“The COVID-19 pandemic has challenged all of us to think, live, and work in new ways. We will offer as much flexibility as possible to support individual workstyles, while balancing business needs, and ensuring we live our culture.” Kathleen Hogan, Microsoft Chief People Officer in a memo to staff.
The pandemic is presenting significant change in people’s lives and opening lifestyle choices about where people choose to live. In the UK, it’s not just about moving out of London and other big cities towards the countryside and coastal areas. It’s also about moving countries, as businesses with large international workforces are experiencing team members wanting to live in other jurisdictions whilst continuing to work for their current, UK based, employer. In addition, travel restrictions and quarantine rules due to the COVID-19 pandemic have meant that some employees must remain overseas for longer than originally planned. Foreign workers in the UK might also have returned to their home countries to avoid prolonged absence from friends and family.
It has been reported recently that Microsoft are the latest company to offer a ‘hybrid workplace’, where employees move to different cities and countries, often because they can have a better standard of living further away from larger more expensive cities. Businesses now have to re-think how they operate; how money could be saved not only on office space, but also on the payroll if the ‘weighting’ for a more expensive living location is no longer required.
Managing your workforce and the compliance which surrounds an international operation presents significant challenges, particularly with regards to taxation. Getting the right advice along the way is essential for the wellbeing of your international workforce and to avoid unforeseen cost implications.
Headline tax risks
- Risk of non-UK tax obligations arising for employees overseas – whilst some countries are relaxing the rules on when an employee might become resident for income tax purposes, there is a risk that the longer they work outside the UK, the more likely they will trigger non-UK tax obligations – the key here is to avoid any dual taxation
- Social Security – companies may be required to operate employer Social Security in the overseas country, especially under current EU Regulations which still apply to the UK at the present time
- Risk of creating a ‘permanent establishment’ – having employees work overseas could accidentally create a permanent establishment in the overseas territory. The risk increases the longer an employee works overseas, and it could mean that companies have to file corporation tax returns (and if applicable pay tax) in the particular country.
How to avoid pitfalls of overseas taxation
- Review local tax obligations
It is important to be aware of the local rules of tax residence, as these will determine the individual’s residence position for tax purposes in the overseas country. Several countries have relaxed their regulations due to the current global pandemic, but this does not mean that businesses should be complacent. The employee should generally expect residence to be determined by how many days he or she spends in the overseas country in a year. It is possible to be resident in more than one country and if the individual is also UK tax resident, they may have reporting and tax obligations in both countries. If there is a double tax treaty, that may give relief in the UK for overseas tax paid but not without having the burden of tax filing on more than one country and added complexity. The employer might have more complex payroll obligations in some circumstances. In cases where there is exposure to employment taxes in another country as well as the UK, with advance planning it can be possible to reach agreements with HMRC, which could help alleviate cash flow
- Evaluate Permanent Establishment (PE) risk
The employer should also check that the actions of the employee overseas and the nature of the work overseas are not going to cause the UK employer to end up with a PE or branch overseas. For example, if the employee is signing contracts and deals overseas such as engagement letters and other business contracts. The risk is that an overseas presence is such that a PE is established in the overseas country and if so, the overseas country will seek to tax the profits attributable to the PE. This would increase the overall tax on business profits and add layers of additional complexity to the business reporting in both countries.
HMRC has already issued some guidance covering situations where individuals are working in places and circumstances that are not the norm due to COVID-19 related restrictions. HMRC has stated that a PE in the UK would not be acquired after a short period of time as permanence is required. Whether or not a PE is formed overseas though entirely depends on the law and interpretation of the overseas country. It is better to err on the side of caution than risk unexpected adverse outcomes and taking advice in the UK and overseas is strongly recommended
- Keep careful records to avoid issues with EU Social Security
Employees working overseas could also trigger employer obligations particularly with regards to employees returning to their home country to work from home in the EU. This could trigger a non-UK Social Security liability if they work overseas for more than a quarter of their total working time. The UK is still bound under the current EU regulations which state that UK employers in such circumstances would have to register to operate employer Social Security in the overseas EU country. The EU is currently reviewing these regulations, but it is important for both employers and employees to keep a careful record of the number of days they work in a particular country
- Conduct a review of overseas staff
It is more important than ever for employers to review their workforce and start to identify employees whose working situations might trigger compliance obligations. For many companies, these new working arrangements will not have been in place for long and naturally it feels like we are in a novel situation. However, it is essential for both employers and employees to assess the risks and familiarise themselves with the regulations for the various jurisdictions. This is particularly important for companies with a large workforce overseas.
How Mercer & Hole can help
We can help you in a number of ways from advice on regulations for particular countries via our overseas networks through our membership of The International Accounting Group (TIAG) to assisting in a risk management review of the tax implications on your overseas staff. Our team can help you avoid the pitfalls that might arise in the unusual working situations we now find ourselves in and which are likely to continue for some time.