15 July 2022
The move to hybrid working has seen many employers review their remote working policies in order to offer more flexible ways of working in line with competitors offering ‘work from anywhere’ policies.
Many employers are now allowing employees to work from abroad for limited durations, typically for up to 30 days whilst living in holiday accommodation during the summer, but sometimes for longer periods. However, remote working by employees away from their home country, even for short periods, can lead to unforeseen or challenging tax implications for both employers and employees. Moreover, the risks and implications of remote working arrangements can vary across different home and host jurisdictions.
The main tax and related issues to consider for short-term cross-border working arrangements are as follows.
- Double tax treaties – a relevant double tax treaty between the home and host countries may exempt employee income from taxation in the host country, subject to meeting the relevant treaty and local conditions. It should be noted that, whilst the UK has an extensive network of double tax treaties, there are a number of popular holiday destinations that do not have treaties with the UK that address cross-border working arrangements, meaning in particular that, depending on the local rules in the host jurisdiction, UK-based employees working for even just one day there could incur a tax liability in that country.
- Payroll operation – there may be a requirement to register and operate a shadow payroll in the host country in addition to operating the home country payroll. This may give rise to potential cash flow difficulties, where taxes are required to be withheld in both countries at the same time before a foreign tax credit claim is made in the home country at a later date, as well as the administrative burden. Consideration should therefore be given to ways of mitigating the impact of double taxation.
- Social security – generally social security contributions are payable in the country where work activities are undertaken. However, there are several international social security agreements in place (the UK has fewer than 20), through which employees may remain within their home country’s social security contributions system for a specified period of time without the need to account for local contributions in the host territory. Where there is no reciprocal agreement between the two countries, social security contributions will usually continue to be payable in the home country for the first 52 weeks, but may also be due in the host country from the first day of arrival.
- Permanent establishment (PE) – the risk that an employee’s presence in their host country constitutes a taxable presence (ie a PE) of the employer in that country largely depends on the nature and duration of the duties that the individual carries out there, although it should be noted that many jurisdictions are increasingly interpreting their local definition of what constitutes a PE in a way that includes many more activities, including some performed by home workers. Where a PE is found to exist, it may lead to local company law and tax registration requirements for the employer entity in the employee’s host country, as well as corporate income tax and VAT implications for the employer in both the host and home countries. It may also trigger a requirement for the employer to register in the host country for payroll purposes and operate both tax and social security withholdings.
- Employee tax obligations - there are additional tax considerations from the employee’s perspective, including potential host country registration for tax and tax return filing requirements and the possible need to claim relief from double taxation in the home jurisdiction. Even where an exemption from income tax applies under the terms of a relevant double taxation treaty, in some countries it is necessary to file an income tax return in order to claim the exemption.
- Other considerations - it is also essential to ensure that individuals have the right to work in the host country from an immigration perspective. For example, as with foreign workers coming to the UK, although UK citizens can travel freely (subject to certain restrictions) in the European Union (EU) since the UK’s withdrawal from the EU, they may need a work permit and be subject to additional visa requirements under the host country’s immigration rules.
- Local labour laws - consideration should be given to all such local legislation, including whether contract addendums are required to meet the requirements. There may also be an obligation for the employer to enrol the employee into a local pension scheme or provide medical insurance for the employee whilst in the host country.
- Data protection considerations and IT policies – where employees work in different jurisdictions, it is important for employers to understand where they are working to ensure that they do not breach data protection regulations or put their business data at risk. An example of this would be a UK or EU employee who processes personal data working outside of the UK or EU without adequate protections or safeguards in place. Restrictions on the use of IT equipment on public wi-fi systems etc should also therefore be considered.
As the world continues to open up after the coronavirus restrictions, creating possibilities for cross border flexible working, it is important for employers to balance requests for flexibility with the potential compliance and regulatory obligations identified above. At the very least, employers need to ensure that they consider these factors before accepting an employee request to work remotely, even for a short period of time.
For more information, please get in touch with David Williams-Richardson or your usual RSM contact.