Employers Must Ensure Compliance Before Allowing Telework from Another Country
As the trend of digital nomads continues to grow, more employees are interested in Work Abroad. With vaccination passports and remote work opportunities becoming more common, employers must consider legal and tax liabilities before approving such requests. Non-compliance can lead to serious problems, so it is important to plan and take the necessary steps to meet tax obligations.
Important Questions to Ask Before Allowing Work Abroad
Before an employer grants an employee’s request to telework from another country, it is crucial to consider the employee’s residency status and the resulting tax commitments. Each situation is unique, and compliance with the rules of the foreign country is necessary. Seeking professional advice is recommended, and employers can start by asking important questions such as whether new tax obligations will arise, whether there is a social security agreement between the countries, and what the employee’s activities will be and for how long. It is also essential to determine whether the employee will become a tax resident of the host country and whether a taxable presence will be established. The level of authority exercised by the employee on behalf of the organization is also a factor to consider. By answering these questions, employers can avoid causing a permanent establishment in another country and potential income tax or filing obligations.
Considerations for Employers Regarding Tax Implications of work from Abroad
While some countries may offer exemptions from local income tax for teleworking from abroad, this does not automatically mean that Canadian taxes can be avoided. If an individual maintains residency in Canada, they may still be subject to Canadian taxation. Furthermore, employees may also face taxation upon their return to Canada. The Canadian Revenue Agency (CRA) emphasizes that residents of Canada must report their world income from all sources inside and outside of Canada. Employers must take these factors into account when allowing telework from abroad.
Employer Tax Obligations for Telework from Abroad
When considering telework from abroad, an employee should inform their employer of their intended country of residence. It is important for the employer to understand their tax obligations to the host country, regardless of the currency in which the employee is paid. The employer should also contact tax officials in the host country to determine if they are exempt from paying local taxes, as interest and penalties for non-compliance can be substantial.
It is a common misconception that if an employee is not taxable locally, the employer will not be either. However, corporate taxation is subject to different rules and only the host country can grant a waiver based on the tax obligations in effect.
Lastly, if a country does not charge income tax, this does not necessarily exempt the employee or employer from Canadian taxes. Even if a Canadian resident lives temporarily outside of the country, they may still be subject to Canadian taxation if they maintain significant residential ties in Canada. Employers should be aware of these tax obligations before allowing work from abroad.
Bilateral Tax Treaties: A Complex Landscape
Canada has established bilateral tax treaties with approximately a hundred countries. However, despite the development of a model tax convention by the OECD, there is no universal approach. Each treaty is unique and can vary significantly between countries.
For instance, the U.S. treaty allows non-resident employees to request a waiver of withholding tax if their employment income is less than $10,000 per calendar year or if they have spent fewer than 183 days in the U.S. in any 12 months. However, the waiver is not granted if they are employed by a U.S. company or an employer with a permanent establishment in the U.S.
Employers must be cautious because not all U.S. states comply with the federal tax treaty. Florida does, but California does not. Consequently, employers must be aware of where their employees are located while working, as employees may not always consider the tax implications for their employer.
Foreign Tax Credit: What Employers Should Know
If you are considering allowing your employees to work abroad, it’s important to discuss with them the potential non-resident taxes they may have to pay on their salaries in the foreign country. When employees file their income tax returns in Canada, they may be able to claim a credit for foreign taxes paid. However, it’s worth noting that the Canadian Revenue Agency (CRA) may not consider social security contributions made in some countries as eligible for the foreign tax credit, as they can be disproportionately high relative to income taxes.
This could result in employees owing additional taxes, especially if their employer has not made any payroll deductions and contributions, such as CPP contributions and Employment Insurance premiums. As an employer, it’s essential to ensure that you understand the tax implications and responsibilities both in Canada and the host country, and that your employees are aware of their tax obligations to avoid any surprises or penalties.
Conducting Due Diligence for International Remote Work
Before allowing employees to work from abroad, employers need to conduct due diligence and extensive research, considering factors such as the type of work and relevant tax treaties.
However, compliance is not simple or cheap. For instance, setting up a payroll system in the host country, which includes opening bank accounts for transfers, setting up source deductions, and filing necessary forms, can be expensive for only one employee. Additionally, laws between neighboring European countries may be similar, but this is not the case between Europe and America or Asia, making it necessary to redo the work each time.
For more detailed and specific tax advice tailored to your unique situation, we recommend hiring a professional accountant. The information provided in this article serves as a general overview of tax rules and regulations, but a qualified accountant can provide more personalized guidance and expertise to ensure that you are fully compliant with all relevant tax laws. With the help of a professional, you can rest assured that you are getting the best possible advice and support for your particular circumstances.