New working environment triggers tax compliance challenges

Despite a surge in vaccinations around the world, the pandemic continues to infiltrate our lives and is set to change our working environment forever.

Having witnessed the benefits of remote working, organisations are now looking at their workplace through a different lens. Whether the future of business will be marked by remote working or flexible workplace, only time will tell, but for now each decision taken by employers will need careful consideration as new working environments will present significant tax compliance issues.

Kiki Stannard, managing director at ZEDRA London, says that businesses switching to remote working and aiming to relocate their headquarters must take tax regulations into account, particularly for employees working abroad.

In April last year, almost half of the UK population worked remotely, according to the Office of National Statistics (ONS).

On the other side of the Atlantic, 83 percent of employers in the US reported that a shift to remote working had been a successful experience, with less than one in five executives claiming they wanted to return to traditional pre-pandemic workplaces, revealed a PwC survey.

Whilst the positive experience encountered by employees reflects on a long-term trend, employers will need to ensure they comply with tax rules of each country they have a presence, including those remote workers.

“It’s not so much about tax planning, it’s more about tax compliance. Because if they’re going to have employees in different locations, those employees can potentially create a permanent establishment for the employer,” says Stannard.

Organisations must consider their employee’s presence and business activities within another country as this could create compliance issues for corporation tax reporting, sales tax, and business registrations, according to Stannard.

“There is going to be a risk of a business presence in these locations where you have salespeople or other local employees,” she says.

The level of information required by tax authorities will also depend on each country, adding another burden for businesses embracing cross-border remote working.

“You cannot have an employee operate in most countries without registering your business and having a locally registered entity,” says Stannard. “With coronavirus, the lines have been blurred.”

Organisations must also consider local payroll issues.

“We’ve seen a number of businesses where they will have employed foreign nationals at headquarters and those employees have returned to their home countries and are working from there,” explains Stannard.

“Once you’ve established an employee is going to stay in a particular location, you have  to consider whether you are required to run a local payroll, also the  employee has different entitlements under the local employment law.”

The employee could face local requirements for mandatory benefits such as pensions, which the employer will have to set up.

To tackle the arising tax challenges, businesses will need to establish collaboration between various in-house finance, legal, and HR teams, particularly as in-house support functions will be impacted by employees working remotely, according to Stannard.

“It could be something as simple as finance team arranging to pay an employee in a different currency, or the legal team needing to understand the local employment law,” she says.

In these turbulent times, lowering costs has been at the forefront of businesses minds to remain resilient. Meanwhile additional corporate tax arising from the pandemic has also created an increasingly competitive environment between states and countries. But whilst re-designing workplaces and relocating in a different jurisdiction has become the solution for many, failing to comply with new tax obligations could yet be an additional bill for employers.

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