When does a small job on a holiday turn into a stay that piques the interest of the local tax authorities? And does a UK company, for example, face tax complications overseas if they have employees and key decision-makers working remotely across Europe?
National tax authorities and the Organization for Economic Co-operation and Development are grappling with those questions as the remote-working revolution blurs the lines between work, residence and time.
This could result in stricter and clearer rules on how long people can work abroad before falling under the tax net of the other country. It is also raising questions about social security and pension payments for employees who have homes in a different jurisdiction from where they are employed.
The OECD plans to conclude by the end of 2023 whether global tax rules need to be changed to cover “workplace” and cross-border remote employment, according to one of its senior tax officials.
The pandemic and the rise of Zoom conference calls have blurred the line between work and leisure and created a new generation of “digital nomads” who physically station themselves in one location while earning an income in another. This has confused the traditional definitions of taxing the income earned by individuals and companies. The distinctions are important because a breach of the rules means you could pay tax in two places at once or be subject to a penalty.
“Countries recognize there is an issue and we need to make sure the rules are up to date with the reality of the modern economy,” David Bradbury, deputy director of the OECD Center for Tax Policy and Administration, said in an interview. “We see this as an emerging set of challenges, but we think it’s fair to say that these challenges are only going to intensify.”
In the OECD, early-stage discussions between firms and countries have raised a host of potential difficulties, from rising workforce demands for flexibility, to jitters over reopening issues across borders from some countries.
As Zoom culture continues to dominate offices around the world, businesses grapple with the risks of double taxation and compliance headaches. Existing treaties to avoid issues such as double taxation seen by businesses are seen as insufficient to deal with new post-pandemic office norms, while experts have said employees risk being liable for social security contributions in many countries. Can also pick up.
Firms and workers are currently faced with complex regulations requiring a worker to pay taxes when they reside in different countries for a long period of time. Many places – such as China, India and the UK – count people as tax residents after about six months. In the US, the guidelines known as the 183-day rule are more complex and look at a person’s time in the country over three years. In most places, the rules come with caveats and exceptions but importantly can be triggered much more easily in some jurisdictions.
But officials are unsure how to treat people who have made temporary stays abroad and how long they can last before they are classified as permanent. Companies are concerned that they risk unpleasant surprises from foreign tax authorities, especially if the authorities are making important decisions and dealings somewhere other than their home jurisdiction.
It’s clear that tax officials want to get ahead of the curve before the remote working boom takes off.
According to a survey by Go City, nearly 30% of Americans are already planning to return to work this year. Airbnb has reported a sharp increase in its long-term stays of more than 28 days since the pandemic hit, a trend linked to greater flexibility over remote work.
Bradbury said the OECD is working towards a scoping note for later in 2023 to set out the problems of remote working tax and the scenarios countries and businesses will face. He said that this would be followed by a discussion with members on how to focus their efforts on remote working tax issues.
Businesses have asked the Paris-based organization to find clarity on allowing them to offer employees more remote working perks. With labor markets around the world extremely tight, companies are keen to gain an edge over rivals by offering workers more flexibility.
“A lot of companies are saying, ‘well, this is an important part of attracting and retaining talent in the modern economy and we want to make sure we are able to do that’,” he said. However, Bradbury said the potential tax implications “often frame the extent to which a business is willing or unwilling to adopt some of these practices.”
“We are having some discussions with businesses in particular as many of them are quite concerned about how this issue may affect them,” he said.
The problem is also being looked at with increasing interest elsewhere. The International Monetary Fund has flagged emerging potential problems while the UK government’s official tax adviser published a report on the issue last year.
The IMF said in its Fiscal Monitor last year, “As opportunities for cross-border remote work expand, a large portion of the labor income tax base becomes more mobile – currently estimated at 1.25% of the global personal income tax base.” Is.” “In future, individual tax coordination will gain importance and will take up issues related to corporate taxation.”