Remote work could disrupt tax revenues

As remote work arrangements become more popular, it’s not just companies and their employees who stand to benefit.

Studies show that flexibility in working arrangements can produce significant benefits for the broader economy and a catalyst for improved productivity and growth.

At the same time, these flexible working arrangements are challenging traditional notions of personal income taxation in a cross-border context. Remote work from another jurisdiction disrupts taxation based on physical presence.

Enabled by technology, flexible working arrangements are becoming common. This could lead to an increasing number of employees who begin working virtually cross-border from, for example, lower-tax locations, which may in turn prompt governments to update their tax rules to protect their tax revenues.

Even now, we’re seeing signs that the enforcement of existing rules is stepping up. Looking ahead, global mobility teams may face a period of uncertainty and disruption as governments begin to examine existing cross-border personal tax and social security rules in the context of increasingly virtual workplaces.

9 in 10 companies set to embrace remote work

In September 2021, 530 companies from 46 jurisdictions were surveyed about their current remote working considerations and decisions during KPMG International’s global webcast on Work from Anywhere issues. Almost 90% of companies said they are considering introducing a remote working policy or have already introduced one.

A study by the US National Bureau of Economic Research suggests that working from home will persist beyond the pandemic for several reasons, including:

• Better-than-expected work from home experiences
• New investments in physical and human capital that enable work from home
• A pandemic-driven surge in technological innovations that support remote work.

The study predicts employees will enjoy large benefits from greater remote work — especially higher earners — while companies could enjoy a 5% productivity boost due to re-optimized working arrangements.

The European Agency for Health and Safety at Work similarly notes the benefits for organizations and individuals in terms of flexibility, autonomy, performance and work-life balance.

The agency also acknowledges drawbacks, such as inadequate working conditions, excessive working hours, and unpredictable work schedules, which it aims to deal with through legislation and policy that ensures adequate working conditions, occupation health and safety and work-life balance.

For economies more broadly, the European Commission (EC) has stressed that adapting to digitalization in the public and private sectors is essential for increasing economic growth.

Specifically, home-working arrangements and temporary work from another jurisdiction (teleworking) are major factors in achieving this growth and better work-life balance.

In 2020, the EC advised emphasized the importance of investing in digitalizing businesses and the public sector to enable teleworking, virtual learning, and homeschooling.

The EC said this would not only increase resilience and productivity but also could “contribute to the green transformation of economies and help bring vulnerable groups into the economic mainstream.”

For companies, the tax and legal implications are the biggest obstacle to realizing the full potential of remote working, according to the KPMG International Survey.

Governments could remove some of these barriers by revising thresholds for triggering taxation, social security obligations and permanent establishment determinations, thereby modernizing the legislation to address the current and future working arrangements and promoting economic growth both regionally and globally.

Impact on government revenues

For government revenues, the impact of losing workers within their jurisdiction to remote work elsewhere could be substantial. This is especially true among OECD countries, which take in up to five times more in personal income taxes than they do in corporate income taxes.

The Stanford Institute of Economic Policy Research reported that OECD countries derive an average of only 10% of their total tax revenue from corporate income tax. When combined, personal income taxes, social security contributions and payroll taxes amount to an average of 50% of total tax revenues. The institute notes that higher earners pay the largest proportion of these taxes and are more likely than lower earners to be able to work remotely.

With high levels of employee demand for remote work, the potential for future tax disruption from mobile workers could be tremendous. Research shows that 31% of jobs in Europe and 37% of jobs in the United States can be done remotely.

Further, in a survey of 10,000 people across 12 markets in Europe, the Middle East and Russia by Cisco Systems, 87% responded that they wanted the ability to choose where, how and when they work, even though only 5% had worked mainly from home before the pandemic.

A new race to the bottom?

In the OECD’s recommendations on post-pandemic tax and fiscal policy priorities, the OECD observed that rising international taxpayer mobility, driven by digitalization, could hinder the functioning of personal tax systems by enabling individuals, especially wealthy ones, to relocate more easily to tax-favorable locations.

The Tax Foundation has similarly warned that if large numbers of workers take up remote work in locations with low taxes on personal income, then tax authorities would need to consider how this tax competition might affect their revenues and how it should influence policy.

The British Tax Review echoed concerns over changing residencies of high-income earners and displaced personal income tax revenues, noting that there are signs competition is already underway. “Such displacement can have far reaching consequences, not least [personal income tax] competition—indeed, there is early anecdotal evidence that, faced with these challenges, countries will respond by competing for the same base, with characteristics similar to the race that has been taking place for many years in relation to [corporate income tax], but with potentially more significant economic and societal consequences, not least because of the significance of [personal income tax] for national budgets.”

According to the OECD, this could drive up tax burdens on less mobile, lower-income people. The OECD advises governments start looking at tax policy options that are adapted to a world where employees are increasingly mobile.

Takeaways for global mobility leaders

For global mobility teams that already have their hands full, it seems that managing the global tax and other regulatory compliance issues that remote work brings is about to become even more challenging.

As temporary emergency remote work situations give way to more formal arrangements and governments struggle to raise revenue to cover pandemic-related shortfalls, tax authorities are taking more interest in enforcing existing tax rules in cross-border work situations.

In the coming years, governments are likely change their tax rules so they can better guard against revenue losses from mobile employees.

Global mobility teams would do well to monitor trends and developments in this area so they can manage emerging tax risks while ensuring their companies and its workers enjoy the increased productivity, job satisfaction, and other benefits that remote work can generate.

Mobility teams can also work with the business to design a structure for remote working with appropriate policies, guidelines and monitoring mechanisms. These guidelines should be flexible and updated regularly for changes in the business, working practices, and regulatory environment.

Although the pandemic may have kickstarted the surge in remote working, technology is what makes it possible. All organizations need to develop the right infrastructure to support remote working on a large scale. At the same time, mobility teams should have technological tools that help them track and manage compliance for remote workers.

Having the right technological solutions for mobility teams will strengthen the organization’s position for whatever legislative changes might come as well as its ability to prosper from digitalization and remote work’s substantial benefits.