Workplace Internationalization has Triggered a Change in Tax Liabilities

The legal obligations of companies are changing as the workplace goes global.



Rose McCarter-Field

By Rose McCarter-Field

We live in a world of international working and localised tax legislation. How do companies manage the complex tax requirements for an international workforce? How is government tax legislation changing to deal with an increasing number of people working for companies in a different country to where they reside?

There is an increasing trend to remote and international working which has been accelerated following the Brexit vote and the pandemic. Following the Brexit vote, the number of people leaving the UK to live in the EU rose by 30% (1). From 2016-18 this averaged at 73,642 people emigrating per year (2). As a response to the pandemic, the 20 countries with the highest number of COVID-19 cases sent 37% of migrants home (3). In both instances, many people continued to work for their UK employer after leaving the UK. But, who is receiving their tax? And who should be receiving their tax? The question may sound obvious, but workforce internationalization is resulting in significant amounts of tax avoidance.

If a programmer for example, has gone home to Germany but continues to work for the same company as they did in the UK, who are they paying income tax to? And is that employee aware that they need to pay income tax in their own country? In this particular instance the two countries have an agreement to avoid double taxation, but it isn’t simple.

If this same programmer is working as a contractor for a UK company and living in Germany, how do the German authorities know they need to collect tax from this person? It is difficult to regulate when each individual is responsible for paying their taxes correctly.

Monitoring who should be paying taxes to whom, is a complex challenge for authorities. As a result many countries are changing their tax legislation to clamp down on tax avoidance. The IR35 legislation in the UK was brought in to ensure UK employers assign correct employment status to their workforce. This legislation places the legal responsibility for paying tax, on the company rather than the individual. This legislation is being adapted and implemented in other countries as a means to tackle this tax collection challenge.

A quarter of the UK workforce has been identified by a McKinsey report to be able to work just as effectively remotely 3-5 days per week (4). That’s a quarter of the workforce that could be recruited from anywhere. With one year’s experience of working remotely employers are now seeing increases in productivity from their remote workers compared to previous office levels of productivity (4). We are seeing a longer term move towards a more remote and internationalized workplace. This opens up huge potential for geographically widening the available talent pool. It also causes a taxation nightmare. 

The lack of standardised global taxation laws means tax and employment status in today’s world is both complex and difficult to regulate. To combat this, the previous onus on the individual to pay the right taxes to the right people, is being changed. The legal responsibility will be placed in the hands of the company. Companies will become legally responsible for correct taxation not just in their country of residence, but in the respective countries of their workers. Thus companies need to understand the laws and tax systems in multiple countries to comply with them, or risk fines and legal implications. These changes will impact tax payments for employees and contractors. 

Canada, Germany, and Italy are some of the first to start to readjust their tax legislation. In some instances these legislative changes are similar to the new UK IR35 legislation. In other instances the changes are quite different, such as a blanket tax.

The enormity of incorrect tax payments has been brought under the spotlight by high profile cases such as the Uber employment tribunal. GSK have also been highlighted as having thousands of contractors that will need to be considered employees from April, when the company will be legally responsible for paying tax directly to the government due to IR35. 

In the UK, business and financial services are a large share of the economy. The most notable sustainable remote working sectors are finance, scientific, and IT (4). These sectors are showing the largest long term move to a remote and internationalized workplace. As a result, these sectors will also see the biggest impact of complex global tax legislation.

Current approaches to payroll compliance are not kitted out for such a complex change. Neither internal payroll teams nor in-country tax specialists have the legal knowledge or the language capabilities to implement legally compliant payroll systems in an international workplace. They are not geared up to deal with this.

Outside specialist help will be critical for compliance. Experienced HR specialists that know the laws in the relevant countries will become essential. For example at Project Recruit, we have partnered with 32 accountancy firms in order to ensure the acquisition of such complex knowledge requirements. These firms provide global coverage of payroll legislation and systems. This allows our clients to comply with the laws now, and the laws as they change.

    1. The Guardian, 2020 https://www.theguardian.com/politics/2020/aug/04/number-of-uk-citizens-emigrating-to-eu-has-risen-by-30-since-brexit-vote
    2. Business Insider, 2020 https://www.businessinsider.com/number-of-brits-moving-to-eu-has-risen-30-since-brexit-vote-2020-8?r=US&IR=T 
    3. Migration Data Portal, 2021 https://migrationdataportal.org/themes/migration-data-relevant-covid-19-pandemic
    4. McKinsey, 2020 https://www.mckinsey.com/featured-insights/future-of-work/whats-next-for-remote-work-an-analysis-of-2000-tasks-800-jobs-and-nine-countries
    5. PWC, 2021 https://www.pwc.co.uk/issues/crisis-and-resilience/covid-19/remote-working—next-steps.html
    6. BBC, 2020 https://www.bbc.com/worklife/article/20201023-coronavirus-how-will-the-pandemic-change-the-way-we-work
    7. BBC, 2020 https://www.bbc.co.uk/news/business-53524486
    8. Lewis Silkin, 2020 https://www.lewissilkin.com/en/insights/home-and-away-when-working-from-home-means-working-abroad

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