Are digital nomads living in a tax-free world?

A traditional office workplace is becoming a thing of the past for individuals who are breaking with the norm and taking their virtual desks overseas. The Covid-19 pandemic and the virtual working practices emerging from it have increased people’s appetite for an overseas working location, but is swapping the spare room for a beach and a coffee for a cocktail as appealing as it sounds?

For some, managing their time to ensure that they remain non-resident under the tax laws of each individual country they visit may, on the face of it, be a means of avoiding tax altogether.

The UK statutory residence test provides a framework to determine residence for UK tax purposes, based on the number of days spent in the UK and the ties a taxpayer has with the UK when considering whether their ‘centre of interests’ is in the UK. If an individual is present in the UK more than any other country in any given tax year, this can also indicate UK residence. It is increasingly difficult for taxpayers to argue residence nowhere when the majority of domestic tax residence legislation in different jurisdictions will ask: if not here, then where?

Assuming an individual can be tax resident nowhere, does this mean that they are not subject to tax at all? Unfortunately, it is not that simple. The use of technology means that tax authorities globally are now exchanging taxpayer information to ensure that tax is generally being paid somewhere, on the basis that many taxes arise due to the geographical source of the income or gains and not just the residence of the taxpayer.

In this regard, double tax agreements can apply to ensure that a taxpayer is not subject to tax in two jurisdictions on the same income and gains. However, digital nomads may find that, if they are not tax resident anywhere, there is potentially no access to the relevant double tax agreements, and they may therefore find themselves subject to higher effective tax rates, rather than no tax at all.

Coupled with the difficulties of managing residence for tax purposes, the digital world lends itself to increased identity requirements, and the practicalities of having no fixed address may simply cause too many practical issues for such an existence to represent anything more than an extended holiday rather than a change of lifestyle for tax purposes.

So, while technology has enabled the possibility of a more globally mobile workforce, the same technology also means that tax authorities can be agile in collecting tax. Planning residence in a specific jurisdiction or joint tax residence in a couple of locations is more likely to provide certainty and a better tax outcome than a constant change of scenery.