Hey Boss, can I work remotely… offshore?
Tax Alert - February 2023
By Andrea Scatchard & Mihiri Nakauchi
How many requests have you had from employees wanting to work overseas? How far has your flexible working policy been stretched? Remote working has been the hot topic recently now that COVID-19 has settled down and we have seen a significant shift towards remote working locally in NZ. However, there is now an increasing trend for employees to request arrangements that involve working remotely from overseas. Why wouldn’t your employees want to work in Asia while visiting family and friends, or do a big OE in Europe but stay with you for work security and a bigger travel budget?
As we can see from our other article in this Tax Alert, remote working is now seen as part of normal working practice, but this new norm may have unforeseen tax consequences for you as an employer. Faced with a tight labour market and wanting to retain your existing people, you may be feeling pressured to agree to such arrangements but you ought to consider the tax consequences before agreeing to anything. Employees will also need to consider the potential consequences on their own tax liabilities when working offshore. Below is a short list of only some of the typical tax related issues that may need to be worked through when employees work offshore:
- Corporate income tax – having staff members based overseas could lead to a risk that the employer now has a permanent establishment in those countries. This can result in the employer becoming subject to the tax laws of another country and maybe needing to file returns and pay income tax on some of the business’s profits. All countries will have their own rules regarding this, and while they are often similar they are seldom the same. So the more countries you have employees working in, the more countries you need to do your homework on to work out whether you have an issue. Often the outcome will be impacted by the type of work employees are doing overseas and the amount of time they spend there so the result may be different for different employees.
- Payroll withholding – if an employee will be subject to income tax in the overseas country, then as an employer you may face a withholding obligation similar to our PAYE rules. New Zealand has a unique mechanism (called being an IR 56 taxpayer) which essentially allows some individuals working remotely in New Zealand to calculate and report their income and PAYE to Inland Revenue personally, rather than it being done by the employer. However, other countries don’t tend to have this mechanism, so who will pay the PAYE equivalent? And if withholding tax is payable in the other country, how will this be funded and should you continue to deduct PAYE from the employee’s wages paid in New Zealand?
- Personal income tax – is your employee aware of the New Zealand tax consequences of their potential departure? Will they retain their tax residency in New Zealand, or will they become tax resident overseas? Will their New Zealand assets now be taxed overseas, and potentially subject to a capital gains tax? Will they still need to file a New Zealand tax return?
- Who bears the cost of all of this? – where employers send staff overseas on secondments or assignments, this is for the benefit of the employer and so they typically pick up the cost of sorting out the tax issues in both the home and host countries. But where offshore working is driven by the employee’s desire to travel, is it fair for the employer to bear these costs?
As you can see from the short list above (and there are many more), it can quickly get very complicated. As all countries have their own tax legislation the answer you arrived at for an employee wanting to work from the Philippines for 3 months to reconnect with family and friends is almost certainly going to be different to that for another employee wanting to work from the UK for 8 months to explore neighbouring countries in her weekends. This makes it very difficult to have generic guidelines and it is likely that each situation will need to be looked at in isolation.
Before you finalise any flexible working arrangements or even have conversations with your employees, we recommend you contact your local Deloitte Tax advisor.
February 2023 – Tax Alerts
- What does Deloitte’s Global Remote Work Survey mean for New Zealand?
- “Hey Boss, can I work remotely….offshore?”
- What happens if you fail to disclose FIFs?
- Inflation and personal tax bracket creep – a bigger picture
- Don’t cry about UOMI
- Tax Governance is here to stay
- ESSTs – what are they and why there is no place for them in the tax system
- Snapshot of recent developments