Insights into global expansion & employee retention

Published: July 22, 2022

Tax Implications When Working From Another Country

Remote working policies have been introduced during the global lockdown. While the world was in a pandemic-induced cocoon, employers have been forced to shift their operations online. They soon realised that their businesses could still function smoothly while employees worked from the comfort of their own homes.

Additionally, it provided previously unexplored benefits to staff with families, such as the degree of flexibility it offered during the lockdown. Finally, as more employers opt for remote and hybrid working arrangements, both employees and employers are unaware of the potential tax pitfalls.

In most countries tax laws, the location where work is performed determines the source of the income from services, such as employment income. Therefore, it becomes challenging for individuals to submit their personal income tax returns due to their freedom of movement, even though remote work makes them able to be more mobile than ever before.

Two ways to illustrate the consequences of the complexity of working from another country

Scenario 1: Remote working while in another country

After an extensive lockdown, you decide to travel to test remote working from abroad. After you prove yourself to be a competent remote worker, your employer then agrees that you don’t have to be in the office. You become a contract employee, and tax will no longer be deducted from your pay. It is so great abroad that you and your family decide to relocate there, and the destination is close enough if you have important meetings to attend in your home country.

An employee working remotely in another country for the same employer based in their home country is viewed as a non-resident for tax purposes. This is because you aren’t a tax resident where your salary is sourced; therefore, your income should be taxed in the country you are in because that’s where you were when you earned that income.

Even though you weren’t living in your home country at the time of earning the salary, you are still a tax resident, and therefore you have to pay your home country’s revenue authority also. So telling you tax authorities that you paid your income tax due that was due to them to another revenue authority won’t do you any favours. At the same time, to pay tax in both countries would be a fruitless experience for you as the taxpayer.

When you are a tax resident in one country and getting an income from another country, to protect yourself from double taxation, there are different tax credit measures and relief measures in place, in the form of a Double Taxation Agreement (“DTA”), along with domestic laws of the separate countries.

Meaning, for a resident working in another country can earn an income in that other country from their home country’s employer, pay tax to the tax authorities where you are based, and apply annually to your home country’s tax authority for the relief tax credits under the DTA between both countries to avoid paying double tax.

Scenario 2: Remote working for a foreign company while abroad

After one year in your new location, you are offered an excellent paying position with a firm in yet another country. You obviously jump at the opportunity without considering the ripple effect and its effect on your finances. You now become a home country citizen working in another country for yet another company.

Nothing has changed from your home country’s tax perspective. You are still a tax resident and are legally bound to submit annual tax returns, though you can claim relief under the DTA between the other two countries involved.

However, the problem comes with the new employer in the third country. If they move the tax responsibility to you as a contracted worker by giving you your salary, you must consider how this will affect your position in the country you live in. You are earning income there, so you are also subject to being taxed there.

However, your home country’s tax revenue service will need some serious convincing. Liaising with them can become quite complicated at this stage of your game. This is because you are no longer earning an income from a home country employer. Instead, you receive foreign income and pay tax to foreign revenue services. This issue has now become unique to your own circumstances.

Things get even more complicated when your current employer withholds an employee’s tax and pays it to their country’s tax authority. You can now be triple-taxed. Suppose your DTA has been violated in any way. In that case, you will be paying personal income tax in the country you are operating from (deducted from your employer), tax in the country you are residing in (where income was sourced), and also tax in your home country (where you would be a tax resident without the opportunity to claim relief under a DTA).

Protect Your Income Before You Cross Any Borders

When crossing borders while remote working, you must understand that, you will be liable for tax within the country where you are situated when you earned an income. And because international employers do not always understand tax implications to you as an individual, or the nature of tax in your home country, or even that of the country where you are currently earning your income, before venturing out into working remotely, it is strongly advised to get guidance from a tax professional.

Do You Have Any Questions About the Tax Implications of Remote Working

At Playroll, our crew of experts with more than 20 years of experience is just the team to chat to.

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