According to the 2021 KPMG Work Anywhere, Together report “The new normal isn’t necessarily a world without working in an office; it’s just a world where we focus on the work instead of the office.”
The report shines a light on the post-pandemic working reality, where physical offices are empty, organizations are struggling with an increasingly rigid or limited service-delivery model, and workforces are attempting to be agile to meet the challenges of working remotely.
Turning this on its head, KPMG believes an opportunity is on the table. To move from challenge-mode into a growth mindset, leverage the reduced real-estate costs and the higher productivity and lower turnover of employees due to a better work/life balance, and invest more than $7 trillion in making work more digital by 2023.
To facilitate this, the report demands an approach built around compliance and process, “to assist with managing complex global tax and regulatory requirements based on employee location, value, and service considerations.”
Here are the highlights of the report, and everything that you need to keep in mind when considering your own organizational landscape.
Global Tax Compliance
While employees have utilized remote working for years, the pandemic has fundamentally changed the global workforce moving forwards, adding the complexities of cross-border remote working as part of the new normal.
The location in which remote employees work, will impact your corporation as a whole, including the taxable presence (permanent establishment) of the company, defined by the local law of each country, any income tax treaties between the two countries in question where applicable, and even what activities the employees are undertaking. For example, the location in which the ‘critical functions’ of your organization are performed can impact the allocation of profits under global transfer pricing rules, usually in line with OECD. These critical functions could be anything from directing business strategy, to controlling Intellectual Property.
It’s also essential to recognize that a tax treaty has its limitations. For employees in the US, high-risk activities that could make an income tax treaty inapplicable include maintaining or regularly working from the same US workspace, even if it’s the office of another company, and negotiating, concluding, signing or closing contracts in the US.
Remote working, SALT and Payroll and Employment Taxes
State and Local Tax (SALT) is also important to consider. Your employee presence may impact nexus between two states, both for corporate income taxes and for sales and use taxes. You will also need to consider local business license obligations, taxes that change based on where work is performed, and even property tax obligations if your employees are working out of state on company owned devices or equipment, for example.
As an employer, the general rule is to withhold payroll and employment taxes in the location in which the services are performed. There are exceptions in certain States, such as New York and Connecticut, where your regularly assigned work location will be where taxes should be withheld. The same applies to wage sourcing, where generally speaking income will be sourced to the location where the employee performs services, but it could also open responsibility for taxation in an employee’s resident location, or in their regular place of work.
Questions to ask include:
- What are your organization’s reporting and withholding obligations in each location where you have employees?
- Can you compliantly utilize a reciprocity agreement or treaty to minimize your double tax implications?
- What is your organization’s risk-tolerance for non-compliance when it comes to payroll?
- How will you operationalize payroll in each location, for example currency exchanges, disparate cycles for payroll, or splitting payroll as necessary?
Thinking About Individual Income Tax
When it comes to an employee’s own individual tax obligations globally, this can vary greatly between different jurisdictions. Many countries based their tax requirements on where an employee establishes residency, while others may impose tax based on income earned or sourced in their country. It’s therefore possible to be a tax resident of multiple countries on the same income. To understand your own obligations, you need a thorough grasp of tax treaties, and residency policies in the locations under scrutiny. You will also want to think about how to frame your own company tax policy to meet this complexity, for example, whether you want to support remote employees in preparing their tax returns, or reimburse them for duplicate taxes that they incur.
As a brief case study, let’s say your employee is a US citizen or permanent resident working abroad. They will be taxed within the US on their worldwide income, no matter where the money has been earned or paid. However, they may be able to benefit from tax concessions, such as the Foreign Earned Income Exclusion, up to $107,600 in 2020, and Foreign Tax Credit. Travel expenses are includible in this income, with the exception of business trip expenses.
Understanding Residency in the US:
If your employee is working within the US as a non-US citizen, and residency is not established, they will only be subject to US tax on their US-sourced income, but will not benefit from deductions or considerations such as Married Joint Filing (MJF) status. If they are a resident, even as a non-US citizen, all income worldwide is taxed in the same way as US citizens. To be considered a permanent resident, this employee will have had a substantial presence in the US over the past 3 years, which is more than 183 days, including 31 days in the current year. There are a few exceptions, including students, trainees, and non green-card holders with a closer connection to another country.
Tax Treaties: A Checklist
Here are some of the main points that the KPMG report considers when it comes to tax treaties with the US.
Tiebreakers: If a person is a resident of both countries, tax will be regulated based on elements such as the employee’s permanent home, their citizenship, which location is the center of vital interest, and where there is a competent authority.
Income: Earnings from employment will be taxable in the country of residence, as well as in the other country in the treaty. The exceptions include if the employee is in the host country less than 183 days, or the remuneration comes from outside of the country.
Pensions: Usually only taxable in the country of residence. Most treaties will not include participation in pensions, although some do allow deductions for contributions to foreign pensions, and any employer contributions for this would not be taxable.
Savings: Any tax treaties with the US do not cover savings. In fact, according to the report, “the US reserves the right to tax its citizens on savings as if the treaty did not exist.” This doesn’t impact the taxation of non-resident aliens.
What Are the Social Security Implications of Remote Working?
The location of your remote employees can affect both your tax obligations as an employer, and those of your employees. Many jurisdictions tie eligibility for social security benefits to work history, so employees may not qualify for full benefits on their home or host country, which could impact anything from pensions and old-age benefits, to unemployment insurance, family benefits, or parental leave.
There are Totalization agreements that can eliminate double social taxes or co-ordinate social security benefits according to best-practices, and can help to fill in the gaps for workers who live and work across different countries. The US has Totalization agreements with more than 30 locations around the globe.
You will also want to fully understand your FICA obligations before creating a distributed workforce, as any US person employed abroad by a US employer, or performing a service for a US employer within the US, is subject to FICA, with few exceptions.
Considering Compensation and Rewards
A remote working landscape also means that you’ll need to consider the various reward-related considerations of different locations. This includes establishing salary and compensation for ‘work anywhere’ positions, as well as benefits like medical coverage, employee assistance and support, parental leave, and pensions, to name a few. Don’t forget to think about compliance. How will you manage data collection and reporting, and any company disclosures?
You may need additional vendor assistance with some of these tasks, and a period of market research and benchmarking to ensure that you are adequately identifying a compensation structure that works both internally and for candidates.
Educating Yourself in the Age of the Global Workforce
As the dust settles after the aggressive and accelerated move to remote working, how will you ensure that your organization is ready for the new realities of a truly global workforce? Papaya Global offers an all-in-one global payroll management platform that provides seamless management over people and payroll, inherent compliance, and innovative employment solutions that can respond to a distributed workforce with agility, visibility and control.