At the same time, there has been a shift in how many companies engage talent, as shown by a considerable increase in contingent labor through contractors or short-term contracts. Some companies have set up, maintained or transitioned to operating on a fully remote basis without physical offices. Others encourage remote-first, with office space being downsized or physical space limited as the company grows.
Diversification in talent
From an operating perspective, professional employment organizations (PEO) and employers of record (EOR) have also increased in popularity, as an expanding labor market brings a significant number of new entrants alongside established vendors. These vendors allow businesses to engage employees in countries where they do not have a legal presence, with the EOR/PEO assuming the compliance and payroll requirements and effectively loaning the employee to the engaging company.
From a talent perspective, the concept of remote work has increased in popularity significantly. From being a relatively uncommon arrangement or restricted in many situations, remote and hybrid working has now become a necessity in many companies, and as a consequence, shifted the balance of power to employees. From highly skilled employees, employees in senior positions, to roles that require less or no in-person working, some employees have been able to negotiate longer-term remote working arrangements or influence company policy. This requires input from tax and finance departments to balance risks and compliance while HR and talent requirements necessitate an approach that enables mobility rather than inhibits employee movement.
Digital nomadism
In recent years, the introduction of a category of “digital nomad visas” has expanded, allowing employees to work in a country without needing a local employment contract, immigration sponsorship from an employer, or the personal expense that investment visas may require.
A Harvard Business Review article1 describes digital nomadism as “a lifestyle where one leverages remote work to travel and live in varying, often affordable locations around the world.” Interest from employers in digital nomad arrangements is increasing, in part due to the increase in the number of countries offering digital nomad visas since the end of the pandemic and the ability to enable mobility with relative ease.
These incentives also create risks, as a recent Grant Thornton survey2 showed that 49% of respondents identified remote working as the key mobility tax risk issue to manage. While encouraging digital nomadism may appear attractive as a means of incentivizing employees and enabling increased mobility, companies should be aware of the potential tax risks of such visa programs.
A widespread misperception of digital nomad arrangements is that there is limited exposure to income tax and tax compliance obligations at the individual taxpayer level along with correspondingly limited employer responsibilities like payroll and employment taxes, and critically limited or corporate tax exposure and compliance obligations.
Few countries, however, offer specific tax breaks for either employees or employers. A Grant Thornton review of 21 countries found 79% of digital nomad visas have no relief from individual tax while 85% have no exemption from corporate tax risk.
Benefits to countries
- Talent attraction, diversification and upgrading workforce
- Targeting growth and upskilling in certain industries
- Economic benefits – tourism, taxes, local economy boosts
Benefits for employers
- Removes immigration compliance risk
- Provides mobility opportunities where no business need for relocation or an assignment
- Expands an existing remote work policy to more countries
- Extends remote working timeframes beyond market trends of up to 30 days
- Delivers on a promise of “work from anywhere”
The tax risk reality
Without specific tax relief under a digital nomad visa program or provided under a double tax treaty, companies must rely on tax laws in the country the digital nomad employee is working to determine the potential tax exposure that could arise from having an employee working remotely on a digital nomad visa. In this circumstance, a corporate taxable presence may be deemed to exist, potentially resulting in corporate and other entity taxes and obligations, including:
- Corporate registration with tax authorities
- Filing of corporate tax returns
- Attribution of profit and transfer pricing considerations
- Liability to corporate income tax
- Liability to indirect taxes
- Potential tax authority scrutiny of activity
A range of employer obligations may also arise, requiring a company to comply with local regulations and potential exposure to employer taxes and other tax risk, where:
- A company has a local entity and thus operates payroll to report an employee’s taxable income, calculate and remit taxes
- There is no local entity and a company must register with the local authorities and operate a local payroll to report and remit taxes
- Payroll operation is required and withholding and remittance of taxes does not occur, the full balance of unpaid tax may fall due on the company. Penalties and interest may further be assessed if there is non-compliance with local employer obligations
- A company may be liable to provide statutory benefits to employees, with some countries allowing employees to litigate to claim benefits not received.
For companies exploring the use of digital nomad visa programs as an opportunity to expand remote working arrangements for employees, careful review is required to ensure the tax implications are fully understood and the company does not assume unwanted financial exposure.
1 The New Reality of Digital Nomads,. Eckerhardt & Atanasova, Harvard Business Review, February 5, 2024
2 www.grantthornton.com/events-and-webcasts/tax/2024/tax-symposium-2024/07-25-tax-symposium-global-mobility-remote-workforce-trends-and-leveraging-data-for-an-ai-future