Since the COVID-19 pandemic, working remotely has become increasingly popular for many South African businesses and their employees. Despite the relaxation of lockdown restrictions, most employees have shifted the expectations of their work environment and several of these shifts are of a permanent nature.
A permanent establishment?
The most significant risk associated with employees working remoting in a different country is that they may create a permanent establishment on the employer’s behalf, establishing a tax presence in that jurisdiction.
Since foreign tax authority could be triggered by harmless acts, such as the employee’s possession of company cards bearing the name and address of their South African employer, employers should proceed with caution in these arrangements. Repercussions could stretch as far as triggering a change in place of effective management (POEM), should company executives be of the individuals working remotely, which will impact the company’s corporate tax residence.
Other risks include employers registering employees in their foreign jurisdiction, holding them liable to pay the relevant tax and social security of said jurisdiction. This does not include the consideration of South Africa’s tax withholding obligation for the remote employees in question.
Risks vs Rewards
Despite the possible income tax risks of employees working remotely in different jurisdictions, it isn’t easy to pinpoint when these may materialise. Each situation is entirely unique, making it essential for employers to seek the guidance of industry experts when employees request to work remotely.
Factors to consider here would include whether there is a risk of the employee creating a taxable presence in their new jurisdiction and which country will have the right to tax the employee’s remuneration. Employers also need to factor in whether they are still obliged to withhold the employees’ tax in their current jurisdiction or whether they will also have to register in the foreign jurisdiction.
Problems on the horizon…
Over the initial lockdown period, when employees were stranded overseas, the Secretariat of the Organisation of Economic Cooperation and Development (OECD) shared guidance regarding tax treaty concepts.
However, the relaxed attitudes regarding remote working in foreign jurisdictions, adopted during the height of the COVID-19 pandemic, will not last. As most work environments return to normal, employers will see a shift back to normal tax rules. Although remote working creates exciting opportunities for both parties, employers must consider the risks of these arrangements to avoid unwanted consequences.
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