When does doing a little work on vacation turn into a stay that piques the interest of local tax authorities? And does a U.K. company, for example, face tax complications abroad if they have staff and key decision-makers are dotted across Europe working remotely?
National tax authorities and the Organization for Economic Cooperation and Development are grappling with those questions as the remote-working revolution blurs the lines between work, residency, and time off.
The result could be tighter and clearer rules on how long people can work abroad before falling into another country’s tax net. It’s also opening questions about social security and pensions payments for staff that keep a home in a different jurisdiction from where they are employed.
The OECD plans to finish scoping out whether it needs to tweak global tax rules to cover “workcations” and cross-border remote employment by the end of 2023, according to one of its senior tax officials.
The pandemic and rise of Zoom conference calls clouded the distinction between work and holiday and created a new generation of “digital nomads” that earn income in one place while physically basing themselves in another. That has confused traditional definitions of where people and companies should be taxed on earned income. The distinctions are important because falling afoul of the rules means you could pay tax in two places at once or be subject to a fine.
“Countries recognize that there’s an issue and that we need to make sure that the rules are up to date with the reality of the modern economy,” David Bradbury, deputy director of the OECD Center for Tax Policy and Administration, said in an interview. “We see it as an emerging set of challenges, but we think it’s fair to say that these challenges are only going to intensify.”
Early-stage discussions between the OECD, firms, and countries have thrown up a host of potential difficulties from growing staff demands for flexibility to nervousness from some countries over reopening thorny cross-border tax issues.
As Zoom culture continues to dominate in offices worldwide, businesses are grappling with risks around double taxation and compliance headaches. Current treaties to avoid issues such as double taxation are seen by businesses as insufficient to deal with the new post-pandemic office norms while experts have said employees could also risk being liable to social security contributions in multiple countries.
Currently, firms and workers are facing a jumble of complicated rules on when a worker needs to pay tax if they are staying in different countries for prolonged periods. Many places — like China, India, and Britain — count people as tax residents after about six months. In the U.S., the guidelines known as the 183-day rule are more complicated and look at a person’s time in the country over three years. In most places, rules come with caveats and exceptions but importantly can be triggered far more easily in some jurisdictions.
But officials are unsure how to treat people doing a temporary stint abroad and how long those can last before it’s classed as permanent. Companies are worried they risk nasty surprises from foreign tax authorities, particularly if executives are making key decisions and deals from somewhere other than their home jurisdiction.
What’s clear is that tax officials want to get ahead of the curve before the remote working boom goes any further.
Some 30% of Americans already plan to take a workcation this year, according to a survey by Go City. Airbnb has reported fast growth in its long-term stays of more than 28 days since the pandemic struck, a trend it has linked to greater flexibility on remote working.
The OECD is working toward a scoping note for later in 2023 to set out the remote working tax problems and scenarios being faced by countries and businesses, Bradbury said. It will then discuss with members which remote working tax issues to focus its efforts on, he added.
Businesses have asked the Paris-based organization to find clarity to allow them to offer more remote working perks to staff. With labor markets across the world extremely tight, firms are keen to gain an edge over rivals by offering workers more flexibility.
“Many companies are saying, ‘Well, this is an important part of what’s going to be needed to attract and retain talent in the modern economy and we want to make sure that we’re able to do that’,” he said. However, Bradbury added that the potential tax implications “often frame the extent to which a business is willing to embrace some of these practices or not.”
“We have been having some discussions with businesses in particular because a number of them have been quite concerned about how this issue might impact them,” he said.
The problem is also being looked at with growing interest elsewhere. The International Monetary Fund has flagged the potential problems emerging while the U.K. government’s official tax adviser published a report on the issue last year.
“As opportunities expand for cross-border remote work, a bigger segment of the labor income tax base becomes more mobile — estimated currently at 1.25% of the global personal income tax base,” the IMF said in its fiscal monitor last year. “In the future, personal tax coordination will gain importance and raise issues such as those related to corporate taxation.”