International remote working – tax and social security compliance risks

This is the second part in our blog series looking at the recent increase in interest around international remote working from employers and employees alike, and in this blog post we will look at compliance-related issues. 

Generally in this series our focus has been on international remote working whereby an employee performs duties while being physically located in a different country from that which their employer is based in. However, some of what is discussed in this blog post may also be applicable to a person who works remotely while being based in the same country as their employer, especially when the country involved has tax and social security rates which vary between its different locations.

In our previous blog post, we discussed how there are two broad types of international remote working arrangement: a virtual assignment (which is more commonly mandated by the employer); and one where an employee requests to be ‘based’ in one country while performing their role in another. We will focus mainly on the first of these but some of what is discussed will be applicable to both. However, the discussion does not cover non-employees or situations where a company may engage the services of a person outside of the organisation, such as a contractor, who is based in a different country.

The ability to work from a different location will always appeal to many: for example, the person who wishes to escape the repressive humidity in Hong Kong each summer and work from Vancouver or their counterpart who wishes to escape cold, dark winters in Hamburg and work from the beach in Thailand instead. However, this can throw up many questions associated with compliance. Although the concept of international remote working is not new, its widespread use was thrust upon many by the Covid-19 pandemic. Many countries are still formulating legislation on how to deal with a person who is performing a service which benefits a company based in country A, while they themselves are based in country B. When deciding to use virtual assignments, it is critical for organisations to address the risks associated and the tax and social security liabilities they create before deciding if they are a viable option.

Taxes

Ensuring compliance with income tax obligations is a challenge commonly cited by people managing employee mobility. In our 2018 Expatriate Salary Management Survey, approximately 40% of participants rated compliance with income tax requirements as a significant challenge for them. This proportion rose to 65% in the case of companies managing virtual assignments when we asked a similar question as part of our 2020 Managing Mobility Survey. When managing a long-term assignment, ensuring that the assignee is compliant with income tax liabilities is generally straightforward: the employee is usually located in the same location as their income is sourced and therefore liable to pay taxes on their assignment income exclusively in the host location. In some cases, there may be added complexity at the start and end of the assignment if the employee remains tax resident in either the home or host location owing to the fact that the assignment has started or ended partway through the fiscal year. There may also be cases where the employee remains liable to pay taxes in the home location on their assignment income for the entirety of the assignment (the most commonly cited example is American citizens who are required to pay federal taxes in USA on income sourced from overseas). However, overall the issue of where the employee is required to pay taxes on their income is normally fairly straightforward.

In the case of virtual assignments, there will more often be a challenge associated with the fact that the employee’s source of income may be from services performed for a company based in location A, while the employee is resident in location B. This may be complicated further by the question of where the company assuming responsibility for paying the employee’s salary is based. This will likely give rise to concerns that the employee’s income tax liability may increase significantly during an assignment.
 
Let’s look at an example - an employee is based in Thailand, at the request of the employer, undertakes a virtual assignment and is seconded to work remotely for the company’s affiliate in Japan. In principle, as the employee’s income is derived from a role they are performing for the benefit of the Japan-based entity, their employment income should be subject to taxes in Japan. However, as the employee remains resident in Thailand, they will likely remain liable to tax in Thailand on the same income, presenting the employee with a requirement to pay taxes in both Japan and Thailand. Therefore, the employer will likely need to ensure that this additional tax liability is reflected in any adjustment made to the employee’s compensation to ensure that the employee is no worse off. In addition, the HR or global mobility function will need to investigate the existence of double-taxation treaties to see if there are ways that income tax paid in one country can be credited against income tax liability in another country, and which party has the primary right to tax the employee. An added complication may be that if the employee remains employed by the entity in Thailand and paid via the Thailand entity’s payroll, the company will need to investigate how the employee’s income can be declared to the relevant authorities in Japan so that the employee’s income is correctly declared and due taxes are paid.

In the case where an employee chooses to work from somewhere else, many employers may take the stance that if the employee wishes to work from a different country, any consequences in terms of additional tax liability should be their own responsibility. In principle, this would be a fair assessment. However, in the interests of retaining crucial employees, a responsible HR function will seek to make the employee aware of the potential implications of choosing to work elsewhere from a tax liability perspective. The employee can then make an informed decision rather than pursuing a desire to work elsewhere and then later deciding to leave the company and work for a local employer in their new location of residence after they find out that their tax liability has increased significantly.

Social security

There is also the issue of social security contributions to be mindful of. While some jurisdictions allow a citizen to maintain contributions to their social security scheme even when that person is not employed in that country (an example being Singapore where a citizen or permanent resident based outside of Singapore can continue to make voluntary contributions to the country’s Central Provident Fund even when not employed by a Singapore company), some countries link a person’s eligibility to make social security contributions to their employment status. 

This may mean, for example, that a worker who chooses to remain in the UK whilst working for a company in USA may not be able to pay contributions to the UK’s National Insurance scheme in full, adversely impacting the value of their government-provided pension when they reach retirement age. Similarly, a person who has a contract to work for a company in Thailand but performs their role while being physically present in Australia may find that they are obliged to make contributions to the Thai social security scheme, but that the company is not able to make contributions to an Australian superannuation scheme on behalf of the employee. Therefore, whereas in the case of taxes the risk to both parties (the employee and employer) is a requirement to pay taxes on income in multiple jurisdictions, the risk to an employee in this case may be the fact that they are not eligible to make contributions to a social security scheme they later want to benefit from.

Corporate tax liability

Finally, there is the issue of corporate tax liability and the risk associated with creating a ‘Permanent Establishment’ through remote working. Countries classify the concept of a Permanent Establishment differently, but generally it means that a company based in Country A but which also has operations in Country B may be liable to pay taxes on income derived from its Country A operations in Country B and/or vice versa. The risk in the context of international remote working is that some countries may treat an employee’s presence in their country as sufficient to create a Permanent Establishment. This means that not only is the employee liable to pay taxes on their income in that location, but the company may also be liable to pay corporate taxes on the same income in that location too, potentially creating an even greater cost to the company.

All of the above considerations show that while both employers and employees may see the benefits of the greater flexibility associated with remote working, the degree to which international remote working may be embraced by employees and employers will depend on the extent to which these issues can be managed. From an employer’s perspective significant management resources, internally and externally, will be required to assess risk and ensure compliance. 

For truly multinational organisations, compliance risks can likely be reduced by employing the virtual assignee or remote worker via the organisation’s business entity in the country where the employee chooses to be based. However, even this may not always be consequence free. A final example would be an employee choosing to work from Vietnam for a short period of time who may not wish to make contributions to the Vietnamese social security scheme that they would be obliged to if employed by the company’s Vietnamese entity during their stay. There may also be extra liabilities for the company caused by having a person nominally employed in Vietnam but providing a service for an entity based elsewhere. 

In fact, the complexities associated with all of the above perhaps underline why most companies responding to our Managing Mobility Survey in late 2020 stated that virtual assignments are mainly considered as a temporary solution suited to situations when it is not possible for an employee to relocate or repatriate at the start or end of the assignment. 

Our next blog post in this series will look at other compliance issues such as the right to work, labour laws, payroll, healthcare and insurance among others. What is clear though is that for any company wishing to embrace virtual assignments, compliance will be critical in ensuring that they can be a beneficial addition to an organisation’s mobility framework. 

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