COMPLIANCE
Flexible and remote working for overseas employees
Olena Chilton, senior manager - global employer services / expatriate tax at BDO, explains how to provide flexibility to employees working overseas while ensuring management of the associated compliance risks
S ince the Covid-19 pandemic, flexibly, including working remotely from a different country. Allowing staff to work abroad is seen as a benefit to them and can also offer advantages for the business – such as the ability to attract new talent, save on operational costs, increase productivity and improve staff retention. However, allowing employees to work overseas brings a complex web of compliance risks, both for the individuals and their employers. This employers have seen a sharp rise in their employees wishing to work article aims to provide a roadmap for the issues to consider and to ensure compliance when employees work from overseas locations. The compliance risks The first step in managing the risks involved is to understand the landscape. Different countries have varied tax and social security laws, employment and labour law regulations and immigration requirements. It is crucial to have a solid understanding of these nuances to avoid any potential pitfalls involved. Income tax: Depending on the host country’s domestic tax rules, the employee may become liable to income tax in the overseas jurisdiction. If such liability arises, the individual is likely to be required to file tax returns in the host country. The basis on which income tax liability is determined will depend on the individual’s tax residence in the host location, as well as other factors. In some circumstances, the employee
“To manage compliance effectively, it is essential for the employers to establish robust policies to navigate the complex landscape of international remote working while wishing to offer flexibility to their workforce”
may remain a tax resident in their home country while triggering tax liabilities in the host country. In such cases, it needs to be determined if a Double Taxation Agreement exists between the two countries and whether an exemption from income tax might be available provided certain conditions are satisfied. If exemption under the Double Taxation Treaty is not available and the same source of income becomes taxable in both jurisdictions, a foreign tax credit would need to be claimed to eliminate the burden of double taxation. The situation would get even more complicated and result in cash flow issues where payroll / withholding at source is required in both countries in real time (e.g. monthly) whereas applicable foreign tax credit and associated tax refund could only be claimed through filing of a year-end tax return, typically sometime after the end of a tax year. There are often significant complexities involved in dealing with the interaction of tax liabilities arising in the home and host country, depending on the circumstances and the length of the international working arrangement, and professional support would be required.
Social security: Similarly to income taxes, social security may become due in the host country. There are reciprocal social security agreements in place between many countries which will determine where the social security contributions are due, based on the employee’s circumstances. This may have an impact on the individual’s entitlements to the benefits linked to social security contributions in their home country but could also be costly for the employer if they become subject to overseas employer social security charges (e.g. some European counties employer social security contributions are considerably higher that UK National Insurance). Registration and compliance: Employees working abroad for their home employer may trigger a requirement for the home employer to register with the overseas authorities and operate a form of income tax and / or social security withholding. The registration and withholding operation may be costly and administratively burdensome and potentially result in a cash flow issue to the employee as mentioned above. Employment / labour law considerations: Local labour laws may dictate specific contract terms, benefits,
| Professional in Payroll, Pensions and Reward | July - August 2024 | Issue 102 30
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