the individual and the employer. This isn’t a new issue, but the coronavirus has created many more instances of this scenario. Many tax authorities around the world have issued coronavirus related relaxations around these points, but these are limited both in terms of time and application. 

Even if such an issue hasn’t arisen to date, the realisation by employees that they can work from home/work remotely anywhere in the world has meant many employers have seen requests for longer term arrangements to be agreed. How can employees and employers manage the tax and other risks around this?

Employees

For an individual, working in another country can trigger local tax residence rules, which might mean the individual is liable for local income taxes and need to file tax returns in that jurisdiction. Where the individual is a returning national, that will increase the likelihood of this. Many countries have COVID-19 specific tax residency relaxations, but these should be reviewed carefully for each individual’s circumstances.

Temporary arrangements of less than 183 days (and where no permanent establishment (PE) of the employing entity is present) can usually be exempted from local income taxes using a tax treaty exemption. Often though, this exemption needs to be claimed on a tax return and, for example, in the US the exemption is not recognised in all states.

Employers

An employee of an entity in one country working in another country is capable of creating a PE (ie a taxable presence) of the employing entity in that other country in certain circumstances. There are often resulting reporting requirements in relation to business registration, payroll, social security and taxes on attributable local profits of the employing entity, as well as potential complications when working visas are required.

The OECD suggests that this outcome would be unlikely for temporary arrangements in response to the coronavirus, but as the pandemic progresses or such arrangements are made more permanent, the likelihood of a PE may increase. A PE is more likely to be present where sales teams negotiate and conclude contracts in the territory in which the individual is temporarily resident, and/or where the individual is a senior executive.

Even if there is no PE, many countries have other obligations which will apply. Payroll reporting is often required, as are related registrations, for example superannuation in Australia.

Looking ahead

International remote and homeworking arrangements are likely to be an ongoing workforce consideration. COVID-19 has meant that many businesses and their employees now realise that this is possible and, in addition, flexible arrangements might help to open up the global talent pool. The key is to be aware of all implications before agreeing to such an arrangement and, if the arrangements are likely to be commonplace, to have a clear policy to help tax and HR teams to manage this.

For more information please get in touch with Joanne Webber.