By Cinzia de Risi
As employers become more flexible around remote working, countries offering tax breaks and incentives can create a win-win situation for workers to reduce their taxes and employers to cut their salary bills
Until recently, the possibility of seeing the world while you keep your office job seemed nothing more than a daydream. But as Covid-19 continues to disrupt how we live and work, smart nationals can use tax breaks to reduce their overall salary bills by employing digital nomads.
One of the permanent changes brought on by the pandemic is undoubtedly how employers view remote working. The Work-from-home initiative is fast evolving to a Work-from-Anywhere movement. Many employees have revisited their hierarchal needs, placing a higher value on family, security, and work-life balance. In turn, many employers are now rolling out their return-to-work policies allowing for more flexible work arrangements post-pandemic, based on this shift in their employees’ priorities.
Likewise, many countries are now offering attractive visa and tax frameworks to cater to these remote workers, who typically earn well and bring much-needed spending power. Ironically, just as the G20 cracks down on multinationals reducing their tax bill by pushing revenues to low-tax revenues, now many countries are using tax breaks to lure these digital nomads to their shores. So, what does this mean for multinationals and is there scope to turn this to the benefit of employees and employers alike?
In the past, employers were wary of having staff spend more than a couple of weeks working away from their home base for fear of triggering tax tangles in the other jurisdiction.
For example, an extended employee presence could create a permanent establishment (essentially a taxable branch) of the employing entity in the work location and hence myriad compliance requirements and a corporate tax risk, and concomitant transfer pricing complexities. Similarly, this corporate presence often extended to the employing entity being deemed to have a payroll withholding obligation. All in all, a massive pain, so in the old days, employers, like Nancy Reagan, just said no to remote working.
Now, employers are being forced to be more flexible – as employees have legitimately needed to work from different jurisdictions during the pandemic, due to family or other personal obligations, or simply because quarantine or lack of flights required them to be elsewhere from their employing entity.
At the same time, many countries are offering very attractive regimes for in-coming professionals, and smart multinationals are understanding that if they can facilitate their staff having significantly reduced tax costs and/or reduced cost of living, they can reduce their overall salary bill. A big potential win-win if carefully planned.
Last year, Greece announced a tax break where incoming workers halve their tax bill for the first five years. Portugal, Italy, and the Netherlands all have similar tax breaks for incoming residents which are attracting more and more skilled workers, particularly where remote working is becoming accepted by their non-local employers.
There are also many shorter-term tax and visa incentives, like Mauritius’ Premium Visa regime, aimed at attracting digital nomads for one or two years, rather than as a permanent move. Under this regime, the worker has no Mauritian tax obligations for up to two years, provided she works remotely, and her earnings are not paid into a Mauritian account. While this won’t lead to Mauritius earning tax revenue, the focus is on the spending power the remote workers bring. This is a great opportunity for businesses to retain their workforce and keep them incentivised while reducing the employers’ costs.
For South African businesses, in particular, setting up or repurposing an existing Mauritius structure is ideal to unlock these benefits and manage the underlying risks.
A Mauritian entity can be used to house remote workers. This will not only better manage permanent establishment risks but can be used to ensure payroll and social security obligations are met.
More excitingly, this in-country presence can be used to the overall corporate tax benefit of the group, as specific functions, and thus revenue streams can legitimately be housed in tax-favourable jurisdictions. The employee tail can be used to wag the corporate dog and pay for its supper by the tax savings crystallised without (to stretch the metaphor) creating a dog’s dinner.
Cinzia de Risi is a Global Mobility Tax Specialist at Regan van Rooy