During the Global pandemic of 2020 we saw remote working become the main style of working for many companies and workers. Some may say that this style of working is here to stay despite the Government urging people to get back into the office.
Aside from the flexibility of working at home some people have been able to spend some time abroad working and we see the rise of the “work from anywhere” style. Granted this has not always been a choice as multiple lockdowns across the globe has seen workers stuck outside their regular country of work.
Working remotely from anywhere in the world may seen like quite a romantic notion and the freedom it grants can be quite attractive. However, this brings with it a whole new risk from a regulatory standpoint for employers that employees may not be aware of. Especially now that we have a vaccine rollout, restrictions begin to ease and the tax authorities claw back the grace period for imposing their domestic tax laws on workers performing duties in country for extended periods of time.
Employers should consider these areas that could trigger an unfavourable tax surprise where their employees are working remotely from overseas if no reporting structure is in place:
- Permanent Establishment
- Transfer Pricing
- Employer Obligations
- Labour and industry Regulations.
An employee can create a taxable permanent establishment in another country simply by working there remotely. This would require the employer to register an entity in that foreign country that will become subject to the local tax, reporting and labour laws. The employer will have an obligation to meet all reporting requirements and often will need to operate a separate payroll for their workers.
Permanent Establishment is defined in each country’s Tax Treaty but usually follows the OECD model. Typically this could be established as:
- A fixed place or business through which the home country operates; or,
- a person who habitually concludes contracts on behalf of the home country company and that are binding to that enterprise.
A Permanent Establishment may not be a physical location. It can be formed based on the nature of the work carried out by the worker. Of course the rules are much more complex than this and legal counsel should weigh in on this.
In practice, employers who have only one or a small number of employees working overseas the administration burden may not be worth it at all especially where we see a Global payroll is needed to pay tax to the overseas jurisdiction.
There are ways that a company can reduce the risk and administration burden where workers are in overseas locations. One such example is the choice to limit the type of work that their team does while working from a location overseas remotely. Perhaps it can be arranged so that the negotiation of contracts is limited to occasions when the remote worker is in the home country.
Each case is unique to the situation and planning for compliance burdens should happen prior to any committment to placing employees overseas for work.
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