Newly converted remote workers have realized that there are a lot of benefits to this lifestyle, such as flexible working hours, cutting down on commute time, and more.
For lovers of traveling, it is the freedom to be able to travel while earning their paycheque remotely – and the only requirement is good internet and cell phone connectivity.
However, there are several drawbacks of remote working too, for both management and employees – And the tax implications of working remotely is a big one.
So, let’s dive deeper into the various complications that might arise from working remotely overseas.
Table of Contents
- Tax implications of Working Remotely for the Employee
- Concerns for the Employer Organization in the Host Country
- Conclusion – Tax Implications of Working Remotely
Tax implications of Working Remotely for the Employee
We have listed below a few of the tax considerations that any remote worker and employer should think about before taking the plunge.
It is important to keep in mind that even though taxes are levied on the personal income tax rate of an employee, a lot of compliance requirements are burdened on the employer, which comes with high administrative costs.
1. Tax Jurisdiction
When an employee works remotely from different locations, whether in various countries or states (like in the USA with state income taxes), determining the applicable tax laws becomes complex.
The primary factors influencing tax jurisdiction include the length of stay in each location, the source of income, and local tax residency rules.
It’s essential to understand each jurisdiction’s tax requirements, as some places tax income generated locally, while others base taxation on residency or citizenship.
This complexity necessitates careful planning and potentially seeking professional tax advice to ensure compliance and optimize tax obligations.
2. The 183 Day Rule
The 183 Day Rule is a common guideline used globally to determine tax residency, no matter the job and profession.
And you guessed, you can’t just ignore this, when it comes to tax implications of working remotely.
According to this rule, if a remote worker stays in a country for over 183 days within a financial year, they are considered a tax resident there.
Being a tax resident usually means the employee’s global income might be taxed in that country. However, the specifics can vary depending on local tax laws and international agreements.
It’s crucial for remote workers to be aware of this rule and plan their stays and income accordingly to manage tax liabilities effectively.
3. Double Tax Avoidance Agreements
Digital nomads across borders may face the risk of double taxation. To mitigate this, many countries have established Double Tax Agreements (DTAs) with each other.
These DTAs are designed to prevent the same income from being taxed in both countries. However, the application of these treaties varies based on the type of income and the specific countries involved.
Remote workers must research relevant DTAs to understand their tax obligations and avoid double taxation effectively.
4. Withholding Tax
When working remotely, employers may withhold a portion of an employee’s salary as tax (withholding tax or TDS).
If the employee isn’t liable for tax in the employer’s country, they may be entitled to a refund. This process involves filing a tax return with a refund request in the employer’s country.
It’s important to understand the specific tax requirements in both the employer’s and employee’s countries to ensure accurate tax treatment and identify potential refund eligibility.
If you want to pay less, check out our strategy here below, which goes through the tax implications of working remotely and more.
5. Social Security Contributions
Another of the tax implications of working remotely to consider is social security.
As far as social security contribution, the laws of both countries (the country of employer and the country/countries of the employee) needs to be checked.
The country where the employer is located may still require payment of insurance contribution even while the employee is no longer a tax resident of that country.
In the same way, the host country i.e. the country in which the employee is present, may also have social security obligations.
Unlike Double Tax Avoidance Agreements, there are very few agreements for such social security contributions between countries.
For example in the case of an employer being from the UK, national insurance contributions (NIC) have certain exemptions in unique cases, such as when employees are working in the EEA or Switzerland, or if the country in which the employee is present has a reciprocal agreement with the UK.
6. Advance Taxes on Behalf of Employees
Advance tax, as the name suggests, is a tax that a person pays in advance before the end of the financial year and before the tax deadlines.
If the income of a person increases or is likely to increase a certain amount, the tax laws in certain countries dictate them to pay a percentage of such income as advance tax.
For the salaries of employees, the burden of calculation and payment of such advance tax also falls on the employer.
Continuing with the example of the UK, the employer is required to pay PAYE (pay as you earn) on behalf of their employees.
Concerns for the Employer Organization in the Host Country
The rules and regulations of the host country undoubtedly require employers to perform multiple regulatory tasks.
Unfortunately, remote working does put employers at a greater risk since the legislations are still decades behind.
1. Registration Requirement in the Host Country
In order to allow for a person to work abroad, some countries require employers to be registered for employment tax purposes.
This will end up costing the employer a lot more in administrative and legal costs than paying the actual salary of the employee.
For countries with state taxes like the USA, registration in the different states where employees are present may be required.
2. Permanent Establishment Rules in the Host Country
Just like the tax residency of an individual is determined by the 183 Day Rule, the tax residency of an organization is determined by ‘significant presence’ of the organization in any country.
To determine such a significant presence, various parameters need to be checked. One such parameter is the nature of activities performed by the members of the organization in the host country.
If the activities performed by the employee working remotely creates a significant presence for the employer organization, then the employer might be required to get registered in the host country and follow the regulatory and tax laws of the host country. This may also include paying corporate tax in the host country.
However, the nature of activities that attract a significant presence is generally manager positions that have decision-making power for the company.
Thus, only the higher and middle-level employees may be able to create a significant presence by their activities and therefore, be considered a Permanent Establishment.
3. Registration Requirements for VAT or other Indirect Taxes
When employees work remotely in a host country, the company might need to comply with local VAT or other indirect tax regulations.
This requirement is especially relevant if the employee’s activities involve sales or the purchase of goods or services.
Companies must be aware of and adhere to the specific compliance regulations for these taxes, as failing to do so can pose risks and liabilities.
This aspect requires careful consideration by companies to avoid adverse tax implications of working remotely.
Conclusion – Tax Implications of Working Remotely
But, it’s not all bad news for remote workers and their employers. It seems that governments are starting to realize that their rules are not helping small businesses and the economy as a whole, and as a response, some countries have started to come up with great, forward-thinking solutions.
Some even go as far as giving remote workers tax exemptions for 1 or more years. This seems to take all the compliance headache away from employers.
And as always, if you need any help with your international tax obligations (whether you’re the remote worker or the employer of a remote worker) feel free to reach out to us anytime.
Do you want professional help with your own International Tax Strategy and Corporate Structure?
Check out our current services. We are here to guide you and help you navigate through the complex world of International Taxes and Business Structures.
We hope you have enjoyed this article. If you have any further questions please leave us a message below and we’ll get back to you as soon as we can.
NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.