Tax compliance amidst the rise of a remote workforce

If remote work is here to stay, are companies prepared? Even prior to the abrupt implementation of work-from-home protocols at the onset of the COVID-19 pandemic, companies around the world have gradually embraced working remotely. Enabled by technological advancement, employees are increasingly able to effectively perform their duties outside of the traditional office setting while remaining connected with their teams and clients.

As the global crisis passes, it is anticipated that many employees will continue to work from home. While many employers have already begun implementing policies and procedures to facilitate and manage such arrangements, this change still presents significant challenges. To cultivate a truly future-ready workforce, companies will not only need to develop their current employees for resiliency, virtual collaboration, and remote leadership, but also increasingly tap into the broader global talent pool to diversify their experience and expertise.

What are some cross-border tax considerations for remote workers?

As employers continue to support remote work arrangements and expand their workforce globally, employees will work in locations other than the principal jurisdiction of the corporate office. Inevitably, tax implications will follow.

In most cases, tax obligations are driven by where an individual is physically present and performing services — not by the location of the employer’s head office or principal entity. Although an employer may decide that an employee who chooses to work remotely from another jurisdiction is fully responsible for handling their own personal tax complexities, the employer will nonetheless need to navigate numerous corporate income tax, permanent establishment, payroll withholding tax, immigration and legal issues as a result of that employee working in other jurisdictions — even in locations where no local corporate entity exists.

To combat certain tax obligations, many employers are instead turning to the recruitment of remote employees as independent contractors. For tax purposes, however, an independent contractor is not simply decided by stipulating as such in a legal contract. For example, Canadian tax law considers several factors outside of the legal name of the arrangement when classifying a person as employee or independent contractor.

Employers should be prepared for several different scenarios that may trigger cross-border tax obligations. Note that this list is non-exhaustive, and the scenarios are hypothetical.

An employee works remotely in a different province than where the employer typically operates. Even within Canada, this may still result in tax implications for the employer.
An employee of a Canadian company works remotely in a country outside of Canada for a predetermined or indefinite amount of time.
An employer resident in Canada hires an employee who works remotely from their home in another country outside of Canada.
An employer resident in the United States (or elsewhere outside of Canada) hires an employee who works remotely from their home in Canada.
The director of a non-resident corporation (i.e. a corporation that is resident outside of Canada) works or attends board meetings remotely from their home in Canada.

To say that these cross-border tax compliance issues are complex would be an understatement. Nonetheless, employers cannot allow these issues to be barriers to hiring the right talent. It therefore becomes imperative that internal tax teams work closely with their human resources and mobility counterparts to understand the company’s remote-work and talent strategy, so as to develop policies to enable their workforce for the future whilst remaining compliant to each country’s regulations.

Is non-compliance the answer?

Make no mistake — the risks and costs of non-compliance are significant. They range from financial penalties and fines to a company’s ability to conduct business in other jurisdictions, and furthermore may risk a company’s global reputation. With government revenues worldwide under increasing pressure, particularly due to the pandemic, it is reasonable to expect increased tax audit activity.

It is therefore critical to develop a future-ready workforce in a tax-compliant manner. This means that employers need to know where their employees are performing services and what services they are performing, as these affect both corporate tax requirements and payroll tax withholding obligations.

Attention to employee travel data is of paramount importance. Employers will need the right technological tools to enable tracking and analysis of remote workers’ location and travel. There is likewise a need for employee education, with a focus on actions to mitigate risk and to enable informed decision-making.

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What are some practical recommendations towards compliance?

There are several ways that employers can manage tax compliance whilst embracing the future of remote work, for example:

Review current exposure and risks: Consider any immediate compliance risks, such as employees currently working (remotely or otherwise) in a jurisdiction where no payroll is operated, or no tax returns are filed. In reviewing existing exposure, a company’s tax teams can use the opportunity to improve data collection processes and visibility between cross-functional teams.
Establish future-ready policies: Internal discussions and business decisions should occur to develop policies that both enable workers and mitigate compliance issues. Consider enacting clear policy documentation, employee education, and informed frameworks for decision-making. For example, how long an employee may (or may not) work outside of the employer’s principal jurisdiction, in particular employees with the authority to contract on behalf of the employer.
Utilize technology-enabled tracking: Accurate and robust employee data is crucial. Various travel-tracking tools exist that can yield such data — and even consider multiple sources of data. Automated technologies and built-in location services can be used to securely track employee location data. More importantly, consider analyzing the data through digital solutions to identify and report risk based on pre-established criteria.

The continual evolution of remote work is inevitable. In many cases, it presents an opportunity for employers to support their employees’ needs, as well as enhance their workforce by taking advantage of global talent. Nonetheless, employers will need to prepare themselves with the tools and knowledge to navigate the tax compliance issues arising as a result of future of remote work.

Christopher Ng
cng@bdo.ca

Debra Moses
dmoses@bdo.ca