In pre-Covid times, many organisations had very informal arrangements with employees who worked some or all of their time away from the office. Often, managers were the only ones that knew who was working remotely – HR departments had no need to record details or keep track of arrangements.
However, some employees now want to work remotely in a different country from the one in which their employer is based. Some apparently don’t even tell their employer before they leave the country!
This situation can open the employer and employee up to a whole raft of obligations, costs and taxes, depending upon where the employee works, where the company is based, how long the arrangement is going to last, and even the importance of the individual to the business.
Don’t sleepwalk into this situation! Our experts explain why employers need to carefully consider a range of aspects, so they can make conscious choices about what is right for their organisation and employee/s. Above all, you need a policy framework in this area, to protect you from nasty surprises which can range from additional cost to downright illegality.
AWA Host: Karen Plum
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00:00:02 Karen Plum
Hello everyone. As more people embrace a Utopian world of working anywhere, are we sleepwalking into an unrealized set of liabilities, taxes, costs and even criminal offences associated with having people working in countries other than the ones they were employed to work in?
This episode explores a range of aspects that organisations need to consider when implementing international remote working. Here we go.
INTRO: Welcome to the Changing the World of Work Podcast where we provide insightful, practical content to untangle and demystify workplace change. I'm Karen Plum, director at Advanced Workplace Associates, where we combine science with nearly 30 years’ experience, helping organizations change the way they work, for the better.
00:00:56 Karen Plum
Welcome to this episode of the podcast where we're going to be considering the implications of having employees working in other countries from the country in which they're legally employed to be.
So I have two guests with me today, both partners of BDO, which is a global firm providing accountancy, tax and advisory services in more than 167 countries. So welcome to James Hourigan and Ross Robertson, and I'm going to ask them to introduce themselves and just tell you a little bit about what they do. James, would you like to go first?
00:01:29 James Hourigan
Sure, thank you Karen. I'm James Hourigan. I am a tax partner at BDO London with over 25 years of experience for my sins in all things expatriates and employment tax related.
We very much help both individuals, but in particular businesses - help them understand and comply with the various tax implications arising from their mobilizing employees to other jurisdictions for however long duration.
00:01:58 Karen Plum
OK, I'm imagining it's been a pretty busy time! So Ross, how about you?
00:02:04 Ross Robertson
Hello everyone, thank you Karen. So I'm Ross Robertson, I'm a corporate international tax partner which means that I spend my time helping businesses to trade across international borders and a lot of that is around helping businesses to design operating models that carefully balance the needs of the business with the obligations that tax rules around the world place on businesses.
00:02:28 Karen Plum
Excellent, thank you Ross. So let's get going.
James, prior to the arrival of COVID last year, what was the typical arrangement for employers / employee, where the employee was working in a country other than the one where they were legally employed to work? What was the typical arrangement?
00:02:47 James Hourigan
A good question Karen. I think you've got to go back a little bit further, perhaps to answer this. Probably if we go back ten years ago, your typical traditional assignment was an individual would be seconded by their employer to another country, or indeed sometimes countries, or a region, for anything between two and five years. But typically two to three years was your standard assignment.
Now over time and I think with rapid transport emerging more and more, you had the birth of other types of assignments. You had commuter type assignments, where people actually lived in a particular jurisdiction, but they would cross the border and work in another jurisdiction, and they might split their week. But clearly tax implications would need to be considered there.
You had virtual assignments, something that's been more and more of a recent phenomenon, but you also had things like extended business trippers as we would call them. So people who might go and work on projects, fly in / fly outs rather than actually be based for the entire duration of a project. They may spend a period of time, come back to their home country and then go back out again at different intervals.
So I think we've seen that prior to COVID but not remote working necessarily. That would tend to have been the exception rather than the norm.
00:04:09 Karen Plum
Interesting, so there's already quite a lot of diversity in those sorts of arrangements.
00:04:16 Ross Robertson
Yes, I think as well as diversity, what we also saw was probably greater formality in those arrangements historically, and particularly with the longer term assignments there tended to be a fairly careful process of ensuring that the relevant visas and tax advice and so on was in place to support both the business and the individual.
And I think more recently, we've seen a transition to much less formality, and indeed, certain circumstances where companies are not even aware of where their employees may be working unless they actually ask them the question, and so I think with formality comes the ability to identify potential risks on the corporate side and better reflect those risks in the decision making process. And the quid pro is with less formality you tend to have greater risk that there are unknown risks within the organization and so you need to redesign the processes to better identify those unknown risks, and I think on the other side of the equation, we're also seeing the tax authorities focused much more significantly in this particular area.
We're seeing a lot more cases come coming through the courts in relation to permanent establishment and other tax implications arising from remote working, and so it's the combination of greater unknown risk on the company side and greater focus by the tax authorities mean I think it's really a key area for businesses to get on top of.
00:05:40 Karen Plum
Yes, absolutely, and I guess from the employees’ point of view, perhaps they're not even thinking or not even aware of the risks that they're exposing their employer to.
I had a friend tell me yesterday that somebody they knew had moved abroad without telling their employer. And the only time the employer found out was when this person turned up on a video call and it was dark outside and it clearly wasn't dark where the other people were taking part in the call and that was the first that they knew about it.
00:06:11 Ross Robertson
Yeah, and I think as much as we'd like to think that the world revolves around tax and everyone thinks of tax first, it's clearly not the practical reality and a lot of people don't appreciate because they may have only ever lived in one country, that different countries have different tax rules and they may never have really focused on who they're actually paying their tax to in the way that a finance professional would.
00:06:33 Karen Plum
Indeed, so James, what are the employment, the tax, payroll, company tax issues that would need to be considered? Presumably there's a whole mishmash of them?
00:06:44 James Hourigan
Looking at it from an employment tax perspective, clearly things that need to be considered, and if you take your traditional assignment - so we're talking pre international remote working - typically, when you've got someone going on assignments somewhere else, you've got to consider what's the tax implications for the employee and employer both in the home country and the host country.
And I think that's the beauty for us of working in an international, a large international network where typically we would not advise our clients there in isolation. We would obviously give them the advice from both a home and host country perspective, but you're looking at payroll tax, potentially you're looking at considering as well, what are the Social Security implications?
Prior to Brexit, and particularly if someone was moving from the UK to the EU and vice versa, it was quite easy to stay in your home country Social Security system for the assignment duration.
Moving outside of the EU, the UK would have a number of Social Security agreements with a number of jurisdictions, but equally there'd be a lot of jurisdictions, the majority there that we wouldn't have Social Security agreements with, so something that companies had to grapple with is - what's the cost of me sending someone here? Am I actually budgeting here properly for someone that's moving from country X to country Y and that would apply whether they're going from the UK further afield or the other way around, whether they're actually coming into the UK.
I think the other thing that is very important is to actually understand what the implications are, depending on the length of a particular assignment, because that also comes into play. There is this myth and let's dispel this myth we've heard before that, look well, I'm in the country for less than 183 days. And I would say that's all well and good but there is an element of, “So what”?
Because we would have situations where someone can potentially be taxable from day one or the employer may have an obligation to register for payroll and operate withholding tax from day one. So 183 days is not a is not a landing.
00:08:42 Karen Plum
So that's an urban myth, then, is it?
00:08:45 James Hourigan
Absolutely. Because it's not the same everywhere it really depends on a number of factors. There are circumstances absolutely where an employer can send mobilized employees to another jurisdiction for, say, up to 183 days, and it is possible in certain circumstances that there will be no taxes, employment related taxes, or Social Security to pay in the host country.
But it's based on specific circumstances, so I think it's not a one size fits all approach. You've got to be careful, it's very much circumstance dependent.
00:09:18 Karen Plum
OK, and what about the company tax issues Ross?
00:09:21 Ross Robertson
So on the company side of things, the company is an independent legal person in its own right, but the way in which a company is taxed is very much dependent upon the way in which the people who are acting on behalf of that company undertake their activities. And there's essentially 3 levels of considerations at the company level.
So the first is the tax residence of the company itself. So broadly speaking, a company is tax resident in a particular jurisdiction, and that is the jurisdiction which has taxing rights. And it is possible that a company could be incorporated in a particular jurisdiction but become tax resident in a different jurisdiction by virtue of it becoming managed and controlled from a different jurisdiction.
So where we've got particularly senior individuals who are working remotely that can actually shift the entire tax residence of a company, which can result in a deemed disposal of all the assets at fair market value of the company in territory where it was tax resident, which can trigger a very significant what we'd refer to as a dry tax charge.
So effectively a tax charge with no actual economic gain to the company. So we really need to be careful around that where senior individuals are going to work on a long term basis overseas.
The next tier down is what we refer to as permanent establishment risk. So this is where a company remains tax resident in a particular jurisdiction, but also gains a taxable presence in another jurisdiction by virtue of the activities of the people in that jurisdiction, and this is again very much facts and circumstance dependent in terms of which territory the individual is working in, what they're doing in that particular territory, how long for, and various other considerations.
But if you trigger a permit establishment, then the company has to register in that foreign territory and pay taxes on the profits derived from the activity in that foreign territory, and there are a number of territories around the world where it's actually a criminal offence not to register a parent establishment if one exists with consequences personally for the directors of the company and potentially others that might be involved in what could be perceived to be tax evasion. And so again an area to be very careful of.
And then I suppose the third tier is where we have a situation where an individual is perhaps formally seconded from one entity in a group to another entity in a group, so they are working on behalf of and for the benefit of that other entity to which they're seconded.
That tends to help you mitigate the tax residence and permit establishment risk because they're no longer acting on behalf of their formal legal employer, they're acting on behalf of another entity. And that can help to mitigate some of those risks, but you would still need to think about transfer pricing.
And so the transfer pricing rules are the rules that require that within a group context, the entities broadly operate in the same way that they would if they were completely independent enterprises and reflect charges for services and provision of IP and so on, in the way that they would if they were completely independent enterprises.
So if you have particularly senior strategic individuals or a significant group of lower tier individuals, then it can significantly shift your transfer pricing policy, which means that maybe you're not paying tax in the appropriate jurisdiction, which can create challenges down the line as well.
00:12:41 Karen Plum
Just looping back for a minute, James, you mentioned international remote working. Let's take an example. So perhaps we have an employee in the UK that wants to work from let's say I don't know Canada or somewhere like Ireland. What are the issues that the employer needs to take into consideration, from a tax and a company tax perspective?
00:13:06 James Hourigan
Karen, I chatted earlier on about the 183 day rule myth for example, right? And this is perfectly a good time to draw out that point. It is true that depending on how long the individual is in the country for, it's possible that they may not pay tax in that country by virtue of a particular clause in the double taxation agreement that the UK has with that country.
The two countries you mentioned, I think you said Canada and Ireland, both of them would have double taxation agreements with the UK. But notwithstanding that, even where it is possible in certain circumstances for them, if they satisfy all the conditions necessary to claim exemption from tax in the host country, take Canada for example.
You still have to actually formally apply for exemption under the double taxation agreement (it's known as a waiver) 'cause I've dealt with this relatively recently. A situation where a company had allowed an individual to actually work in Canada and now they're looking at retreating from the arrangement because we'd explained to them that look, you've got a payroll tax obligation; clearly there's visa related issues if they're not a Canadian National, you've got to consider the immigration issues as well and take the appropriate advice.
There is a Social Security agreement between the UK and Canada which in this instance would allow the individual to remain in the UK Social Security system for I think up to five years, so that would tend to take care of that unless it was a permanent move, and indeed it was a permanent move they may actually switch into or fall into the Canadian Social Security system up front.
From a payroll tax perspective, though, applying for that waiver to claim exemption under the double taxation agreement, to the extent that exemption criteria was satisfied in the first place, right, I might add.
You would still have to operate payroll withholding tax in Canada, and if we just flip it forward and say, well look, let's say the person was gone for a year. Well then there is Canadian taxes, both federal and provincial taxes, withholding taxes, from the beginning that are due. The employer has an obligation to make that happen from the get go.
Take a scenario where you have a UK employer but they don't have a legal presence in Canada, nor do they actually want to have a legal presence in Canada - from a payroll tax perspective, they're going to have to either register there in country or set up an entity to do it, or they're going to have to appoint someone like a BDO who would manage the payroll for them in country, and that's something, obviously that we do, but there's implications of them moving someone for a period of time.
You take Ireland. Ireland actually has similar rules, and indeed the UK has relatively similar rules the other way around, where we talk about these people who work in country for a period of time. But if you take Ireland, if you've got someone who's in Ireland, I think for more than 60 days now, if they qualify for the exemption under the double taxation agreement, and as I said, we’re getting a bit technical there, and you've got to look at the specific facts of the case.
But if they did the UK business would still have to register with the Irish Tax Authority for payroll and then claim a dispensation from operating Irish PAYE. Failure to do that would mean they'd have to operate Irish PAYE. This applies if the if the person is in country for 60 days or more and then it gets messy because they've got UK PAYE potentially on the one hand Irish PAYE at the same time, trying to manage all of that from a cash flow perspective.
And it's just adding to the admin burden. So what I'd be saying to your listeners is look. It's important here to understand that you could have people who are only in country for 60, 70 days at intervals, it's in the aggregate rather than consecutive days, within that 12 month period, within the tax year.
And you could be creating unintended negative tax consequences for both you as a business, and indeed for the employee.
00:17:03 Karen Plum
Yes, there really is a lot to consider, isn't there? And what about the company tax situation Ross?
00:17:09 Ross Robertson
So there's a few different angles to this. One of the angles that is maybe less often thought about, but where we help our clients with, is shaping benefits and incentive packages for employees, and those benefit and incentive packages are typically designed around an employee being in a particular location.
So this might be the structure of a particular share plan or a particular type of benefit that's awarded. And when you get into situations where an individual is working outside of the territory where the benefits package was designed in respect of, you get into questions from sort of as fundamental as well does the medical policy actually cover this individual?
And if not, do we need to actually get a different type of medical policy to ensure that they're covered, through to does the share incentive arrangement that we've got in place, actually deliver tax efficiency in the way that it was designed for an individual in that particular territory.
So there's pieces around that in terms of what it means for the incentive package. But I think on the corporate side, where I'd definitely start with is, you know it's very facts and circumstances specific and we'd very much advise against people taking sort of ‘assumed views’, like the 183 day rule that James has mentioned.
And I think where you really need to start with is what is the individuals role? How long is the working arrangement expected to last? How senior are they? Who is the arrangement driven by (and I'll mention in a second why that's relevant) and also the form of the working arrangement.
So who's going to be the legal employer? Is it better if a different entity is the legal employer in terms of mitigating some of the risks or ringfencing some of the risks that may inherently arise from the arrangement and just to go back briefly to the point about who the arrangement is driven by - we've seen some really interesting developments in case law recently on the topic of permit establishment that I mentioned earlier.
So circumstances where a company may be regarded as being taxable in another country by virtue of the activities of a person in that country. And there's a lot of nuance to these cases, but one of the themes that seems to be emerging is that it is a relevant factor whether the business has asked the individual to be in that territory or whether the individual is driving the view to be in that territory.
And if it's the individual driving the view to be in that territory, and there's no real business benefit for the business of being in that territory, some tax authorities, or at least in Denmark, where the majority of these cases have been heard, would appear to be more comfortable that that's less likely to create a permanent establishment of the organization. Whereas if the organization is driving their presence there for business benefit, then that can create, or is more likely to create a permanent establishment.
But then you do again get into areas of grey where there was a recent case where an individual was based in Denmark, but working predominantly across the Nordics. There was no real business reason for them to be based in Denmark, but their role was to expand the Nordic market and because of the proximity of Denmark to the Nordic market, the courts ended up concluding that there was business benefit in the individual being in Denmark and therefore declined to confirm that there was no permanent establishment in Denmark.
So it's a really interesting and evolving area, but really start to understand what is the individual doing? How long will they be there for? How senior are they and who's driving the arrangement? And then you can start to unpick the questions.
00:20:33 Karen Plum
Yeah, and who knew Denmark was going to be such a hotbed of this sort of activity?
Just back to Social Security and work visas, things like that. James when we were part of the EU, I guess things were more straightforward, but has there been a big shift since Brexit happened?
00:20:52 James Hourigan
Yes there has I mean let me give you one simple example on this subject around (they call it from a Social Security perspective) detached workers, but typically people who are being mobilized on assignment right.
When the UK was part of the EU it was possible for, let's say a person going from the UK out to another EU jurisdiction or vice versa for that person to remain exclusively within the Social Security system of their home country for a period of up to five years.
With Brexit under the new rules, it is still possible, and I think pretty much in fact all EU states have signed up to this, that you can still remain within your home Social Security system for a period of up to two years. But - gotta be very careful here.
So if we take for example, if someone was going for three years, well then they could fall into the Social Security system of the host country from the get go. So it's important how you actually structure the assignment you know and I say this also from the perspective of cost.
Yes, we had the recent announcement around the increase in National Insurance contributions in the UK. The 1.25% increase, but that still pales almost into insignificance cost wise compared to some of the European jurisdictions like Belgium and France where the employer Social Security costs in particular are very high.
So from a pure costing perspective, you could trigger unintended negative consequences there for you as a business if you're looking at moving someone, for example into Belgium or France and say it's for a three year or a four year period. So you've just got to tread carefully there.
Also obviously with immigration, and I'm not an immigration expert, but having worked alongside some in advising companies, you know moving people around since Brexit, you've now got different permissions that you need to obtain if people are traveling for business purposes. So it's just something that they shouldn't overlook.
00:22:48 Karen Plum
OK, so question for both of you really around the subject of international remote working. I’m just curious to know what you're seeing from clients that you're advising - are they putting the right sort of policies and safeguards in place, or are they starting to back off from agreeing to people working abroad?
00:23:09 James Hourigan
I think there is a mix and I think you can have polar opposites here. You can have those who fully embrace the concept of working from anywhere and are not letting tax be the main driver. Maybe it's the culture, maybe it's the particular need that they need to engage certain individuals who are in particular countries, and they're willing to deal with the tax issues, whatever they are - the war for talent and all of the rest takes priority.
And you're also seeing, I think it's probably fair to say a little bit of a backtracking from some organizations, or maybe clarifications as they get more to grips with what the issues are, and indeed what the needs of their business are, alongside of course, the fiscal issues.
They are starting to maybe now put caps on the length of time, period of time that they're permitting their workforce or part of their workforce (it may not even be all of their workforce). So it may be people performing certain activities within that organization. They're enabling them to work, perhaps from home, which may be across a border in another jurisdiction, for maybe say up to X period of time. Maybe it's 30 days, maybe it's six months, you know it varies.
And equally we're seeing companies out there who have sought the advice from the tax side, realized what's involved, realized all the variables here and the length of time in a particular jurisdiction can dictate what the tax issues are, for example, it can be one of the factors; that they're actually backtracking entirely and saying we're not embracing working from anywhere. It's as simple as that.
00:24:50 Ross Robertson
Yeah, I’d echo, it's definitely a mix with polar opposite views emerging around the tolerance to remote working as well as the degree of formality of thinking and process around it, if it is permitted.
And I think there's a really diverse range of points surrounding this, so one is culture and some businesses just take a view that it is culturally important that their people are working together in a particular location and clearly international remote working is unlikely to deliver that.
But there are companies out there that are saying, well, how can we still maintain that culture in an international remote working environment, and they're really sort of innovating around what that looks like in terms of how they maintain connectivity for the team.
I think I'd just say that the key point, I think, is to be aware of the issue. Have a policy put in place processors to deliver against that policy, but also be willing to evolve that policy if you find that it's not working.
I think we are living in a bit of an experiment, but it's important to start with a policy otherwise you can get into a real mess quite quickly.
00:25:50 Karen Plum
OK. And just to wrap up, what would you advise employers that are being asked by employees, because the employee wants to go and base themselves in another country, or indeed if they're thinking about hiring people that already live in another country and intend to stay there. What's the general advice you would give?
00:26:10 James Hourigan
They need to acknowledge and understand that it's not necessarily a one size fits all approach. I'm looking at this now just from a tax perspective, that it is important to address those tax considerations and at least be cognizant of them.
I think that's important. It can, as we've alluded to earlier, it can be location dependent, more so length of time dependent as to what those issues are. But I think there's also other things.
I think Ross touched on a very good point around benefit plans and I think that is true and you could add pensions to the mix there. Is the person entitled to remain in the group pension plan? Does it have coverage for someone who's working in other jurisdictions? Maybe it does, or maybe it doesn't, so it's something that would need to be looked at.
Employment law considerations. Again, not an employment lawyer, but one would have thought that you'd need to consider that. Does the person if they're working in a particular jurisdiction, have they recourse to the laws of that particular country rather than the country in which they're employed?
IT data security issues must be also something I imagine that would need to be looked at. So all in all, a lot for a business and the stakeholders in that business to consider.
00:27:23 Karen Plum
Yeah, for what might be just one individual and it might be a very valuable individual, but you know, nevertheless, there's a lot to consider.
00:27:31 Ross Robertson
Without sort of wanting to scare people through this podcast, there is a lot to think about, and I think it's important to involve stakeholders across the business and not take decisions in relation to remote working policies in a silo, as these decisions can impact upon many things from culture through the training, succession planning, financial considerations around tax or legal considerations, and I think, really it's about weighing the pros and cons of different approaches to the question and then ensuring that processes are in place to realize the pros without being burdened by the cons.
00:28:02 Karen Plum
I think that's spot on.
00:28:04 James Hourigan
Just to reinforce the point in terms of what advice would give your listeners, make sure you have a policy framework in place around this issue. If you're working on it, great, but I think it's important because what you don't want to do is adopt the laissez faire approach here.
Inevitably, you're going to run into trouble, so I think it's coming to whatever is right for your business, is right for your business. Whether tax is top of the pile kinds in terms of issues to consider or not as the case may very well be.
Have a policy, have a written policy framework in place. We've definitely been helping quite a few businesses in that regard, perhaps more so from the tax perspective, but it is something that businesses should not overlook.
00:28:49 Karen Plum
Absolutely. So, my thanks to James and to Ross for joining me on the podcast today. It's been a fascinating discussion. Thank you very much, gentlemen.
00:28:58 James Hourigan
It's a pleasure. Thank you.
00:29:00 Ross Robertson
00:29:02 Karen Plum
I found it interesting to reflect on the fact that remote working arrangements used to be very informal in the UK. Often managers were the only ones that knew what had been agreed. There was no contractual change or even formal documentation. I think you'll agree that we can't adopt that level of informality when we have people working internationally.
Anyway, that's it for this episode. See you next time.
CLOSE: Thank you for listening to this episode of the Changing the World of Work Podcast. Please follow or like the show so you don't miss any of our content. You can find more information on this episode in our show notes, including a link to the AWA website, if you'd like to know more about us. Hope to see you next time. Goodbye.