Employers and employees have begun to embrace more flexible hybrid working arrangements but may not be aware of the tax implications. It is important that anyone considering remote work be aware of this this aspect of the process.
When the COVID-19 pandemic became part of our lives, it created an opportunity for employers and employees to re-evaluate their working arrangements. This led to a greater embrace of remote working, with some employees working mostly from home and, in certain extreme cases, opening up opportunities for employers to access talent in foreign jurisdictions without the requirement of embarking on expensive expatriate employment agreements.
Thanks to this new environment, employers now have access to an unlimited pool of skills. However, hiring abroad comes with various tax consequences for employers and employees alike. This can include simple measures such as deductions on home office expenses and individual income tax consequences for rendering services in a foreign location, to more intricate and complicated considerations related to permanent establishments for the employer.
From an individual’s point of view, the tax question may be as simple as understanding the strict rules around the deduction of home office expenses. To this end, SARS issued an interpretation note detailing their views on how home office expenses could be claimed and by whom. These requirements are very strict, ranging from requirements that the working space be solely and mainly used for rendering the specific services, to record keeping that includes providing visual evidence in the form of pictures of the home office.
The tax situation can become more complicated when a company allows its employee to work from anywhere in the world. When a situation like this arises, spouses tend to accompany their partner to a foreign jurisdiction while continuing to render services to South African employers. Depending on the circumstance, these accompanying spouses may continue or cease to be a South African tax resident. In situations where they remain tax residents, the question becomes how they would be taxable in the country where they physically render the services as well as South Africa where they remain a tax resident.
This scenario highlights the somewhat complex nature of taxation when it comes to remote working. As much as the pandemic has allowed for work flexibility, there are a number of considerations an individual needs to consider when deciding to take advantage of working in a more enticing location.
It is advisable that individual clients seek tax advice when it comes to deciding on such flexible working arrangement to understand the resultant tax implications they may face.
From an employer’s perspective, the pandemic has opened up a wider pool of skills and expertise, especially in industries that don’t require the physical presence of an employee. Take as an example entertainment service providers such as Netflix and Amazon Prime. Due to a boom in their industry, these businesses now have a greater demand for subtitle interpreters, a job that can be fulfilled from anywhere in the world without requiring the employee to be physically present. A further advantage here is that an employer in this position can avoid the expenses associated with relocation.
While employers enjoy the advantages of remote working, they also need to consider the high risk of creating a taxable presence in the countries where their employees are located. Hiring remote workers in foreign countries has a high probability of creating an additional tax burden for employers. This can apply across various jurisdictions and increase the cost of compliance with regards to a country’s laws.
Employers need to be aware of these unintended consequences and put measures in place to mitigate against creating tax risk in countries where they have no physical presence. This can be done by ensuring they adopt an appropriate structure for their industry such as forming a global employer company per region or contracting with the individuals as consultants. In addition, the employer should seek out appropriate tax advice in order to ensure legal and tax compliance within the various jurisdictions of their operations.
Dumisa Sihawu, Associate Director at BDO Tax