In early 2020 the Covid-19 pandemic caught the world by surprise. What ensued has been a challenging, frightening and miserable time that has been likened to a war by many world leaders.
One positive aspect of this pandemic has been the exponential rise of remote working. The speed with which companies have adapted to this way of working has been remarkable. Technology has no doubt played the biggest role in enabling this to happen and has contributed to keeping millions of people employed and thousands of companies from going bankrupt. As the crisis gathered momentum individuals found themselves stranded in various places, with some far from their homes or country of employment. These displaced workers had very little choice but to remain where they were stranded due to lockdowns and border closures.
Fast forward a year and half, some of these individuals have continued working remotely from a country which is not their normal country of employment. This is probably due to a choice they made arising out of a desire to perhaps stay close to their families, live in their home country or achieve a better work life balance.
Employers have allowed these overseas remote working arrangements to continue in many cases because the arrangement has proved satisfactory from a productivity perspective and has meant continuity of business with minimum disruption on one hand and a content employee on the other.
These working arrangements, however, inevitably come with their own set of risks and considerations and there are a number issues that the employer should consider before agreeing to put these arrangements in place or extending anything that has already been in place during the last few months because of the pandemic.
The most common issues to think about
Even in a remote working scenario it is extremely important to ensure that the employee has the necessary permits that enable him to work from the overseas jurisdiction. It may seem very easy to obtain a visitor visa for a country, spend a few months there and log on to work remotely. However, in a lot of situations that will mean flouting the immigration rules and can have significant consequences for the individual and a risk of reputational damage for the employer in addition to potential financial implications.
Local registrations and reporting obligations:
The employer may have the obligation to register as a foreign employer for tax and/or social security purposes in the overseas jurisdiction.
Withholding tax and social security obligations:
Often the overseas jurisdiction will require the employer to run a payroll in that country to report and pay over monthly wage tax and social security contributions. Although it is possible that the individual may not ultimately have a tax liability due to the existence of a double tax treaty or limited presence in the country, the administrative obligations with regard to reporting and withholding may remain regardless. This of course leads to increased costs and an administrative burden for the employer.
Double deductions of tax:
If the employee is liable for monthly wage tax deductions in the country where they are staying and ongoing wage tax obligations continue in the normal country of work, it can pose a considerable cash flow problem for the individual. In such cases, advance planning may make it possible to take actions to ease the cash flow problems. e.g., in the UK, subject to meeting certain criteria, the employer can reach an agreement with HMRC to claim advance foreign tax credit relief via the UK payroll thereby extinguishing or reducing the UK tax liability by the amount of foreign taxes payable each month.
The social security contribution position often tends to create significant problems. Generally, contributions are payable where the individual lives and works. Therefore, in situations where the remote working arrangement is permanent, employer and employee social security contributions should be payable in the work location. However, if the remote working arrangement is temporary then the position could get tricky and would depend on the country combinations, existence of social security agreements, possibility of obtaining Certificates of Coverage etc. In a worst-case scenario, contributions could be due in both jurisdictions for a period.
Permanent Establishment Risk:
In addition to the employment related issues, there are the wider potential tax implications that the business will need to consider. The employee may inadvertently create a Permanent Establishment risk for the company in the other jurisdiction. The activities carried out by the employee may expose the company to corporate tax and sales tax (VAT) liabilities and reporting obligations in the overseas jurisdiction.
Often when somebody lives and works in a country that is different to their normal country of employment, it is the employment laws of the country of residence of the individual that becomes applicable. It may be necessary to revise employment contracts to reflect the laws of the other jurisdiction if it is anticipated that the remote working arrangement will carry on for an extended period or permanently. This will be particularly important where the laws of the other country are more favourable to the laws of the original country of employment. In the event of a dispute, termination, or dismissal the last thing an employer wants is to find that the employee is covered by laws which provide far more protection to them than expected.
Health and Safety:
The employer will continue to have to meet their obligations with respect to employee health and safety and this might become particularly tricky when they have no control over the workplace arrangements of the employee. The situation can become worse in the event of a natural disaster, political turmoil, civil unrest, or terrorist activity. Employers will therefore need to implement policies and procedures to make sure they manage the various hazards effectively.
Data protection and security:
General security risks posed to company data and equipment often tend to become heightened in an environment that is outside the secure confines of the office. These risks will inevitably be even greater where the remote worker crosses borders and places himself in a territory that may be unfamiliar to the employer. Care will need to be taken to ensure Data Protection laws are being adhered to.
Personal tax implications:
The employee may inadvertently create personal tax obligations for themself because of the remote working arrangements. Taxes may not only be due on employment income, but the individual could also find
themself liable to tax on his worldwide income and wealth. E.g., Italy for instance, has a wealth tax regime and anyone that becomes resident in Italy could face a Wealth Tax bill based on their worldwide wealth.
Whilst the long list of issues may look daunting, it is worth bearing in mind that every situation is unique and will bring with it its own unique combination of issues.
Tax compliance requirements already vary widely from country to country and the way tax authorities may tackle non-compliance during these extraordinary times will probably vary even more. Towards the beginning of the pandemic most countries put in place emergency measures. Concessions were available to deal with things like days of presence and establishing tax residence. Tax authorities were willing to relax the normal rules and consider exceptional circumstances where individuals were really and truly stranded perhaps because they were sick or self-isolating or where borders were fully closed. However, some of these concessions only apply where the individual is not actually working while stranded. A lot these special measures and concessions have now
elapsed, and there will inevitably be closer scrutiny in due course.
Employers often fail to realise that when it comes to tax compliance in the context of overseas remote working it is essential to consider matters from the overseas perspective. The UK employer, for example, may think that they are being fully compliant as what appears to be the correct amount of UK tax and National Insurance is continuing to be deducted from the employee via the UK payroll and that there is nothing further to do or worry about. Not thinking about the overseas implications may mean that there is an unwelcome surprise in store somewhere down the line.
Common misconception of the 183-day rule.
One final thing that deserves a mention in this context is regarding a common misconception about the 183-day rule. There is a common belief that if someone spends less than 183 days in a country that individual will have nothing to worry about from a tax perspective. This can be a dangerous assumption to make. In this regard it is useful to remember that:
- The 183-day rule is not a universal rule. It only applies in situations where the two countries in question have concluded a double tax treaty between them and only if the treaty contains the relevant article that deals with this rule;
- The rule only applies to taxes on employment income. It has no relevance when counting of days for immigration purposes or to the rules regarding social security contributions;
- There are two other conditions that both need to be met for the 183-day rule to apply:
- the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State (i.e., foreign jurisdiction);
- the remuneration is not borne by a permanent establishment which the employer has in the other State;
- The 183 days of presence cover not only workdays but also any day of physical presence including weekends, holidays, sick days etc;
- The 183 days may be counted over a tax year a calendar year or a rolling 12-month period. This will depend on individual tax treaties and will have to be verified accordingly.
The two main risks that all the above issues bring about are the risks of non-compliance and reputational damage. Of
f course what may follow because of non-compliance are fines and penalties levied by the various authorities and greater scrutiny for the individuals and the employers in future.
Time for Action
The time to act is now! Employers should be thinking about putting together a framework and developing policies surrounding overseas remote working. They may wish to follow some of the suggestions below:
- All overseas remote working requests should be logged
- Employers should keep track of where their remote working employees are and how long they spend in each location
- Ensure the employees have checked whether they have the right to work remotely from the country they are living in. There appears to be a fair amount of confusion with the post-Brexit visa rules for Europe. While visitors from the UK may be allowed to visit Europe for a certain number of days, it is not necessary that they will be eligible to work during that time. Certain types of work may be permitted under the visitor rules while certain other types will need the usual work permits or authorisations
- Take appropriate advice for the overseas jurisdictions bearing in mind the various issues mentioned above
- Assess and quantify the risks where possible. Put together as estimate of the additional costs that the company must bear as a consequence of agreeing to a remote working request
- Determine the level of support that the business wishes to provide the employees with respect to foreign taxes / immigration related support etc. i.e., will the employees get help with the preparation and filing of foreign tax returns? Will some of the additional administrative costs be passed on to the employees by way of renegotiating salaries?
- Start building a framework for decision making purposes based on the risk assessments and external advice received.
- Once a decision has been made and remote working request has been approved it will be prudent to monitor the situation to ensure that overseas remote workdays do not exceed what has been agreed. Should the planned / agreed number of days be exceeded, a fresh risk assessment should be done as per the framework and company policy.
- Tax laws and immigration rules are fairly dynamic and therefore what stands true today may not necessarily be the case in a year’s time. Therefore, it is necessary to ensure that any advice received remains current and internal decisions are adjusted to reflect any changes in rules and regulations as needed.
Ultimately it is up to the business to decide what they wish to do as an organisation and adopt a fair approach to the decision-making process. Remote working is probably here to stay, and a bit of planning can help mitigate a lot of the risks we have talked about. Of course, as with any cross-border work arrangement there will inevitably be some additional costs to account for and some hard decisions to make. It is possible that some requests may need to be rejected purely for commercial reasons. Companies may also be comfortable approving remote work from certain locations in preference to others e.g., where they may already have entities set up.
How can we help?
The Global Mobility and Employment Tax experts at Menzies can support employers with all their remote worker compliance obligations including identifying risks and developing mitigation strategies. In addition to UK related advice, employers will also need country specific advice from various overseas jurisdictions and therefore ideally want an adviser with access to a global network of specialists. Menzies are members of the global advisory and accounting network HLB International. This provides global reach into over 150 countries and gives us the ability to source advice from local member firms in the relevant countries.