By Cinzia de Risi
As employers become more flexible when it comes to remote working, countries offering tax breaks and incentives can create a win-win situation where workers can lower taxes and employers lower their payroll.
Until recently, the ability to see the world while keeping your desk job seemed like nothing more than a daydream. But as Covid-19 continues to disrupt the way we live and work, smart nationals can use tax breaks to reduce their overall payroll by employing digital nomads.
One of the permanent changes brought by the pandemic is undoubtedly the way employers view remote working. The work-from-home initiative is rapidly evolving into a work-from-anywhere movement. Many employees have revised their hierarchical needs, placing a higher value on family, safety and work-life balance. In turn, many employers are now rolling out their return-to-work policies allowing for more flexible working arrangements after the pandemic, based on this shift in their employees’ priorities.
Likewise, many countries now offer attractive visas and tax frameworks to meet the needs of these remote workers, who tend to earn well and have much-needed purchasing power. Ironically, just as the G20 is attacking multinationals that cut their tax bills by pushing their revenues towards low tax revenues, many countries are now using tax breaks to lure these digital nomads to their shores. So what does this mean for multinationals and is it possible to benefit both employees and employers?
In the past, employers were reluctant to allow staff to spend more than two weeks working away from home for fear of triggering tax tangles in the other jurisdiction.
For example, prolonged employee presence could create a permanent establishment (essentially a taxable branch) of the employing entity in the workplace and therefore a myriad of compliance requirements and corporate tax risk, and attendant complexities. in terms of transfer pricing. Likewise, this corporate presence has often extended to the employer entity being deemed to have an obligation to deduct payroll. All in all, huge pain, so in the old days employers like Nancy Reagan just said no to remote working.
Now employers are forced to be more flexible – because employees rightfully had to work in different jurisdictions during the pandemic, due to family or other personal obligations, or simply because of quarantine or lack of flights. forced them to be elsewhere than in their employment entity. .
At the same time, many countries offer very attractive schemes for entering professionals, and smart multinationals understand that if they can help their staff to have significantly reduced tax costs and / or cost of living, they can reduce their costs. overall payroll. . A big win-win potential so carefully planned.
Last year Greece announced a tax break whereby new workers cut their tax bill in half for the first five years. Portugal, Italy and the Netherlands all have similar tax breaks for inbound residents which increasingly attract skilled workers, especially when remote work is accepted by their non-local employers.
There are also many short-term tax and visa incentives, like the Mauritius Premium visa regime, aimed at attracting digital nomads for one or two years, rather than a permanent move. Under this regime, the worker has no Mauritian tax liability for up to two years, provided that she works remotely, and that her income is not paid into a Mauritian account. While this does not lead to tax revenue for Mauritius, the focus is on the purchasing power of remote workers. This is a great opportunity for businesses to retain and motivate their workforce while reducing costs for employers.
For South African businesses, in particular, setting up or reallocating an existing Mauritius structure is ideal for unlocking these benefits and managing the underlying risks.
A Mauritian entity can be used to host teleworkers. This will not only better manage the risks associated with permanent establishments, but can be used to ensure compliance with payroll and social security obligations.
More interestingly, this in-country presence can be used for the overall tax benefit of the group, as specific functions, and thus income streams can legitimately be hosted in tax-advantaged jurisdictions. The employee’s tail can be used to wag the corporate dog and pay for his dinner by the crystallized tax savings without (to stretch the metaphor) creating a dog dinner.
Cinzia de Risi is Global Mobility Tax Specialist at Regan van Rooy