There is a steady rise in the number of remote workers along with the advancement of technology.
In this article, we are going to discuss the tax system for these digital expats. Recent media reports how these digital nomads impact local economics. They are self-employed individuals with no permanent location. They scour every corner of the world wide web in search of job opportunities that they can get by using their gadgets, Wi-Fi connection, and in-demand skills.
These digital nomads can earn enough to pay the bills by working remotely anywhere they are from the globe. They can do their business online without geographic limits. Lisbon, Portugal’s capital, has recently noticed an influx of these nomads along with an ensuing expansion in rents and cafe culture as of late.
Planning Struggles
Independent workers who spend their money and digital currencies. For example, cryptocurrencies have their own tax systems in place. In the local financial system, they will add the local taxes to national coffers, also known as public coffers.
We should explore some questions related to taxes and working remotely in-depth. Are they getting any taxes? How does the government guarantee they are contributing something taxable? Are they paying any amount at all? Or are they evading taxes?
In short, the answer is no. Digital nomads must pay the tax according to residency rules, either as an income tax or a corporate tax if they come under a corporate format. One example is Portugal’s 183-days-in-12-months rule.
It relies upon where the individual lives, regardless of whether the nation concerned has a tax treaty with their working country or not. The length of the working contract is irrelevant. It does not matter whether they are short-term or long-term workers. However, the place where they work matters in the tax and reporting issues. This is where Social Security and Labor Law considerations come into play.
Let’s give a sample scenario. Assuming that a Polish freelancer who is based in Portugal works for a Swiss company that runs a website in Hungary. How will the tax work here? The answer is a bit complicated.
Richard Harryman, tax director at PwC, says that “The rule of thumb in this situation for income tax and social security would be that an individual would pay tax and social security where they work.” This goes well in a situation where a digital nomad lives and works in the same country. For an online professional like the one mentioned in the above example, settling the tax where they work and live would become a more suitable option. Most living communities would expect their citizens to take part in tax paying.
Things to Ponder On
Richard Harryman says that working remotely may create some potential problems for workers and companies alike. It’s important to know about these things. For example, whether the freelancer is employed or self-employed? Does he/she need to settle social security? Is his/her income tax withholding due or not? And can he/she stimulate the corporate filing for the business? These are some questions to ponder.
According to Harryman’s statement, the primary trigger to keeping the engagement alive is for businesses to have basic information about their employees. Details such as job position, work structure, and place of residence are valuable to the company. Company compliance rules should be drafted in a manner that avoids unnecessary confusion. It should be digitally accessible for easier access.
There is a significant difference in an individual’s tax and social security status when they are employed as opposed to individuals who are self-employed. For self-employed workers, there are also some consequences for a company’s tax and legal commitments. For instance, many nations have anti-avoidance tax laws just like UK’s IR35 rule. This helps to classify a person as a working individual even without concentrating on any legal papers. Each country has its own systems in place, so this could be another challenge for remote professionals depending on where they’re at.
For a government provision, social security is apparent for individuals who work in the same country that they live in. However, this is not feasible for remote workers. In the case of an individual, social security is essential for claiming their benefits. In the case of a company, they have cost and consent needs.
Employees who are classified as working individuals need to operate withholding tax in most countries. The company may not place it in the country where the employee works remotely. Either the company or business registers under the local tax system to work on tax withholding in some countries or the worker registers under a direct collection agreement.
Worker Commitments
Companies must be aware of the risks when hiring digital nomads from different countries. The corporate tax filings may be completed through a remote working setup, but it totally depends on the employer and the employee.
Andy Kelly, the global expatriate tax services partner at BDO, does not recommend for companies accept digital nomads from another country until they discuss the tax system clearly. He also said, “Even where the individual is engaged via a personal service company or a consultancy agreement, there’s no guarantee that the relevant tax authorities will not consider that the individual should be taxed and subject to social security as an employee with accompanying employer liabilities and obligations.” In conclusion, remote workers and companies should keep an eye on this.