Being a remote worker or a digital nomad is a rapidly growing phenomenon. With the pandemic, remote working has become a necessity for the majority of the world. Now, it seems that workers all around the globe want to continue with the trend of ‘working from home’.
The newly converted remote workers and digital nomads have realized that there are a lot of benefits to remote work, such as flexible working hours, cutting down on commute time, the ability to live with family, savings from the cost of living in big cities,and so much more. For lovers of traveling, it is the freedom to be able to travel while earning their paycheque remotely – and the only requirement is good internet and cell phone connectivity!
However, there are several drawbacks of remote working too, for both management and employees alike. (We’re talking for larger companies here). Management may begin to face difficulties with effective coordination and control over their employees, while employees may have to be available for work and work-related meetings beyond their normal working hours.
But one of the biggest concerns with working remotely is TAXES!
So, let’s dive deeper into the various complications that might arise from working remotely overseas…
Concerns for the taxes on employee’s income and compliance requirements for both employee and employer
We have listed below a few of the tax considerations that any remote worker and employer should think about before taking the plunge. It is important to keep in mind that even though taxes are levied on the personal income tax rate of an employee, a lot of compliance requirements are burdened on the employer, which comes with high administrative costs.
1. Tax Jurisdiction
When the employee is in a different tax territory i.e. different country, different state (in countries where state income tax is applicable like the USA), or constantly traveling around the world, there are a lot of factors that need to be taken into consideration to determine which country’s tax laws will apply to them.
2. The 183 Day Rule
The most general rule is the 183 Day Rule. As per this Rule, if the employee is residing in a country for a period of more than 183 days in one financial year, then they will be considered a resident of that country for tax purposes. This means that the employee will have to pay tax in that country.
3. Double Tax Avoidance Agreements
It is possible that an employee might end up in the very unfortunate situation of being double taxed. A lot of countries have a reciprocal two-party DTA (Double Tax Agreement) with other countries to avoid this. However, such treaties need to be researched on a case-by-case basis for each type of income, and for each set of countries.
4. Withholding Tax
Employers may be required to deduct a certain amount of salary from the employee’s wages before remitting it as withholding tax or TDS (tax deducted at source) to the tax authority. If the employee is not liable to pay any tax in the country of origin i.e. the country of the employer, then they may qualify for a refund of such withholding tax by filing a return with a refund request.
5. Social Security Contributions
As far as social security contribution, the laws of both countries (the country of employer and the country/countries of the employee) needs to be checked. The country where the employer is located may still require payment of insurance contribution even while the employee is no longer a tax resident of that country.
In the same way, the host country i.e. the country in which the employee is present, may also have social security obligations. Unlike Double Tax Avoidance Agreements, there are very few agreements for such social security contributions between countries.
For example in the case of an employer being from the UK, national insurance contributions (NIC) have certain exemptions in unique cases, such as when employees are working in the EEA or Switzerland, or if the country in which the employee is present has a reciprocal agreement with the UK.
6. Advance Taxes on Behalf of Employees
Advance tax, as the name suggests, is a tax that a person pays in advance before the end of the financial year and before the tax deadlines. If the income of a person increases or is likely to increase a certain amount, the tax laws in certain countries dictate them to pay a percentage of such income as advance tax. For the salaries of employees, the burden of calculation and payment of such advance tax also falls on the employer.
Continuing with the example of the UK, the employer is required to pay PAYE (pay as you earn) on behalf of their employees.
Concerns for the Employer Organization in the Host Country
The rules and regulations of the host country undoubtedly require employers to perform multiple regulatory tasks. Unfortunately, remote working does put employers at a greater risk since the legislations are still decades behind.
1. Registration Requirement in the Host Country
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In order to allow for a person to work abroad, some countries require employers to be registered for employment tax purposes.
This will end up costing the employer a lot more in administrative and legal costs than paying the actual salary of the employee. For countries with state taxes like the USA, registration in the different states where employees are present may be required.
2. Permanent Establishment Rules in the Host Country
Just like the tax residency of an individual is determined by the 183 Day Rule, the tax residency of an organization is determined by ‘significant presence’ of the organization in any country. To determine such a significant presence, various parameters need to be checked. One such parameter is the nature of activities performed by the members of the organization in the host country.
If the activities performed by the employee working remotely creates a significant presence for the employer organization, then the employer might be required to get registered in the host country and follow the regulatory and tax laws of the host country. This may also include paying corporate tax in the host country.
However, the nature of activities that attract a significant presence is generally manager positions that have decision-making power for the company. Thus, only the higher and middle-level employees may be able to create a significant presence by their activities and therefore, be considered a Permanent Establishment.
3. Registration Requirements for VAT or other Indirect Taxes
If the activities of the employee in the host country relate to sales or the purchase of goods or services, then the company might be required to register for sales taxes.
These indirect taxes also have their own set of compliance regulations. All these risks adversely affect companies that allow their workers to work remotely.
COMMENT
But, it’s not all bad news for remote workers and their employers. It seems that governments are starting to realize that their rules are not helping small businesses and the economy as a whole, and as a response, some countries have started to come up with great, forward-thinking solutions (go and check out our Digital Nomad Visa blog). Some even go as far as giving remote workers tax exemptions for 1 or more years. This seems to take all the compliance headache away from employers.
And as always, if you need any help with your international tax obligations (whether you’re the remote worker or the employer of a remote worker) feel free to reach out to us anytime.
