As companies move toward hybrid working arrangements, there are many broad issues to tackle from tax and regulatory compliance to real estate and business strategy. Finance and treasury departments need to be attuned to these different impacts and plan effectively alongside other parts of the business. And when it comes to tax and human resources, there are real obligations to consider by allowing people to work in different countries (in the US this applies to different states too), away from their home working locations. Treasury will need to assess what this means from a cost perspective, and where the company is putting its funds.
Earlier in the pandemic, authorities announced reliefs to mitigate unintended tax consequences of having people work in places where ordinarily they wouldn’t be. Largely, however, these no longer apply. Where employees are still working remotely or in a hybrid arrangement, there is now the potential of companies accruing tax risk in these different countries. Treasury will have to think how this could impact the audit and how the business should address this.
It is important to remember, however, that while the working landscape has changed, the tax regulatory landscape hasn’t – we are back to where we were pre-pandemic, governed by double tax treaties and other bilateral and multilateral tax and social security agreements. This means employees in a different country could foreseeably create corporate tax exposure. Treasury and finance teams will have to determine if that individual could, by virtue of how long they are there or what they are doing, create a permanent establishment, which is deemed as a corporate taxable presence for the company and could force the company to pay corporate tax in that foreign jurisdiction.
There are also risks for companies as employers. Companies may need to register as an employer or operate a payroll. If companies don’t do this, they are potentially liable for the tax not withheld for the employees in that location. In short, it could open the company to employment taxes it might not otherwise be subject to, and in Europe particularly, the employer social security costs can be significant.
Although it’s still early days to identify what enforcement activity will be taken by tax authorities, we’ve seen cases in Israel and New Zealand where employees working remotely have been contacted by tax authorities and told they need to pay taxes. This tax season could put employees on those tax authorities’ radar when tax returns are filed – and companies must be prepared to address any tax consequences that arise.
The workforce has been liberated in a way unforeseen at the start of 2020, with many businesses that wouldn’t have considered hybrid working now accommodating what employees want – which is now amplified, given it’s an important source of talent attraction in a post-pandemic work environment. Companies must find a way to navigate a path forward that meets their business needs and manages tax and employee obligations. By leveraging tools to track the correct tax requirements for an employee’s work locations and the element of change management around the payroll, companies can effectively tackle these new complexities.