Global Mobility in a COVID-19 World – Key Employment and Tax Considerations
The pandemic has created a swathe of “COVID expats”—employees performing work in international locations—but most employers have not had the opportunity to think through all the complexities associated with a remote work arrangement.
Coronavirus (COVID-19) is reshaping many aspects of life. Among the more apparent changes are those related to the employment relationship, particularly the expansion of remote work. “Shelter in place” orders early in the pandemic made remote working a necessity for numerous employers. In the months following, employers have learned that some employees travelled to international locations to shelter in place away from their normal work location, or remained in foreign countries even after travel restrictions were lifted, and now intend to stay there.
International remote work raises challenging employment and tax issues for employers. Usually such arrangements are planned in advance, after the careful consideration of legal and tax risks. It is important for employers to fully understand these risks, particularly if employees are requesting an extension of remote work as the pandemic continues.
Employment Law Considerations
The primary employment risk with international remote work is the application of local employment laws. Generally speaking, the longer an employee works in an international location, the higher the risk that the employee will be entitled to local employment rights.
In some circumstances, local employment laws may be more favourable to employees than those in the home country. For example, local law may provide longer periods of paid leave, advance notice of termination, or severance payments. A key issue for US employers is that at-will employment, where the employer can terminate the employee at will, for any or no reason (as long as it is legal), is unlikely to apply in international jurisdictions. Accordingly, a US employer may ﬁnd that it has to demonstrate sufficient cause for termination, or follow a speciﬁc and unfamiliar procedure when dismissing a remote employee in an international location.
Local immigration requirements should also be considered. The employer will need to determine whether or not the employee is actually entitled to perform work in the local jurisdiction. This will depend on the employee’s individual circumstances and local law. If work authorisation is required, it will be down to the employer to determine how to comply without a local presence. Because the timing for obtaining work authorisation may be lengthy, these important immigration issues should be considered as soon as possible.
Employee Tax Considerations, Including Employer Withholding and Reporting
An international remote employee may be subject to local income and social security tax on employment income that is attributable to services performed in the local country. If the employee becomes a resident of the local country, which in many countries occurs when an individual is physically present in the local country for at least 183 days during a 12-month period, all of the employee’s income may be subject to local tax.
Exceptions to local income tax on wages earned by a nonresident may apply under an income tax treaty or, in the case of social security tax, under a totalisation agreement. If an employee is a resident of two countries and an income tax treaty applies, the treaty will generally provide a tie-breaker test for determining a single country of residence. The application of local laws and any treaty beneﬁts are issues that should be considered when determining a remote employee’s tax liability and an employer’s potential withholding tax obligations.
Local laws may be more favourable to employees than those in the home country.
Early in the pandemic, a number of countries provided temporary relief to address certain tax consequences for employees who were unable to leave an international location owing to COVID-related travel restrictions. For example, the United States indicated that it would disregard up to 60 days of presence in the United States if a foreign individual was unable to leave the country as a result of government travel restrictions. The US exception was short-term and was not extended, which was also the case for the tax relief provisions enacted by many countries.
If an international remote employee becomes subject to local tax based on performing services locally, or because the employee has become a local tax resident, not only must the employee ﬁle a local tax return, but the employer must often comply with withholding and reporting requirements. In some countries, the employer may be required to register with the local authorities as a foreign employer. Alternatively, the employer may be able to retain a local payroll provider to withhold and remit the local taxes.
Importantly, because the employer may be liable for tax and penalties if it does not withhold and remit the tax, it is important to determine the tax consequences of having a remote employee working in an international jurisdiction.
Employer Tax Considerations, Including Establishing a Taxable Prescence
Another critical consideration is whether or not the employer may be considered to have a taxable presence in the international jurisdiction under local law or under an applicable income tax treaty, referred to as a permanent establishment (PE), as a result of having an employee located in and working in a foreign country.
To the extent an income tax treaty applies, most treaties provide that a PE exists if a company has either: i) a “fixed place of business” in a local country, which can be a home office; or ii) has an agent in a local country that regularly concludes contracts on its behalf. Under the fixed place of business test, the employee does not need to be contracting on the employer’s behalf, but must be performing the types of services for which the company earns revenue, such as customer-facing activities rather than back-office services. Importantly, a local taxable presence or a treaty PE can exist even if the employee is in the international jurisdiction for less than 183 days; i.e., the taxable presence test is different from the employee’s residence test.
The employer may be required to register with the local authorities as a foreign employer.
On 3 April 2020, the Organisation for Economic Co-operation and Development, which has a model income tax treaty on which most modern treaties are based, addressed the impact of the COVID-19 crisis. It provided that, at least initially, a PE would not be deemed to exist if an individual was stuck in an international location for a short period of time owing to travel restrictions because this was the result of force majeure, not the intent of the employee or employer. This provided employers with some comfort for a short period, but may no longer be applicable, especially if an employee moves to or remains in an international jurisdiction from choice, not because of COVID-related travel restrictions.
Because having a taxable presence or PE in a local country can subject the employer’s business income, not just the amount paid to the remote employee as salary, to local tax, and because many countries can be very aggressive on this front, this is an important issue that should be considered before granting an employee’s request to move to, or remain in, an international location.
While COVID-19 has made it possible for employees to work anywhere, it is important for employers to evaluate and understand the risks of having an employee working remotely in an international jurisdiction. In some cases, it may be possible to structure the remote work arrangement to minimise some of these risks.
In any event, it is important that employers understand and assess these risks in order to determine if they are willing to take them on.