Welcome to the second part of our series of blogs regarding the continued interest in international remote work among employers and employees alike. Previously in the first blog, we introduced the basic concepts of international remote working, this time we will cover tax compliance challenges involved with it.
In this series, our focus is on the area of international remote working where an employee performs duties for an employer in one country while being physically located in a different country. This is a more focussed segment of the current number of people engaged in remote work, but some of what is discussed below may be applicable where employees work remotely while still being based in the same country as their employer, especially in countries where taxes and/or social security rates may vary from city to city or state/province to state/province. Likewise, this does not cover scenarios where a company may use the services of a person other than an employee (e.g. a contractor) who is based outside of the country where the company who is benefitting from the person’s services is located.
It is undeniable that the ability to work from a different location is highly appealing to many: for example, the person who wishes to escape the repressive humidity in Hong Kong each summer and work from Vancouver or their counterpart who wishes to escape cold, dark and damp winters in Hamburg and work from a beach in Thailand. However, this arrangement can pose many questions associated with compliance. Although the concept of international remote working is not new, its use grew during the Covid-19 pandemic. Many countries, particularly those where tourism contributes much to the economy, have sought to attract digital nomads as tourism revenues dried up during the pandemic. Many of these countries adopted a liberal approach to immigration and income taxes and few are yet to roll them back. Likewise, some organisations embraced the concept of International Remote Work at the onset of the pandemic. However, companies with the most liberal policies on the matter in the early days of the pandemic have since tightened their policies, curtailing the total time that employees can work remotely to a limited number of days per annum or to specific roles. Indeed, our Global Mobility Now survey, conducted in 2022, showed that the most common maximum duration permitted is up to 30 days per annum (cited by 26% of respondents). This highlights the fact that while they may be appealing to employees, they create risks for employers which can outweigh the benefit to the company of providing employees with flexibility in terms of the location from which they conduct their work. We will explore some of these risks here.
Ensuring compliance with income tax obligations is a challenge commonly cited by people managing employee mobility. In our 2022 Expatriate Salary Management Survey, approximately 40% of participants rated compliance with income tax requirements as a significant challenge for them. This proportion rose to 80% in the case of companies managing international remote working arrangements when we asked a similar question as part of our Global Mobility Now survey. Ensuring that the assignee is compliant with income tax liabilities is relatively straightforward when managing a long-term assignment: the employee is usually located in the same location where their income is sourced and so they are liable to pay taxes on their assignment income exclusively in the host location. There may be added complexity at the start and end of the assignment if the employee remains tax resident in either the home or host location due to the assignment starting or ending midway through the fiscal year. There may also be cases where the employee remains liable to pay taxes in their home location on their assignment income for the entirety of the assignment (the most commonly cited example is American citizens who are required to pay federal taxes in USA on income sourced from overseas). However, notwithstanding the above, the issue of where the employee is required to pay taxes on their income is relatively straightforward.
However, in the case of international remote work, there will more often be a challenge associated with the fact that the employee’s source of income may be from services performed for a company in location A, while the employee is resident in location B. This may be complicated further by the question of where the company responsible for paying the employee is based. This will likely give rise to concerns that the employee’s income tax liability may increase significantly during an assignment. Take the example of an employee working for a company in Japan who requests to work from Thailand. In principle, as the employee’s income is derived from a role they are performing for the benefit of the Japan-based entity, that person's employment income should be subject to taxes in Japan. However, as the employee is resident in Thailand, he/she may become liable to pay tax in Thailand on the same income, presenting the employee with a requirement to pay taxes in Japan and Thailand on the same income. HR will therefore need to allocate resources to finding out the answer to this question.
Many employers may take the stance that if the employee wishes to work from a different country, any consequences in terms of additional tax liability should be their own responsibility. In principle, this would be a fair assessment. However, in the interests of retaining crucial employees, a responsible HR function will seek to make the employee aware of the potential implications of choosing to work elsewhere from a tax liability perspective. This allows employees to make an informed decision, rather than pursuing a desire to work elsewhere and then deciding to leave the company and work for a local employer in their new location of residence after discovering their tax liability has increased significantly.
Corporate tax liability
Corporate tax liability is an important consideration when it comes to international remote work arrangements. Companies can’t simply excuse themselves of any responsibility for additional taxes associated with this type of arrangement as there is the issue of corporate tax liability and the risk associated with a Permanent Establishment through remote working. Countries classify the concept of a Permanent Establishment differently, but the general concept means if a company is based in Country A, but also has operations in Country B, it may be liable to pay taxes on income derived from Country A’s operations in Country B and/or vice versa owing to the company’s ownership structure. The risk in the context of international remote working is that some jurisdictions may treat an employee’s presence in their country as sufficient to create a Permanent Establishment which means that not only is the employee liable to pay taxes on their income in that location, but the company may also be liable to pay corporate taxes on the same income in that location, creating potentially an even greater cost to the company.
This explains why companies reported tax compliance as the main challenge associated with international remote work. Therefore, companies limit the amount of time that people can spend performing work internationally or they will only allow the employee to perform such duties in countries where the company has a physical presence, as the entity there can act as the employer (although this can also create extra administrative costs for the company owing to the need to set up the employee in the host location, cross charging the employee’s expenses and the additional service fees that may need to be charged). In countries where the company does not have an entity, the option of using an Employer of Record has emerged as a possible solution. However, there are also limitations with this arrangement. These include the need to limit the roles and tasks that the employee can perform (for example, the employee can’t generally act as a representative of their employer or sign agreements on behalf of their employing entity).
Social security contributions also pose challenges in international remote working. While some jurisdictions allow a citizen to maintain contributions to some or all of the elements of their social security scheme even when that person is not employed in that country (an example being Singapore where a Singapore citizen or permanent resident based outside of Singapore can continue to make voluntary contributions to the country’s Central Provident Fund even when not employed by a Singapore company), some countries link a person’s eligibility to make social security contributions to their employment status or residence status. This may mean, for example, that a worker who chooses to remain in the UK while working for a company in USA may not be able to pay contributions to the UK’s National Insurance scheme in full, adversely impacting the value of their government-provided pension when they reach retirement age. Similarly, a person who has a contract to work for a company in Thailand but performs their role while being physically present in Australia may find that they are obliged to make contributions to the Thai social security scheme but the company is not able to make contributions to an Australian superannuation scheme on the part of the employee. Therefore, whereas in the case of taxes, the risk to both parties (the employee and employer) is requirement to pay taxes on income in multiple jurisdictions, the risk to an employee in this case may be the fact that the employee may not be eligible to make contributions to a social security scheme from which they may ultimately benefit.
These complexities highlight that while both employers and employees may see the advantages of flexibility in remote working, the extent to which international remote work is embraced will depend on the ability to manage these issues. From an employer’s perspective, significant management resources, internally and externally, will be required in order to assess risk and ensure compliance. For truly multinational organisations, compliance risks can likely be reduced by employing the international remote worker via the organisation’s business entity in the country where the employee chooses to be based. However, this may not always be consequence-free. For example, an employee choosing to work from Vietnam for a short period of time may not wish to contribute to the Vietnamese social security scheme that they would be obliged to if employed by the company’s Vietnamese entity during their stay. Additionally, there may be extra costs and liabilities for the company in having a person nominally employed in Vietnam but providing a service for the entity based elsewhere.
As we have previously predicted, governments and organisations such as the Organisation for Economic Co-operation and Development (OECD) are beginning to attempt to clarify the rules and recommendations around how to define the location of work in response to the recent rise in this type of working. The stated aim of the forthcoming OECD guidelines is to help countries ensure they are not missing out on key revenue but also that companies can continue to offer the opportunity to employees to work for short periods overseas.
Our next blog will look into other compliance issues such as the right to work, labour laws, payroll, healthcare and insurance among others but it is clear from the above that for any company wishing to embrace international remote working, compliance will be critical in ensuring that they can be a beneficial addition to an organisation’s mobility framework.
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Have a look at the other blog posts of the series to refresh your knowledge on international remote working: