Mobility Matters

There are several considerations with regards to the interplay of taxation and teleworking in this digital economy era. There is limited public discourse that deals with the impact of teleworking on personal income tax and social security post-COVID-19. Public debate tends to focus more on the current situation and the continuing leniency of authorities (more on this below) while restrictions on movement of people are still in place and the state of the health emergency is still in force. 

However, taxing multinational companies in jurisdictions where they have physical and/or digital presence has come to the fore and grabbed increasing attention. In addition, if we then consider that corporate income tax accounted for approximately 10 percent of total tax revenues in OECD countries in 2018 and personal income taxes accounted for about 23.5 percent of total tax revenues,⁶ it seems inevitable that the attention of governments, international institutions, and fiscal experts should also include an in-depth look into the dynamics of personal income tax in the digital economy in general and teleworking in particular. 

Finally, if the effects of teleworking on personal taxation and social security result in financial disadvantages, less social protection for individuals—that is, employees—and their families, more bureaucracy, and lower levels of compliance, then the success of “teleworking productivity” is in jeopardy. (“Teleworking productivity” is the terminology used by the EU Commission in its report of recommendations.)

(Source: Eurostat, Employed persons working from home as a percentage of the total employment, by sex, age and professional status (%))

Share of employed persons usually working from home

Teleworking is not a new phenomenon—COVID-19 has merely accelerated teleworking, making it an acceptable and attractive form of working to many employees. Teleworking prior to COVID-19 was generally an occasional event rather than a permanent working pattern in most cases. In fact, in 2019 on average only 5.4 percent of employees in the 27 member states of the EU (EU-27) usually worked from home, a share that has remained constant since 2009.⁷ 

As illustrated in the graphs above, it should be noted that the variation between the countries is striking. While 14.1 percent of employees usually worked from home in 2019 in The Netherlands and Finland, less than 1 percent of employees usually worked from home in Romania and Bulgaria, and less than 2 percent were recorded for Hungary, Cyprus, Croatia, and Greece.⁸ Expectedly, the percentage of people usually working from home grew in all countries noted in the graph from 2019 to the first year of the coronavirus pandemic in 2020. 

There are several aspects to the shifting tax base occurring during the COVID-19 pandemic that deserve highlighting. Generally, the jobs suited for remote work in other jurisdictions are likely to be found on the higher end of income scales, and more highly remunerated employees tend to be digitally skilled and more ready to work remotely. The EU Commission pointed to the fact that the benefits of remote work are not available to unskilled or untrained employees,¹⁴ who are usually paid lower wages. 

If we assume that remote work in other jurisdictions is more suited for skilled employees in usually higher-paid jobs, and that these employees will become even more mobile, this could lead to shifts in the personal income tax base. Applying these assumptions in actual examples, some experts predict that states could potentially suffer substantial loss of tax revenues in future.¹⁵

It is extremely difficult to discern any indication about how tax authorities and governments intend to approach this challenge after COVID-19. The unpredictability of the legislative landscape for remote work in jurisdictions makes it almost impossible for employers to design long-term policies for remote working. This can lead to frustration for employers and employees (and their professional advisers) because they cannot establish any stable longer-term flexible working arrangements. We are currently seeing employers limit teleworking from another jurisdiction, typically to four weeks and often as an extension of an employee’s holidays. This is likely done with an assumption that such a time limit has a low risk of triggering liabilities in the host country and that a risk of an employee having to contact local authorities -- e.g. for health-care -- and thereby risking the local authorities discovering remote work is low during a four-week period. 

Another factor in respect of there being a low risk of triggering non-compliance for work done remotely in another jurisdiction is that currently, many governments continue to show leniency. When employees cannot access their usual working place, certain authorities have taken the position that, in some working situations, work in another jurisdiction does not lead to changes in the employee’s or the employer’s tax and social security situations16. This has revealed a certain awareness and acknowledgment of the exceptional times we are operating in and injected a certain “stability” in the tax situations of “displaced” employees and remote workers. It is not unreasonable to wonder though how long this will last. 

In some recent reporting, we have learnt of New York tax authorities targeting individuals who claim to have left the state during the COVID-19 pandemic—the aim being to collect income tax revenue.17 How long before we start to see similar actions in Europe? 

Even though there seems to be motivation for governments and tax authorities to engage in discourse regarding taxes on personal income and social security post-COVID-19, it can be argued that is not the case. Instead, we are observing various countries competing for skilled labour by launching targeted initiatives, such as visas for so-called “digital nomads” and special tax regimes that allow a lower tax rate on personal income for highly-skilled labour. 

These programs can be problematic. Special tax regimes that provide for lower tax rates on personal income, typically for high-income earners, increased from 5 to 26 from 1995 to 2020 in the EU, a tax cost of at least EUR 4.5 billion annually and more than 200,000 beneficiaries. These numbers could be significantly higher as some EU countries did not provide sufficient data to make a more precise calculation. The EU Tax Observatory identifies in its study that among the most aggressive special tax schemes are Cypriot, Italian, and Greek high-income schemes and the pension schemes of Cyprus, Greece, and Portugal.18 Such preferential treatment can influence mobility, and affect where mobility occurs, since countries that do not have such options for bringing in lower taxation may be left behind as people choose where to work. Furthermore, the most aggressive regimes seemed to have been introduced only recently. Greek and Italian lump-sum tax regimes on foreign-sourced income allow individuals a tax rate reduction by over 50 percent for taxable incomes of at least EUR 500,000 for periods of over eight years without a requirement for a real economic activity.¹⁹

Among the least aggressive regimes according to the study of the EU Tax Observatory are the Austrian artists and athletes schemes and the Finnish researchers scheme that are intended to attract certain professionals and are primarily short-term schemes.²⁰ 

The EU member states have introduced special tax regimes to attract personal income-taxpayers. However, the EU Tax Observatory highlights that these schemes are problematic as they target the highest-income taxpayers which directly undermines the progressivity of tax systems and inflict revenue losses on other countries by attracting taxpayers who would not have moved their tax domicile in the absence of such regimes ²¹. It may be expected that the number of special tax regimes will continue to increase and the countries will at some point be obliged to look at the effects of uncoordinated, unilateral and highly-competitive approaches to tax policy for individuals in terms of the tax base and labour mobility. 

The EU Tax Observatory recommends that some of the initiatives in respect of corporate taxation be considered for personal income taxation. For example, assessing and identifying aggressive tax regimes with a view to abolishing such regimes is one option.²²

While several EU members states have introduced special tax regimes to attract personal income-taxpayers, the member states may decide to consider taxing expatriates who move their tax residency to another country. These former tax residents would be taxed on income in the country of their original tax residence for a number of years, a form of “tax quarantine.”²³ It is too early to determine what we can expect from the member states in the future when considering taxation on personal income; but it is reasonable to expect that we could see significant changes to taxation of personal income, either unilaterally or as a coordinated approach by the member states. Whatever happens it will likely have a significant effect on the mobility of workers, especially those on the highest end of the earnings scale. 

Another interesting aspect of remote working is the role of the employer. Increased mobility due to teleworking can lead to diminishing the role of employers as the party responsible for withholding and paying taxes on wages. A decrease in withholding taxes is conceivable, as administrations’ assessments of whether a person is self-employed are increasing.²⁴ 

In other words, the changes in employees’ workplace jurisdictions, as a result of an increase in teleworking, may also lead to a shift in administrative liability to withhold and pay tax on wages from the employer to the individual.

Moreover, the physical detachment between employer and employee might lead some to no longer identify as employees, but rather as self-employed agents. Marc Zuckerberg, CEO of Facebook, predicts that half of the company’s employees will be working remotely within the next five to ten years, and at the same time he states that employees can expect adjustments to their salaries if they change their location.²⁵ This is an interesting position to take, because it would, theoretically, reduce financial incentives that might motivate an employee to consider moving to a different jurisdiction. Moreover, it would not simplify administration of compensation and benefits, payroll, and so forth. 

It will be interesting to see if and how other companies will implement adjustments to compensation packages in their teleworking policies when employees relocate to a jurisdiction with lower taxation, lower cost of living, etc. It will be equally interesting to see how this “equalisation” will be received by the employees in an environment where there is global competition to attract talent. 

It is important to consider social security contributions when discussing tax revenues on personal income. Social security contributions (sometimes called “social security tax”) are in most countries a shared financial burden between employer and employee, and they may cover compulsory insurances such as social pension, health insurance, sickness benefits, etc., for employees and their families. Social security contributions may provide individuals with benefits at any stage of life.²⁶ 

Perhaps it is because of the “quid pro quo” principle in most social security systems that the share of social security contributions is higher in most of the European Economic Area (EEA)—which includes the 27 EU countries plus Iceland, Liechtenstein, and Norway—than the share of tax revenues that comes from direct taxes.27 Levels of social security contributions vary from country to country, as do the levels of benefits and social security protection.

What Is the Potential Impact of Teleworking on Social Security? 

In the EEA countries and Switzerland, employers and employees cannot choose in which country they are covered by social security. Instead, the competent country for social security is determined through a uniform set of coordination rules.²⁸

Recently, a couple of EU member states have taken an approach that when an employee works, for instance, for four weeks in another jurisdiction in a one-off arrangement, both employer and employee are liable to social security in the host member state. Given this author’s experiences with several authorities on certificates of coverage matters, authorities in certain of these countries have made an interpretation of the coordination rules that categorise working remotely in another jurisdiction as a separate form of working that is not covered by an exception rule on temporary posting. Here, they argue that the EU coordination rules cannot apply to situations in which an employee relocates temporarily without a specific business reason for them working in that specific location. 

This line of reasoning is familiar from treaties on social security, e.g., between an EU member state and a non-EU member state. However, within the scope of existing EU legislation, this interpretation does not seem to find support in the legislation or EU case law, but such practices in these few member states continue all the same. It is therefore possible that we will see a case in which the home country refuses to issue a certificate of coverage to an employee who is working remotely in another member state before the European Court of Justice. 

This situation with the categorisation of teleworking in another jurisdiction as a separate form of working that is not in the scope of the posting provision in EU legislation becomes increasingly perplexing when we learn, based on experiences and observations, that the same authorities issue certificates of coverage to employees working remotely in another jurisdiction when this work is categorised under the provision for work in two or more member states (multi-state working). However, the application of the provision for multi-state work does not come without challenges.

A working situation that has become much more widespread during the pandemic is that in which the employer is in one country and the employee is resident in another country. The EEA coordination rules for social security state that an employee who works less than 25 percent in the country of residence is covered by social security in the country where the employer is situated. However, if an employee is working at least 25 percent of the time in the country of residence, the employee is covered by social security in the country of residence.

This may be administratively burdensome, as the employer must register and comply with the social security rules in the country of the employee’s residence, a process which is often complicated and costly, and may result in non-compliance. 

Temporary Relief Measures Due to COVID-19 and the Future 

Due to COVID-19 restrictions in the EU and the inability to conduct one’s work as usual, many frontier workers²⁹ and employees who occasionally worked from home (less than 25 percent) pre-pandemic are now working most of their time remotely and from home, in a different jurisdiction than their employer. This means that social security should shift from the country of their employer to their country of residence. However, employers and employees for the time being can rely on the temporary measures EU countries have implemented that allow remote work in the country of residence to exceed 25 percent of the employee’s time without triggering changes in their social security position, unless these changes to the working arrangement are meant to be permanent.³⁰

The leniency by the social security authorities in the EU to not change the country that is competent for social security when working patterns change is based on the fact that the global pandemic has prevented workers from moving freely. Because remote work is not a choice but is instead necessitated by health emergency and pandemic control measures, the change in one’s usual work location to a different (remote) location would not generally result in changes to the applicable legislation for social security. However, if employees choose to work from their home countries in increasing numbers, countries may question whether the 25-percent threshold continues to be appropriate. 

Many perceive the 25-percent threshold not to be practical. Twenty-five percent of work can be organised in various ways, but it would be an unusual pattern for employees to work a full week from home and three weeks from the office. It may therefore be more relevant to look at the 25-percent threshold on a daily basis. If an average full-time employee works eight hours per day, five days per week, 25 percent amounts to one day and a couple of hours of the second working day. If we assume that in general one full working day amounts to 20 percent of work, then a more appropriate threshold could be 40 percent. If an employee worked up to 40 percent in the country of residence, social security in the country where the employer is located would continue to apply. 

A threshold of 40 percent would allow for a higher degree of flexibility than a threshold of 25 percent, and it is easier to calculate and comply with. As the pandemic continues and work patterns continue to change, we may see EU member states elevate the issue to the EU level, to consider reviewing the coordination rules from a long-term perspective. 

If we consider countries outside the EU, there are similar challenges in bilateral social security agreements (or “totalisation agreements”), which may need to be reviewed and adjusted to address the ways people work in a cross-border context at present and (presumably) in future. For example, in the USA, an employee cannot maintain coverage under U.S. social security if he or she initiated the relocation, and it is not substantiated with business reasons―if an employee in the USA requests to work remotely for a couple of months from Portugal for personal reasons, for example.

We have already mentioned that in some of these bilateral treaties teleworking in the other jurisdiction as a one-off arrangement does not allow coverage under social security in the home country. It would be helpful if the authorities engaged in a dialogue to review this position and consider changing it to modernise the treaties and accommodate developments in the labour market. The objective of these treaties is to remove obstacles to mobility between the countries and provide continued protection when work in other jurisdiction is of a temporary nature. 

However, another challenge in these treaties is that very few of them describe a situation in which an employee works in both countries in alternance, what we know as multi-state work from the EU legislation. At the time many of these treaties had been concluded it was not relevant to consider a situation in which an employee could work simultaneously in both countries as usual, but developments in technology and infrastructure are making it possible -- and commonplace -- for employees to work in both, e.g., in Germany and the USA in alternation. Therefore, it may be worthwhile for countries to reconsider their social security agreements to assess whether they are adequate for the current and future labour markets, as well as whether they still support mobility, as was their initial intention. 

It will be interesting to follow this topic, because if teleworking in another jurisdiction becomes categorised as a form of working that is not subject to the coordination rules on social security, it could potentially restrict the free movement of employees and prevent businesses and employees from reaping all the potential benefits of remote working, from optimising and growing a business to improving work-life balance and employee satisfaction.