If an employee relocates to a jurisdiction outside of their regular host country for an extended period, the employer should examine whether the activities of this employee will result in tax filing and payment obligations in the new country. This could occur if the employee’s activities constitute a taxable presence. Even work conducted remotely can trigger a taxable presence resulting in tax filing and payment obligations.
While treaties may provide relief where the employee’s activities do not constitute a permanent establishment, companies must analyse the facts and circumstances of each situation against local laws and employers should develop a mitigation or compliance strategy as appropriate. In addition, COVID-19 may change the way companies carry out business and send goods into other countries. As a result, multinational companies may need to review their current corporate structure, supply chains and existing intercompany agreements, along with tariff and other customs implications.
Will the country of residence determine where an employee is taxed?
In relation to employment the primary factor determining liability for individual income tax is generally the worker’s country of residence. However, employees who work in cross-border situations may be taxable in countries other than their country of residence. These rules are largely based on the physical presence of an individual in a country. However, given the unprecedented circumstances of COVID-19 the working arrangements of many employees, who previously worked in foreign countries or across borders, mean that many are now working remotely or otherwise remain based in their home countries. This can still create cross border tax issues, especially if an employer is located in another country that is different from the employee’s home location.
From an international taxation perspective, the general rules to determine which country has taxing rights remain applicable. Consequently, the country in which these employees should be taxed, may change due to the pandemic. Within this framework, it is important to verify what consequences may arise for income tax, payroll tax and other employment obligations in both the employee’s country of residence and in the country in which the work is carried out. This would also apply to the obligations of the employer in their home country.
What about temporary tax measures introduced to deal with changed working arrangements?
It is essential to consider the exceptional measures that some countries have introduced to deal with the consequences of unexpected changes in working patterns due to the pandemic. Many countries have implemented COVID-19 tax measures to help alleviate the unexpected tax issues for employers and employees due to remote working arrangements. However, as some of these measures were only temporary, it is important to continually review these arrangements to ensure the tax obligations for the employer and employee are fulfilled on a timely basis.
What are employers’ global social security obligations?
Individuals who have been displaced from their normal work location and are working from a different jurisdiction could trigger an unexpected social tax liability (e.g., taxes paid to support retirement, health care and other social programmes administered locally) because social tax liability generally arises in the location where the work is performed. As such, companies should be aware of the applicable country’s social tax obligations, so they can take the appropriate steps to meet the employer’s and employee’s local compliance and payment obligations, including having in place appropriate documentation (e.g., certificate of coverage).
From a social security point of view, European Regulation 883/2004 on the coordination of social security systems is applicable in cases where there is a cross-border working arrangement within the European Economic Area (EEA). In relation to non-EEA countries, bilateral social security treaties contain the relevant provisions. In cases where an employee or self-employed individual is based primarily or fulltime (tele)working from home following COVID-19 measures, this might lead to a change of the applicable social security scheme that applies.
In North America, totalisation agreements help to determine which social security system employees and employers are obligated to follow. In a remote work arrangement, this may not be that easy to navigate. An employer located in one country may be required to remain under their home social security system for their employees. However, for employees located in another country who wish to remain under their home country social security system, certain elections may be required to allow cross border coverage.
How is international mobility impacted by privacy regulations?
Companies with internationally mobile employees may be required to share and store personal data of their employees, and possible family members, with parties in other countries to meet local compliance requirements in the countries where employees perform their duties. However, under current privacy regulations, such as the GDPR, the sharing of personal data across borders can prove to be a challenge.
In an era where data is abundantly available and shared, privacy and protection of personal data is under the spotlight. The fines for GDPR violations are serious and can range from 2% of a group’s annual turnover, with a maximum of 10 million euros, to 4% with a maximum of 40 million euros. This not only applies to businesses based in the European Union ( EU) but also, potentially, to companies established outside the EU but with connections to the EU or companies that transfer the data of EU residents.
Companies with internationally mobile employees must ensure compliance with privacy regulations, such as GDPR, when transferring personal data across borders. This can cause tension, since transferring this personal data may also be key in being able to comply with other areas, such as tax.
Preparation starts with awareness and education. A Privacy Impact Assessment can help companies to identify personally identifiable information, including identification of internationally mobile employees and the personal data that is exchanged, stored, and processed across borders. Knowing where your employees’ personal data is and how it is used is a priority in contributing to robust data privacy protection.
Which countries’ employment laws prioritise posted workers?
From an employment legislation point of view, secondment agreements within the EU are, in principle, governed by the law of the posted worker’s home country. That said, the legislation of the host Member State regarding basic employment conditions such as minimum wage, maximum working time and minimum rest time, rules regarding health, safety and hygiene at work, continue to apply.
In cases where workers are not able to relocate to the new location due to COVID-19 restrictions, the posted worker should generally respect the rules of the host country, and they will remain entitled to social security benefits from the state where they pay social security contributions.
The employment agreements for frontier workers are usually governed by the employment legislation of the state of employment and therefore currently employment contracts will continue to be governed by the law of the country of employment, unless the frontier worker agreed otherwise with their employee. The fact that the frontier worker is now working from their home country due to travel restrictions, does not change the applicable employment legislation.
What is the relevance of DAC6 for the international movement of employees?
In essence, DAC6 rules require taxpayers and advisers or intermediaries to disclose tax planning arrangements to tax authorities. DAC6 does not refer to concepts of aggressive tax planning but compiles a list of the features and elements of transactions that present a strong indication of tax avoidance or abuse that may lead to a reporting requirement. The main goal of the directive is to create a balance between the need for early information for tax authorities on aggressive tax planning schemes and the compliance burden for advisers and taxpayers on the other hand. Failure to comply with the directive may lead to stiff penalties exceeding EUR 1million.
While international movement of employees is mainly driven by the business, DAC6 may still lead to reporting or documentation requirements for the taxpayer or its intermediary on why the international movement does not need to be reported. Either way, it creates an additional administrative burden for employers. That said, it can also be used to track and remain in control of employees’ international movement.
DAC6’s reach is limited to cross-border arrangements concerning either more than one EU Member State or an EU Member State and a third country.
The reporting obligations under DAC6 are separate from any tax compliance obligations for wage/payroll and personal income tax purposes in the jurisdiction where the work is physically performed and these compliance obligations should always be reviewed in isolation. It could be that there is no reporting obligation for DAC6, but that wage/payroll and income tax needs to be reported according to where the employees physically perform their activities.