Pre-Covid, remote working wasn’t particularly common. It was seldom listed on a job specification or discussed in a job interview. Then Covid hit and multi-nationals across the globe rushed to update policies that would allow their employees to work remotely on a continual basis post-pandemic. Now, it’s likely that allowing employees to work remotely will add to the attractiveness of a job offer, at a time when retaining skilled staff in many sectors remains difficult.
But what are the key issues to consider when work is performed in a different jurisdiction to that of the employer?
The aim of this article is to highlight some of the tax issues to consider for cross-border remote work arrangements going forward, namely:
-The risk of an employer triggering Permanent Establishment (PE) in the remote-work location;
-Tax issues for remote workers to consider;
-Employment tax issues for the employer; and
-Social security considerations
The points below are raised in an Irish context but will apply in other locations with obvious reference to local legislation and accepted practice.
-Risk of Permanent Establishment
Article 5 of the OECD Model Convention for Tax states that a PE exists where ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’. Consideration needs to be given as to whether the use of a home office could constitute a ‘fixed place of business’ for an entity. The commentary to the Model Convention is helpful in this regards and states:
Even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the automatic conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual who works for the enterprise…….In many cases, the carrying on of business activities at the home of an individual will be so intermittent or incidental that the home will not be considered to be a location at the disposal of the enterprise……Where, however, a cross-frontier worker performs most of his work from his home situated in one State rather than from the office made available to him in the other State, one should not consider that the home is at the disposal of the enterprise because the enterprise did not require that the home be used for its business activities’.
It further noted that activities carried on at a home office will often be merely auxiliary in nature and therefore would fall within the exception to paragraph 4 of Article 5 of the Convention such that no PE arises.
However, where an individual habitually concludes contracts on behalf of an enterprise there is an additional risk that PE can exist in that location (refer Article 5(5) of the Model Convention). These contracts would need to relate to the ‘business proper’ of the enterprise to constitute a PE.
Below are some suggested ways to minimise the risk of PE creation in these situations:
-The individual bears the cost of the home office personally;
-Company stationery (letterheads, business cards) do not reference the remote/home office location;
-Negotiation, amendment and conclusion of contracts do not habitually take place in the remote work location; and
-Arrangements to work remotely are agreed for a definite period of time and are ideally short-term in nature.
The facts and circumstances of each case need to be considered and further clarifications from local tax offices on remote working and PE risk would be helpful.
-Tax considerations for remote workers
Some of the issues the employee needs to consider include:
-Their tax residency position in their remote working location;
-Whether they will qualify for exemption from tax in that location under the relevant Double Tax Agreement;
-Tax rate differentials that exist where they are taxable in that location, and the impact to their net pay;
-Domestic tax compliance rules in their remote work location (e.g. in Ireland, an individual who is in receipt of PAYE employment income only is not required to file an annual tax return); and
-Whether they have broken tax residence in their previous location and the tax implications of this (e.g. cases of ‘dual tax residence’ can result in tax exposure in two locations)
The employee may need to seek local advice to ensure they understand the implications for them personally.
Tax issues for the employer
These include:
-Requirement to register to withhold employment taxes in the remote working location (compliance obligations can exist even where the income is exempted under the relevant Double Tax Agreement);
-Employment tax withholding obligations in the ‘old’ working location – there may be cross-over and dual withholding obligations in some cases. A process needs to be set-up to manage any such obligations.
-Where a PE has been created there are corporate tax and transfer pricing issues to consider also.
The employer should obtain expert tax advice to ensure they do not inadvertently fall foul of compliance obligations in the remote working location.
Social security issues
Social security obligations are generally linked to the place where the work is physically carried out.
Exceptions to this arise in instances where a bilateral social security agreement exists. These agreements often permit ‘posted workers’ to continue contributing to the system in their previous location for a specified period of time. If an employee is not considered a ‘posted worker’ they may be subject to social security in their state of residence and this has implications for both the employer and the employee.
Non-tax issues
There are various non-tax issues to consider which are relevant in the context of cross-border remote-working which include:
-Immigration;
-Intellectual property;
-Employment law;
-Data protection and GDPR;
-Local health and safety protections; and
-Insurance benefits (e.g. some insurance policies stipulate that a beneficiary must be legally residing in a specific location in order to avail)
The takeaway
The full WB Yeats quote referenced above is often phrased as follows:
‘All changed, changed utterly.….A terrible beauty is born’
Generally accepted working practices have effectively been reset in the last 18 months. ‘Remote working’ has emerged as one of the big positives post-pandemic. It is clear that there are a wide range of tax and non-tax issues to consider if a cross-border remote working arrangement is to continue. Ensuring the resulting tax compliance issues are managed may seem onerous however with expert planning and support for employees and their employers the author is hopeful that this trend can continue with positive outcomes for both sides.
If you need assistance understanding the above issues in an Irish context, contact us info@expattaxes.ie
The above does not constitute advice – tax advice should be sought specific to your personal circumstances.
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