US companies in Europe look at the complexities of having remote workers in another jurisdiction
Long before COVID-19, multinational companies were tailoring their employee work models to adapt to the agile work environment that automation now offers. Then the pandemic hit, and overnight companies raced to make the shift to completely remote working.
Having employees work remotely offers multiple benefits, including less travel time, increased productivity, reduced office costs and potentially a better work-life balance. As the world rolled out shelter-in-place restrictions to minimize the virus, remote working soared to unprecedented rates.
CEO’s of global multinationals like Tobias Lütke of Shopify, a fast-growing Canadian-based global e-commerce platform company with over 5,000 employees globally, tweeted plans to keep offices closed until 2021 and after that most will permanently work remotely, stating that office centricity is over. Tech giants, such as Facebook and Twitter, are implementing long-term work-from-home (WFH) policies for employees. Mark Zuckerberg, CEO of Facebook, is reported to have stated that as much as 50% of Facebook’s workforce could be working remotely in the next five to ten years. Recently, Microsoft and Dropbox have given their employees the freedom to work from home forever. In the case of Microsoft employees, compensation will vary for anyone that decides to move to a different state.
So, is it as easy as having the correct technology to enable employees to work from anywhere? Well, companies are beginning to weigh up the benefits of this distributed working model. US companies with global staff are now considering the legal and HR implications of having workers move between foreign jurisdictions. The complexities arising are putting additional strains on HR, operations and financial teams as employers understand how remote working will potentially impact their employer obligations relating to payroll, immigration requirements, employee tax residency and their tax obligations around international tax issues, value added tax (VAT) and legal requirements. As a result of these complexities, a number of US companies have introduced policies that remote working is only possible where the employee remains located within the country of their employer company (employer).
Louise Kelly, a Tax Partner with Deloitte Ireland LLP, recently shared with me some key considerations facing US companies in Ireland with WFH employees in other countries.
Where an employee is working in a country that is different to the location of their employer, a taxable presence or permanent establishment (PE) may be created for the employer based on where the employee is working. This means that if a company based in Ireland has employees working remotely in Italy, it may lead to additional Italian corporation taxes for the company. It may also lead to additional VAT registrations.
When remote employees work in another country, there are implications for transfer pricing that can create a domino effect on taxable profits. If due to remote working senior leadership are located outside their home employer company, it may undermine the transfer pricing strategy of the group and lead to more profits being allocated to multiple jurisdictions. With companies becoming global earlier in their growth cycle, employee mobility must be considered in tandem with finances.
Payroll and employment tax obligations are an obvious conundrum, even for US employees living and working in different states. Payroll obligations are separate from employees’ residency rules. For US companies with employees in different locations in Europe, it’s important to note that the triggers for payroll tax obligations may vary across the countries. If an international company has 10 employees dotted around 10 different countries, the arrangement can lead, not only to increased payroll taxes and social security contributions, but also to increased complexity for the company’s finance teams. In addition, there may be immigration matters to consider such as appropriate work visas.
There may be other factors which need to be considered including reward packages depending on higher/lower tax bills by virtue of an employee’s location. Recently, Silicon Valley based employees of VMware experienced this when salaries were cut by 18% because they were no longer living in the high-cost areas of San Francisco and the Bay Area. Stripe is offering a once-off bonus of $20,000 to employees who move away from high-cost cities, accompanied by a 10% pay reduction.
Different employment law obligations and entitlements is also an area for consideration where remote workers are working in various jurisdictions. Yet, another factor to consider is corporate tax incentives. Ireland, for example, has generous R&D tax incentives, including an R&D tax credit that is available at 25% of allowable expenditure on R&D activities. However, qualifying for the R&D tax credit may be impacted if staff are working in another location. For example, a company must undertake R&D activities within the EEA in order to qualify for this incentive.
Ireland is home to many of the world’s leading high-performance companies including Google, Facebook, Twitter, eBay, LinkedIn, Zendesk, DocuSign, Uber, Airbnb and Deem for example. Many are active in the social & digital media, big data, technology and cloud computing space - most of these companies moved seamlessly to remote working earlier this year. While some countries announced concessions in relation to the creation of PEs and employment tax obligations recognizing the difficulties caused by COVID-19, many of these are temporary. If the remote working arrangements continue during and beyond the pandemic, employers need to consider the above-mentioned HR, tax and legal obligations.
A July 2020 study by AIB/Amárach Research found that 80% of those working in Ireland want to spend part of their week remote working from home, and this scenario will likely impact the workplace of the future. Companies are now looking at a future that may incorporate remote working as a norm and although there are many advantages to this future way of work, there are challenges that need to be overcome in order for it to work efficiently. Despite the extraordinary events of 2020, many US companies are continuing to expand into Europe, and we are confident at IDA Ireland that Ireland offers a location to support this expansion.
For further information on how IDA Ireland can support international business expansion, download our Land and Expand Playbook or visit idaireland.com
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