Donal Nugent, journalist

Covid-19 has proved a steep learning curve for businesses on many fronts. As the year concludes, challenges related to taxation, both personal and corporate, may bring further unexpected complications.

For Ireland’s multinational workforce, the move to indefinite working from home in March often meant returning to their home countries. For a generation raised on globalisation, the internet and the EU single market, this typically proved a seamless adaption, facilitated by employers focused on continuity and the belief that physical location matters less than virtual availability.

In such circumstances, it can hardly be surprising that issues such as residency for tax purposes and work permit compliance have fallen off the radar for many.

Scenario planning

In April, the OECD (Organisation for Economic Co-operation and Development) offered its interpretation of likely scenarios around employee tax liability due to coronavirus. It said there was little cause for concern in situations where an individual was stranded abroad and attained domestic law residence in their host country, or where an individual temporarily returned to their ‘previous home country’ while continuing to work for their employer in their ‘new home country’.

In the case of stranding abroad, the OECD said: ‘If a tax treaty is applicable, the person would not be a resident of that country for purposes of the tax treaty; such a temporary dislocation should have no tax implications.’ In the case of a temporary return to a previous home country, it said: ‘It is unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home country.’

In Ireland, a number of measures introduced by Revenue supported that thinking. The tax authority stated: ‘Where an individual is prevented from leaving Ireland on their intended day of departure due to force majeure circumstances … the individual will not be regarded as being present in the state for tax residence purposes for the day after the intended day of departure.’

Period of grace

However, these arrangements related only to the initial crisis. ‘In the early stages of the pandemic, some revenue authorities introduced a grace period in a number of scenarios, but these applied only so long as the employee was genuinely stranded,’ says Thalia O’Toole, head of global mobility at KPMG Ireland.

She adds: ‘What emerged after that, in many cases, was employees choosing to remain outside Ireland, which has very different consequences for their tax and social security obligations in Ireland and overseas.’

Revenue’s statutory test to determine tax residence – effectively that an individual is in Ireland 183 days or more in a tax year – and its comprehensive suite of double taxation treaties provides additional comfort to employers on the short-term relocation of their staff.

‘Many people thought initially that as long as employees were out of the state for less than six months there would be no overseas tax or social security issues,’ O’Toole says. ‘That works as a general rule of thumb, but, as with everything to do with tax, there are shades and nuances.

‘The content of a tax treaty, for example, can vary significantly from country to country, even within the EU, and a blunt six-month rule in the tax year doesn’t cover all scenarios. Other factors like whether the employee’s activity creates a permanent establishment overseas, as well as the employee’s historical presence in the overseas location and personal and economic ties, may need to be considered.’

The most significant headache for an Irish business could be that an employee’s activity abroad may trigger a corporate presence in that jurisdiction

No return policy

As the year concludes, the vast majority of companies whose employees moved abroad will have come to some arrangement regarding their return to Ireland. But what happens if an employee declines to return?

‘Generally, an employer would look to the employment contract to determine the normal place of work,’ O’Toole says. ‘A refusal to return could therefore attract a disciplinary sanction up to and including dismissal.

‘However, as with any such dispute, the process would have to be procedurally and substantively fair.'

Corporate presence

Whatever challenges payroll taxes and social security contributions pose, the most significant headache for an Irish business could be that an employee’s activity abroad may trigger a corporate presence in that jurisdiction.

O’Toole says: ‘HR is the first port of call when we work with companies on these issues, but all stakeholders in the business need to be involved, such as tax, finance and the management team. Ensuring the right company policies and framework are in place is key to managing employees’ expectations, corporate strategy and compliance obligations.’

While multinationals may have both the HR resources and the broad corporate presence to mitigate these challenges, they have other equally significant risks to contend with. ‘Many companies have established EU/EMEA headquarters in Ireland,’ O’Toole points out. ‘Allowing a large proportion of sales and marketing employees to work remotely from other countries may impact established corporate structures, so should be considered carefully.’

Future shift?

When life finally gets back to normal, the expectation among many employees will be that working from home can remain central to their routine. O’Toole stresses the importance of a thorough risk analysis by employers to manage this assumption. ‘Supporting employees who wish to work remotely overseas is important for staff retention and productivity,’ she says, ‘but it is important to consider the broader impact on corporate tax structures when looking at the categories of employee that will be supported.’

As to whether there will be reform, perhaps at EU level, to create a tax environment that allows greater personal mobility from country to country, O’Toole thinks that unlikely. ‘Many employers focus on payroll tax obligations but neglect to consider the potential social security impact of remote working,’ she says. ‘Many countries within the EU have substantially higher employer rates than in Ireland – for example, the rate in France is over 40%, and in Spain 29%.

‘Where employees are choosing to remain overseas rather than return to Ireland, this can create additional employee and employee social security liabilities. Managing these is important for the employer and employee.’