The tax implications of employees working remotely abroad

An employer should always know where its employees live, because their work location can have tax implications for the organization (Getty Images/StudioImages)

Despite the widespread closure of borders, there are more digital nomads than ever—35 million worldwide. And, with the introduction of vaccination passports and increasing remote work opportunities, a growing number of employees are attracted by the prospect of teleworking from abroad.

But, before employees relocate, employers have several legal and tax liabilities to keep in mind. “The risks of non-compliance are real for the employer,” says CPA Annie Poitras, lead senior manager, taxation, at Raymond Chabot Grant Thornton in Quebec City. “Failure to meet tax obligations can result in problematic situations. It’s best to plan ahead and take the necessary steps.”

ASK THE RIGHT QUESTIONS

In advance of granting an employee’s request to telework from abroad, an employer needs to understand what the employee’s residency status will be in the new country and the subsequent tax commitments. [Read more from Bruce Ball, CPA Canada’s vice-president of taxation, on the implications of remote work on taxes.]

“It is important to understand that every situation is different—from one country to another,” says Poitras. “There is no single solution.” Remember, although employees can be upfront about where they are moving to, the employer will need to make sure they are compliant with the rules in the foreign country. Aside from seeking professional advice, Poitras advises organizations start the process by asking the following questions: 

• Will the business have to meet any new tax obligations? 
• Is there a social security agreement between the two countries? 
• What will the employee be doing there and for how long? “Unless they have dual citizenship, the duration of their stay is often limited,” says Poitras.”
• Should a maximum number of weeks be set for their stay?
• Will they be working from home alone or will they be active locally? For example, providing in-person technical support to clients.
• Will they become a tax resident of the host country?” If so, the individual may still remain a resident of Canada, but be subject to foreign tax. [For more about how residency status is impacted when moving abroad, see The tax consequences of leaving Canada permanently]

These answers should help an employer determine if there’s a risk of causing a permanent establishment and, therefore taxable presence, in another country. Other things to consider are the types of activities being conducted by the employee and the profit attributable to that activity, explains Moss Adams, one of the largest public accounting firms in the United States.

Also, take into consideration the level of authority exercised by the employee on behalf of the organization, like the ability to enter into contracts. According to Moss Adams, the goal is to understand “the specifics of when a taxable presence is triggered in the country where the employee is working,” because the employer could be subject to income tax or filing a return even if no taxes are levied.

UNDERSTAND THE TAX IMPLICATIONS

Although some countries emphasize an exemption from local income tax when working from abroad, this does not necessarily mean that the individual will not be subject to Canadian tax as some individuals may remain a resident of Canada if, for example, their families still live here. Also, it doesn’t mean that employees will be exempt from taxes when they return to Canada, says Jean Gabriel Crevier, co-founder of the accounting firm Le Chiffre in Montreal. 

This is important information because a resident of Canada must report the world income “from all sources both inside and outside Canada earned after becoming a resident of Canada …”, explains the Canadian Revenue Agency (CRA). 

Here are other factors employers need to consider:

• Employer taxes

“The first thing an employee should mention to their employer is their intended new country of residence,” says Poitras. “What matters is not the currency in which the employee is paid, but the employer's tax obligations to the host country.”

An employer should also contact the country's tax officials to find out if it is exempt from paying local taxes, as interest and penalties can be high in case of defaults.

“It would be wrong to think that if an employee is not taxable locally, his employer will not be either, because other rules govern corporate taxation,” she says. “Only the host country can grant a waiver based on the tax obligations in effect.”

Finally, if a country does not charge income tax, this does not mean that no income tax is required to be paid in Canada. Although residents live temporarily outside of Canada, they will have their income taxed like they still are in the country if they keep significant residential ties in Canada.

• Bilateral tax treaties

Moreover, Canada has bilateral tax treaties with about a hundred countries and “even though the OECD developed a model tax convention, there is no universal approach,” explains Poitras. 

“For example, the U.S. treaty allows non-resident employees to request a waiver of withholding tax, provided that their employment income is less than $10,000 per calendar year or they have spent fewer than 183 days in the U.S. in any 12-month period, and they are not employed by a U.S. company or an employer with a permanent establishment in the U.S,” she says.

But, again, emphasizes Poitras, an employer needs to be careful because not all states comply with the federal tax treaty, even within the same country. “For example, Florida does, but California does not,” she says. “That’s why an employer should know where its employees are (working) at all times, because they rarely think about the tax implications for their employer.”

• Foreign tax credit

If you let your employees work abroad, make also sure to have a conversation with them about potential non-resident taxes they may have to pay on their salaries locally.

“When employees file their income tax return in Canada, they could claim a credit,” says Poitras. However, the CRA does not consider social security contributions in all countries as eligible for the foreign tax credit because, in some countries (such as France), they can be very high relative to income taxes. 

“In these cases, a taxpayer could end up with an extra bill, especially if their employer has not made any payroll deductions and contributions, such as CPP contributions and Employment Insurance premium” adds Poitras.

DO DUE DILIGENCE

From the type of work to the relevant tax treaty, employers need to do extensive research before allowing employees to work from abroad, says Poitras.

“As you might expect, compliance isn’t simple or cheap,” she explains. “If there is only one employee involved, the costs of tax compliance, like setting up a payroll system in the host country (opening bank accounts for transfers, setting up source deductions, filing necessary forms, etc.) can be really high. And, while the laws may be similar between neighbouring European countries, this is much less the case between Europe and America or Asia, making it necessary to redo the work each time.”

Crevier agrees, adding that Le Chiffre currently has two employees working remotely from Mexico and Haiti, albeit temporarily. “If we were to have employees permanently abroad, we would consult an expert to reassess the risks,” he says. 

FIND OUT MORE

This article includes a general summary of detailed tax rules. Need specific tax advice? Hire a Chartered Professional Accountant (CPA) and get the best working for you. Visit the website of your provincial or regional CPA body to access a CPA directory.

Also, learn how LiveCA became the first virtual accounting firm in Canada and read how the employees work as a team when all are digital nomads. Plus, find out how CPAs, who are in more demand than ever, have adapted during the pandemic and benefited from the experience.