The tax challenges of international remote work
Due to the impact of the COVID-19 pandemic, many employers have seen an increased demand for international remote working arrangements. We have briefly touched upon the OECD guidelines relevant to these arrangements in a prior article.
Different tax consequences of international remote working may arise for both employers and employees, depending on the facts, such as employees working in South Africa for a foreign employer and employees working abroad for a South African employer. However, there are certain key issues that are common to these scenarios. We deal with some of these below.
- Corporate income tax considerations for the employer company
Where an employee works abroad, a key consideration from a corporate income tax perspective is whether the activities of that employee in the foreign country could create a taxable presence for the employer.
This would most likely be the case if:
- the employer is regarded as carrying on a trade or business in the foreign country through a permanent establishment situated in that country (in which case, the profits of the employer which are attributable to that permanent establishment may be taxed there); or
- the employer may be regarded as a tax resident in that country, usually due to its place of effective management shifting to that jurisdiction (in which case it may be fully taxable there).
Determining whether such a taxable presence may arise for the employer would typically depend on the role and activities of the employee, the domestic law of the country concerned as well as the provisions of any double tax treaty concluded between the relevant countries, if applicable. An additional consideration is the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("MLI"), which will enter into force in South Africa on 1 January 2023 (click here for our newsflash on the MLI).
- Employees' withholding tax and tax compliance
An important practical issue for both the employer and the employee is whether, and in which jurisdiction/s, employees' tax withholding and tax compliance obligations may arise.
This often depends on the location and the duration for which services are rendered by the employee, as well as the provisions of any double tax treaty concluded between South Africa and the foreign country, if applicable. In addition, a change in the employee's tax residence status as a consequence of the remote working arrangement may impact on the employer's tax withholding obligations
Where more than one jurisdiction requires withholding of employees' tax (usually accompanied by a local filing obligation for both the employer and employee), this would result in a dual withholding obligation for the employer and a cash-flow issue for the employee (which may be temporary, depending on the relevant local legislation and potential refunds, exemptions and/or foreign tax credits).
Other relevant considerations include the situation where remuneration is paid to an employee by different employers in different jurisdictions, and remuneration (such as a bonus or share incentive payment) payable to the employee relates to services rendered in different jurisdictions.
3. Tax residence for employees
In respect of employees relocating, it will be necessary to determine whether they will cease to be tax residents of a particular jurisdiction as a result of their relocation and, if so, when this will occur. This is usually a factual enquiry based on various factors and will depend on the individual's personal circumstances.
If it is determined that the employee will cease to be tax resident, there are often various deemed disposal and timing rules which apply and which will need to be considered.
The above are some of the key tax issues which must be carefully thought-through when considering remote working arrangements. In addition to these and other tax considerations, there are various immigration, employment law, exchange control, and regulatory issues which may arise, both locally and in the relevant offshore jurisdiction. Most of these issues are case-specific and require bespoke legal analysis.
As the frequency of international remote working increases, employers will need to bear these complexities in mind when assessing and implementing these arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.