If Covid-19 has taught us anything, it is that the use of an exclusive office within which to perform your work is no longer an absolute requirement.
While not a new concept, the popularity of an island-hopping, ‘working near the waves’, digital nomad life appeals to many, even professionals. But very few individuals or employers consider the inherent tax risk with this new-age working model.
While technology has kept up with the changes, the basic tax principles remain the same and should always be considered, because international tax law has not evolved in this area as much as one may think. This is not to say there is no space for digital nomads, on the contrary, this is increasingly becoming an important consideration for any job-seeker – the ability to work from anywhere.
Here, we are more concerned with employees who wish to work remotely and what an employer should consider when introducing a ‘work from anywhere’ policy.
The risk for the employer, and one that needs to be carefully managed, is the possibility of creating a so-called permanent establishment in another country. This is essentially fancy lingo for creating a tax presence in another country. While the analysis and ultimate answer to whether a tax presence is created is cumbersome and involves a number of considerations, an important consideration is whether the presence of an employee in another country could create a taxable presence for the employer in that country.
If this is the case, the employer would essentially create a so-called ‘branch’ in that country, and be subject to corporate income tax on any business profits that could be attributed to that branch. There may also be VAT consequences, but the two tests are not mutually exclusive.
For an individual, the general rule is that a taxable presence is created after an individual spends more than 183 days in any 12-month period in a certain country, but it can vary depending on the country. The starting premise is that being in a country and rendering services means that an individual’s income is sourced in that country, which is when double tax treaties apply in terms of how the taxing rights are allocated.
Where there is no double tax treaty in place, then an individual pays tax in one country on a source basis and in another country on a residency basis, but may be able claim a credit for taxes paid in the other country – an administrative nightmare which can ruin your time on the beach.
The responsibilities of a ‘digital nomad’ would need to be carefully managed so as not to create this tax presence. For low-level employees with basic or administrative functions, the risk is generally low because the employee will not be doing any work of substance in that country and would not generally be in a position to negotiate or bind its employer to any contract. If this is the case, then the employer would need to reconsider what is termed “administrative functions”.
For senior employees or, if you like, administrative-staff- with-contract-negotiating-powers, the line becomes blurred and a significant risk starts to develop. The ability to negotiate or enter into contracts or have a material influence in any of these aspects vastly increases the risk of a permanent establishment being created for the employer. Employees that fit this profile should rather be given approval to go on leave and not permission work remotely from a desk with an enviable real-life ocean view.
After all, it would probably be better for their mental health not to be working whilst on holiday in an exotic location!
Denny Da Silva is director designate, tax practice, Baker McKenzie Johannesburg. He has over 13 years’ experience in corporate and international tax as well as the application of exchange control regulations.
