On September 12th, AIRINC hosted our third Global Tax Chat. I was joined by my colleague, Jeremy Piccoli, and our moderator, Robert Zeitz. We talked about several tax developments and discussed tax implications for remote workers and business travelers.
Tax Updates: China
The China tax authorities have again extended the implementation date for changes in the expatriate tax concessions for expatriate staff inbound to China. The concession currently in place permits eligible employees to elect one of two options:
- Tax-free treatment for certain allowances such as housing, children’s education, language training, meal and laundry fees, relocation expenses, business travel, and home leave, or
- To claim statutory deductions available to all individuals. The expatriate concession is often more beneficial and is intended to provide tax incentives for attracting foreign workers to China.
The plan was to eliminate this concession at the end of 2023 so that, as of 2024, these expatriate allowances would be taxable and potentially increase tax liabilities from 2024 onward. The Ministry of Finance has decided to defer the tax change now to 2028. Given the current economic conditions in China, the decision was made to continue this expatriate incentive to help China attract and retain foreign talent. Companies had been reviewing expatriate packages this year, expecting that the tax changes would result in higher tax costs in 2024. They may wish to revisit those plans to revise employment arrangements now that the tax changes are deferred to 2028.
More details can be found in our blog post here.
New tax programs for housing: Kenya
Kenya is facing an affordable housing shortage. They estimate they need approximately 200,000 new homes annually; however, actual production is roughly 50,000 units, resulting in a housing shortage, especially in urban areas. Kenya created the National Housing Development Fund in 2018 to attempt to implement mandatory employee and employer contributions to the housing fund, but immediately faced legal challenges. Finally, effective July 1, 2023, the new National Housing Development Levy is now required to be withheld at a rate of 1.5% from the employee and 1.5% from the employer. Kenya was able to work around the legal battle by calling this a payroll levy instead of a new social security scheme. This means that the contribution cannot be avoided by using totalization agreements: everyone will pay into the fund. The fund will work with property developers and financial institutions to develop housing projects for individuals that pay into the fund.
New tax programs for housing: Canada
Canada also has identified a shortage of available residential housing. The Canadian plan implements a First Home Savings Account (FHSA). This is a registered scheme and provides tax benefits for participants. Only employees make voluntary contributions to an FHSA account; employers do not contribute. Contributions are deductible up to CAD 8,000 per year, and up to a lifetime maximum of CAD 40,000 over a 15-year period. The FHSA is intended to provide taxpayers with a lump-sum distribution available for a down payment for a home purchase. Eligible taxpayers must be Canadian tax residents, and this purchase must be for their first home. Taxpayers would also have the option to transfer the funds to a qualified pension scheme, such as a Registered Retirement Savings Plan.
Tax Considerations for Remote Workers & Business Travelers
Trends for WFH/Hybrid/RTO – Tax Implications for the Pandemic, Three Years Later: Deloitte’s most current survey indicated that 99% of employees prefer either fully remote or a hybrid work model. According to Gallup, about 52% of remote-capable US workers are hybrid working, and 29% are fully remote. The recent development, however, is that the prominent Fortune 100 companies with greater than 50,000 employees (Amazon, IBM, Meta, Disney, etc.) are starting to lead from the front in terms of requiring employees to return to the office at least 2 or 3 days per week, with many medium and smaller companies planning on following suit by the end of 2024. It appears likely that hybrid arrangements will become the predominant working structure going forward.
AIRINC’s advisory team is holding a webinar with further insights on remote work in October - subscribe to the blog for details.
POLL RESULTS FROM OUR LIVE GLOBAL TAX CHAT: Where are you currently working at this moment?
- 65% - At home
- 32% - In the office
- 1% - Remote working elsewhere
- 2% - I’m not working – I’m here for fun!
Where are remote workers and business travelers taxed?
Taxation will certainly depend on the individual’s fact pattern. The key is remembering that employees are taxed where they work. That tax jurisdiction – whether it is another country or another state – will consider that the employee’s wages are subject to taxation because that is where the wages are earned. This is what tax pros call ‘sourcing’. The sourcing formula is the number of workdays in that location divided by total workdays for the year, multiplied by the total wages.
But that is not all! Individuals are also potentially taxable where they live. Individuals living in a country or state will be taxed based on tax residence. Tax residents are generally taxed worldwide on all income that doesn’t rely on the sourcing concept.
For most employees, they work and live in the same jurisdiction so there is no conflict with which tax authority assesses the tax. If they are different, typically double tax relief is given in several ways.
- First, an offsetting credit is claimed on the tax resident’s worldwide tax calculation for the taxes paid to the sourcing tax jurisdiction. There could be differences in tax rates, so typically the combined tax will end up being the higher tax rate between the two jurisdictions.
- Second, some neighboring states and countries have bilateral agreements in place, called reciprocity agreements (US states) or frontier worker agreements (generally in Europe). Here, the terms of the agreement will determine which jurisdiction has the first right to tax the wages.
Either the resident country or the sourcing country will assess tax on the wages – sometimes the agreement will agree to split the tax revenue.
There are also totalization agreements to coordinate contributions for social security in cross-border situations. For example, Europe has a new Framework for Teleworkers that coordinates social contributions for hybrid working arrangements. The framework is now effective as of July 1, 2023, for those countries that have signed the agreement. Slovenia just signed, and several other countries are in the process of signing. Notably, the United Kingdom has explicitly opted out, which should not be a surprise given Brexit. The framework now has 19 countries opting in. For eligible hybrid workers, they can work up to 49.9% of their time remotely while still only contributing 100% in the country where the employer is located. An A1 certificate will be necessary to use the relaxed teleworker rule. EU employees that do not qualify for the expanded hybrid work rule can only work up to 25% of their time remotely and still only contribute social security to the employer’s country.
For more information about the EU Framework on Teleworkers, please see our blog post from the May 2023 Global Tax Chat on Social Security.
One final aspect of where remote workers are taxed
There is the possibility that workers are taxed in the jurisdiction where the employer is based and where the employee’s office is located. This is a different rule from taxation based on the sourcing location where the employee is rendering services. The example of this concept is the term “Convenience of Employer” (COE) that some U.S. states apply, where the taxation is based on where the employer is based. New York state applies this COE concept to New York-based employers that have employees wishing to work remotely from a different state, where the remote work is not a requirement of employment. This means that employees of New York-based companies deciding voluntarily to work from their New Jersey or Connecticut homes are still 100% taxable in New York. To avoid double taxation, New Jersey tax residents subject to these rules pay a nonresident tax to New York and claim a credit on their resident New Jersey tax return. Often, the tax rates in New York are a bit higher than in New Jersey, so it does increase their tax burden. It also complicates employer payroll compliance as the appropriate withholding tax must be remitted to the appropriate jurisdiction.
In response to New York’s position on remote workers, New Jersey has implemented similar COE rules, but the scope is narrower than New York’s. The New Jersey COE rule only applies to a New Jersey-based employer with employees working from a state that also has a COE rule. Only a few states have COE rules, including Pennsylvania, Connecticut, New York, and Nebraska. Because New Jersey and Pennsylvania already have a reciprocity agreement, Pennsylvania residents will not be subject to the new rule. And New Jersey has announced that Connecticut remote workers will get similar tax relief. That leaves New York remote workers that may need to comply with the new New Jersey COE rule. This was just enacted, and the new withholding requirements for New Jersey-based employers begin September 15th.
How will tax authorities know about remote work activity?
Tax Authorities’ responses have been slow to adapt to the new normal of hybrid workers. We are likely to see this initially with audit activity. Tax authorities typically begin audits several years in arrears. We can anticipate that audits will begin now for the 2019 and 2020 tax years. Tax audits in this area primarily focus on the employer’s obligation to report and withhold taxes correctly -- it is less likely for individual tax returns to be audited. It is in these payroll audits that the employer’s records are examined to determine where the employees have been working. The audit trail will include badge swipes, expense reports, travel vendor data, timesheets, and other company records. Finally, tax auditors will have access to immigration activity as immigration agencies will share data about entry and exits.
Any remote work or business travel can potentially trigger a tax liability, even from Day One. The tax implications will be fact-specific and will vary based on the jurisdiction combination and the extent of the remote work. Global Mobility managers will want to understand where employees are living and working and ensure that payroll processes are in place to meet compliance requirements.
Our next Global Tax Chat will be in December 2023. Look for an invitation email and blog post closer to December with registration details.