Where should remote workers pay income tax?

The United Nations (UN) Tax Committee is reviewing the taxation of remote workers and is contemplating changes to the convention. This includes a proposed change to the taxation of remote workers, with a potential amendment to Article 15.

Under Article 15 of the United Nations Model Convention, primary taxing rights are allocated to the country in which the employment is exercised, with secondary taxing rights to the country in which the employee is resident. In contrast, under Articles 16 (director and senior management fees) and 19(1) (government service employees), the primary taxing right is allocated to the contracting state where a company is resident or to the contracting state that is the employee’s employer, irrespective of where the employment is exercised.

The UN has outlined four options for reform in respect to the provisions of Article 15 of the model convention:

The number of days an employee can spend in a state they are non-resident in before they are liable to tax in that country on their employment income could be reduced from 183 to 60 or 90 days.
Granting taxation rights to the state an employee’s employer is resident in even if the employee is not resident in that state and does not undertake any employment duties there.
An alternative provision could be added to the commentary on the UN Model Convention to deal with situations where the number of employees resident in one contracting state and working for employers who are resident in the other contracting state are relatively equal for both states.
The commentary could be modified to add guidance about the treatment of remote workers, given that the existing commentary on Article 15 does not contain any consideration to this effect. The additional commentary would explain the situations in which the state the employer is tax resident in is entitled to tax the employment income of their employees that are tax resident in another country.

What are the key drivers behind this amendment?

Loss of revenue

Remote workers typically pay income tax in the country where they are working. As such, where employees are legally employed in a different country to where they physically work, there is a loss of tax revenue to the country where their employer is resident.

Competition

Since the COVID-19 pandemic, there has been a boom in international remote working. A common theme is the preference to work from jurisdictions with sunnier climates and often lower tax rates and cost of living. As countries compete for tax revenues, there is an argument to support affording taxation rights to the country which benefits/profits from the employee’s duties.

Compliance

Where the Article 15 approach applies, this can create complex compliance issues and the need to consider double tax relief.

Our thoughts

We welcome the UN Tax Committee's proactive response to the challenges posed by remote work.

However, the current proposal raises more questions than answers:

The interaction with domestic tax rules

The proposed changes to Article 15 contradict the fundamental principles of most countries' domestic tax rules. In other words, most countries would not look to tax the employment income of a non-resident who does not perform any employment duties whatsoever in that country.

A ‘tax grab’

The changes may be viewed as a ‘tax grab’ by the more developed countries and result in tax losses for the jurisdictions where remote workers are based, including developing countries which are in need of the tax revenue.

Secondments

The application of an amendment to Article 15 to traditional secondments is unclear. For example, if an employee is seconded to a host country for two years and breaks tax residence in their home country, will the home country have the taxation rights over 100% of their employment earnings? It remains to be seen.

What happens next?

The next session of the UN’s Tax Committee will take place from 19-22 March 2024. The intention is to finalise the proposed amendment to Article 15. However, even if an amendment is finalised in March and is included within the UN’s Model Tax Convention, there is no obligation for countries to adopt this in their double taxation agreements with each other.

There are several practical challenges for the UN’s Tax Committee to overcome before an amendment to Article 15 is finalised, and it will be interesting to see how this evolves over the coming months. Will the proposed changes influence the decision making of remote workers or their employers in the meantime? Watch this space.

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