After the coronavirus pandemic, the possibility of remote work became very popular, and eventually the opportunity to work from abroad. In such a situation, there was uncertainty in which country the personal income tax would be withheld. The current situation with “digital nomads” – employees who receive income in one country but live in another forced companies to turn to international intergovernmental organizations and state tax authorities for help.
The Organization for Economic Cooperation and Development (OECD), which includes 38 developed countries such as the United States, Germany and France, may revise the taxation rules due to the increase in the number of employees of companies engaged in work from abroad in recent years. One of the main issues will be the period after which a person is considered a tax resident of another country. With the advent of “digital nomads”, the number of gaps in tax legislation has only increased, so it is extremely important for companies and their employees to avoid problems with tax authorities to avoid fines and possible additional costs for paying taxes in two jurisdictions.
Since the possibility of remote work retains and multiplies its popularity, companies have to make additional efforts to prevent problems with double taxation and compliance with the requirements for social and pension contributions to the budget. These problems should be resolved by agreements on the avoidance of double taxation between countries, however, employers say that in the new economic conditions these agreements are ineffective, and experts say that if you do not make changes to the current legislation, there is a possibility of the need to deduct social contributions in both countries. If it is necessary to pay funds for an employee at a remote location to social funds, employers’ expenses for each employee can grow at least 1.5 times.
The OECD plans to develop by the end of the year a list of taxation problems that companies have encountered with the advent of remote work and then the organization will have to select from this list those items that are subject to revision or clarification. In addition to income taxes, there are also issues with the deduction of social and pension payments for people working remotely abroad.
Now, the main problem for organizations is the lack of a clear understanding of how to calculate taxes for foreigners before they receive resident status in the host country. Companies have certain concerns related to the residence of its employees and transactions abroad, as this directly affects the possible requirements from the tax authorities to the employer company. Therefore, to minimize the risks of double taxation and additional costs, companies need help in solving such problems, and the earliest possible amendments to the legislative framework on taxation.
Many employees prefer to be able to work remotely, and take this into account when applying for employment, so it is important for employers not to create new gaps related to the taxation of this category of employees. Companies where employees have flexibility in choosing the format of work are more popular with potential employees than companies with a more conservative approach to the format of work, so companies try to have as many opportunities as possible to attract the most talented employees.