Income Tax Implications for Remote Employees
Practical considerations for Income Tax Compliance
A notable practical issue in these situations is when tax compliance obligations arise based on the employees’ tax jurisdiction. Determining this depends on various factors, including the location and duration the employee has rendered services for the company in question. In addition, the provisions of double tax treaties also need to be taken into account.
The change in an employee’s tax residency due to remote work environments could also impact an employer’s tax withholding obligations. Withholding taxes from employees becomes more complex when multiple jurisdictions are involved. For example, if an employee is subject to withholding in two separate jurisdictions, the employer would be responsible for withholdings in both cases. Depending on local legislation and potential refunds, this could result in a cash-flow issue for the employee.
Factoring in the Employee’s Tax Residency
When employees relocate, it is necessary to determine whether they will stop being tax residents of a particular country because of their relocation and, if so, when this will happen. This is generally a factual enquiry based on the employee’s circumstance. However, if the outcome is that the employee ceases tax residency, other timing and disposal rules may apply.
Considering Corporate Income Tax
A key tax consideration for companies when an employee works abroad is whether the employee’s activities in the foreign country could create a taxable presence.
This could occur in the following situations:
- If the employer has a permanent establishment in a foreign country where trade or business is conducted, where profits are generated and potentially liable for tax, or;
- An employer is taxed as a resident in another country if its place of effective management shifts to that jurisdiction, which typically occurs when headquarters are moved to another country.
To correctly determine whether an employer has a taxable presence in the country, it would largely depend on the employee’s duties and activities and any double tax treaty between both countries.
Alongside existing provisions that prevent double taxation, South Africa is in the process of introducing a new consideration called the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profiting Shifting (MLI), which will help prevent double taxation.