The tax consequences of employees who work abroad remotely (2023)

An employer should always know where their employees live, as their workplace can have tax implications for the organization (Getty Images/StudioImages)

Despite the widespread closure of borders, there are more digital nomads than ever –35 millionworldwide. And with the introduction of vaccine passports and increasing opportunities for remote work, a growing number of employees are drawn to theprospect of teleworkingfrom abroad.

But before employees move, employers should keep several legal and tax obligations in mind. “The risks of non-compliance are real for the employer,” says CPAAnnie Poitras, chief tax senior manager, at Raymond Chabot Grant Thornton in Quebec City. “Failure to comply with tax obligations can lead to problematic situations. It is best to plan ahead and take the necessary steps.”

ASK THE RIGHT QUESTIONS

Prior to granting an employee's request to telecommute from abroad, an employer mustmust understandwhat the employee's residence status in the new country will be and subsequent tax obligations.[Read more from Bruce Ball, CPA Canada Vice President of Taxation, on thetax consequences of remote working.]

“It is important to understand that every situation is different – ​​from country to country,” says Poitras. “There is no one solution.” Keep in mind that while employees can be upfront about where they're moving to, it's the employer's responsibility to make sure they comply with the rules abroad. In addition to seeking professional advice, Poitras advises organizations to start the process by asking the following questions:

• Does the company have to meet new tax obligations?
• Is there a social security agreement between the two countries?
• What will the employee be doing there and for how long? “Unless they have dual nationality, the length of their stay is often limited,” says Poitras.
• Should a maximum number of weeks be set for their stay?
• Do they only work from home or do they operate locally? For example, providing personal technical support to customers.
• Will they become tax residents of the host country?” If so, the individual may still remain a resident of Canada but be subject to foreign taxation. [For more information about the consequences for the residence status if you move abroad, seeThe tax consequences of leaving Canada permanently]

These answers should help an employer determine whether there is a risk of establishing a permanent establishment and thus a taxable presence in another country. Other things to consider are the types of activities performed by the employee and the profit attributable to that activity.explains Moss Adams, one of the largest public accounting firms in the United States.

Also consider the level of authority the employee exercises on behalf of the organization, such as the ability to enter into contracts. According to Moss Adams, the aim is to understand “the specifics of when a taxable presence is activated in the country where the employee works”, because the employer could be subject to income tax or file a return even if there is no taxes are levied.

UNDERSTAND THE TAX IMPLICATIONS

While some countries emphasize an exemption from local income tax when working from abroad, this does not necessarily mean that the individual will not be subject to Canadian tax, as some individuals may remain Canadian residents if their families still reside here, for example . Nor does it mean that employees will be exempt from taxes if they return to Canada, says Jean Gabriel Crevier, cofounder of the Montreal accounting firm Le Chiffre.

This is important information because a resident of Canada must report worldwide income “from all sources, both inside and outside Canada, earned after becoming a resident of Canada…” explains theCanadian Revenue Service (CRA).

Here are some other factors employers should consider:

• Employer taxes

“The first thing an employee should report to his employer is the intended new country where he or she will be living,” says Poitras. “It is not about the currency in which the employee is paid, but about the employer's tax obligations to the host country.”

An employer should also contact the country's tax officials to find out if they are exempt from paying local taxes, as interest and penalties can be high in the event of default.

“It would be wrong to think that if an employee is not taxable locally, then neither will his employer be, because other rules govern corporate taxation,” she says. “Only the host country can grant exemption based on applicable tax obligations.”

Finally, if a country has no income tax, it does not mean that there is no income tax to pay in Canada. While residents temporarily live outside of Canada, if they remain significant, their income will be taxed as they still are in the countryresidential tiesin Canada.

• Bilateral tax treaties

Besides, Canada doesbilateral tax treatieswith about a hundred countries and “even thoughthe OECDhas developed a model tax treaty, there is no universal approach,” explains Poitras.

“For example, the US treaty allows nonresident employees to apply for a withholding tax exemption, provided their earned income is less than $10,000 per calendar year or they have spent fewer than 183 days in the US in a 12-month period. and they are not employed by a US company or an employer with a permanent establishment in the US,” she says.

But again, Poitras points out, an employer must be careful because not all states comply with the federal tax treaty, even within the same country. “For example, Florida is, but not California,” she says. “That is why an employer should always know where his employees are (working), because they rarely think about the tax consequences for their employer.”

• Foreign tax credit

If you let your employees work abroad, make sure that you also talk to them about possible foreign taxes that they may have to pay locally on their wages.

“If employees in Canada file their income tax returns, they can claim a credit,” says Poitras. However, the CRA does not take social security contributions into account in all countriesif you are eligible for the foreign tax creditbecause in some countries (such as France) they can be very high relative to income taxes.

“In these cases, a taxpayer could face an additional bill, especially if their employer has not made payroll deductions and contributions, such as CPP contributions and employment insurance contributions,” Poitras added.

DO DUE DILIGENCE

From the type of work to the relevant tax treaty, employers should do extensive research before letting employees work from abroad, says Poitras.

“As you might expect, compliance isn't easy or cheap,” she explains. “If only one employee is involved, tax compliance costs such as setting up a payroll system in the host country (opening bank accounts for transfers, setting up withholding deductions, filing the necessary forms, etc.) .) are very high. And while the laws are similar between neighboring European countries, this is much less the case between Europe and America or Asia, making it necessary to do the work over and over again.”

Crevier agrees, adding that Le Chiffre currently has two employees working remotely from Mexico and Haiti, albeit temporarily. “If we had permanent employees abroad, we would consult an expertto reassess the risks," he says.

FIND OUT MORE

This article provides a general overview of detailed tax rules. Need specific tax advice? Hire a Chartered Professional Accountant (CPA) and get the best job for you. Visit your provincial or regional CPA agency's website to access a CPA directory.

Also find out how LiveCA became Canada's first virtual accounting firm and how its employees did itwork as a teamwhile they are all digital nomads. Plus, find out how CPAs,which is more in demand than ever,have adapted during the pandemic andbenefited from the experience.