The pandemic has created a notable shift in the approach individuals and companies are taking to remote working which prompts a number of tax and social security issues for both the employer and the employee. The OECD has recognised this is a pressing issue with work set to be undertaken during 2023, however the UK’s Office of Tax Simplification has also opened a review to understand whether hybrid working arrangements are set to continue and whether there are opportunities in the UK tax system to make things simpler.
Lockdowns and travel restrictions have put a number of the tax considerations in sharp focus, although arguably rules based on an outdated notion of physical presence were already creating friction. From a corporate perspective there has been a risk remote workers create an accidental permanent establishment (PE) for some time. The rules on establishing a PE are multifaceted and vary depending on treaties, but if a taxable presence is created in a jurisdiction by the PE then the company will need to understand what its tax exposure is and where those liabilities rest. Complications may occur in allocating profit to the PE jurisdiction and the related transfer pricing considerations this entails. VAT also poses a risk if there is a fixed establishment which may require registration and obligations to file VAT returns.
Unforeseen tax consequences can also arise in relation to the corporate residence of a company if key decision makers exercise their powers from another jurisdiction, for example, if board meetings are held virtually. For MLI modified treaties, the place of effective management tie-breaker has been replaced with a process by which treaty residence is determined by mutual agreement between tax authorities. Although tax authorities are not seeking to revisit previously agreed positions, a material change in circumstances, such as this, may prompt this to be reviewed.
From an employee perspective there is an obvious risk of exposure to additional tax. This depends on where the individual is considered resident and whether there is a tax treaty. Social security obligations generally arise in the jurisdiction where the individual is located although there are some international agreements in place (e.g. within the EU) to limit social security obligations to one jurisdiction. Nevertheless this entails registration with relevant tax authorities by the employee and/or employer creating administrative friction.
The complexity of these issues is compounded by the specific circumstances. It is not simply about working remotely, but what those individuals are doing. Invariably this creates a burden for both the employer and relevant tax administrations.
The pandemic has magnified the issues, but they have been ripe for modernisation (and by that read, simplification) for some time. It is welcome that the UK is willing to tackle this, however given these are cross-border issues they ultimately require coordinated international action. It will be vital for the OTS’s review to flow into the OECD’s work in this space next year.
"a high-level evidential review of the extent to which hybrid and distance working is likely to increase, whether this trend involves more overseas working, and whether the changes in working practices give rise to any new problems or challenges for employer and employee compliance."