How many of you thought of working from a paradisiac island with a view to the infinite blue sea? Maybe you are a mountain person, and you prefer majestic green sceneries with the sound of waterfalls? Says who you cannot have your daily meetings with your team while you are sailing on a boat and having the world at your fingertips?
Not long ago, the idea of such a nomad work environment was not even conceivable. A few years ago, I wrote an article about the digital nomads lifestyle and taxation, in which I was addressing the necessity to elect a place of belonging, a residence, even if it ties to the moment of passing, for tax purposes[1]: Choose your tax residence: Envision where you would like to be buried. Back then, incurring a digital nomad lifestyle was not recognized by tax authorities and the tax burden was high on taxpayers.
But thanks to the globalisation and digitalisation, as well as the “miraculous” Covid-19 and other generational factors, who changed the work-life balance and lifestyle, now everything is possible. This means that the current labour income and tax principles, as we know them, can no longer drive the tax system, as is.
As I am implicated with expats from Canada, USA, Germany, Netherlands, and Nordic countries, recently, I hosted a webinar destined to Canadians in Spain. The most common and repetitive situation was related to digital nomads and/or teleworkers. We see more and more people looking for warmer and sunnier places, with a good quality of life. Thus, Spain is becoming one of the most interesting countries to live and work remotely in a cross-border reality for digital nomads with higher salaries, in a much less costly environment, which allows them to have an excellent quality of life.
It is in this perspective that the European Economic and Social Committee (“EESC”), a consultive body of the EU, had adopted an opinion[2] on the taxation of cross-border teleworkers globally and the impact on the EU. It presents the challenges that could be faced by employers and employees and throws solutions about how cross-border teleworking should be addressed from a tax point of view.
It is estimated that around 22% of the EU workforce is now doing some form of telework or work from home, and this way of doing had proven high efficiency. Therefore, this trend is a fast-growing reality, creating new challenges from tax perspective. Tax rules must be updated to reflect the new reality of society. With the choice of locations individuals are benefitting from the social services and public expenditures, which are covered by taxes paid. This is why, usually teleworkers pay taxes in the territory where they reside. Is it sufficient? Is it fair?
Another aspect of international teleworking is that, unintentionally, such employees may run the risk of creating a PE for their employers, in a country that is not their own, and where they are not ready to confront tax consequences and liabilities. I agree with this statement, because lately, in practice we see persons deciding to leave their residence countries and establish their life in a different country without informing their employers, who could potentially face filing obligations with the tax authorities and the governments, such as direct taxes, payroll taxes, insurance taxes, and benefit taxes. This could oblige the foreign employer to register for the social and tax obligations, when in reality it was not planned so. I believe that this aspect of international teleworking is not addressed enough. It should be clearly discussed by authorities and/or by corporations, especially in a context of cross-border transactions and multinationals. In my opinion, an employee is entitled to choose the place where he would want to perform his tasks, but at the same time must be aware of all the repercussions that the employer could meet, who in return has the right to accept, or not, to be drown in these consequences.
This issue of cross-border teleworking should be addressed, and bilateral agreements should be revised, says the EESC. It invites to set-up agreements based on generally accepted principles. Otherwise, this new reality may result in complex set of international rules and applications that could lead to fragmentation and in some cases to double taxation.
In its paper, the EESC refers to article 15, 16 and al. of the OECD and UN Model Convention where it is stated that salaries, wages, and other forms of remuneration shall be taxable in the country where the employment is exercised, or in another contracting state, and where the 183 days rule is mentioned. Also, when a contracting state has the right to tax remuneration of the employee, it often imposes obligations on the employer to withhold wage/payroll taxes/fees.
Spain decided to impose the 183 days rule in the case of the Digital Nomad Visas (“DNV”) for non-European individuals desiring to live in Spain while working, in some cases for foreign employers too. If one does not meet the number of days required, the residence permit under DNV, could no longer be valid. This implies tax obligations in Spain as opposed to the former country of residence or the country of the employer.
The EESC presents an example of an employee living in country A but working in country B. It explains the differences on how taxation is affected between the states when the employee decides not to commute anymore to country B, in contrast of the situation of a self-employed. It is true that with the mobility of individuals, it is easier to determine where the company for which the work is performed is located, than where the individual worker is located.
The EESC suggests that if taxes are collected in the country of the employer, regardless of where the work is performed and where the employee is located, would make things simpler for employees and may be mor attractive to employers. It would mean that the revenues would be unchanged compared to today, since the only difference would be the physical presence of the employee. Also, to compensate for loss of revenue in the employee’s country of residence, a revenue sharing mechanism would likely be required.
I think this is a good approach that would simplify drastically the tax processes for cross-border teleworkers by avoiding double compliance, double tax filing, and most importantly by stopping tax evasion based on residency theories. Did you know that many taxpayers and/or digital nomads use the freedom of movement to reside less than 183 days in different states, this way, avoiding paying taxes? Did you know that Spain is suffering from this misfortune?
As a taxpayer, I believe that this proposed solution of paying taxes based on in the country of the employer is a proper fix that would help us straighten up this form of tax avoidance. However, I am sure that no states are willing to let go of their share of the cake, and they all want to keep somehow the link to the presence of the teleworker in the territory.
Moreover, the EESC proposes that the revenue authorities may divide the income between the countries by applying data on actual individual presence in the states concerned, reported by the employer to the tax authority in its country of residence, thereby acting as a “one-stop-shop” or using some macro-economic aggregate key. I believe this approach would be more complicated as it could be challenging from system and tax technology perspective, that would require a lot of changes by the states, adding to their unwillingness of dropping their share of the tax revenues.
In my view, the EESC is addressing a real problem to which states are not giving too much of attention when their revenues deriving from income and direct taxation could increase significantly. It also points out lack of labour market regulations for social security contribution in the context of cross-border teleworking.
I don’t see any global harmonized adaptation soon. I believe, we will witness more amendments in local laws to oblige digital nomads and teleworkers paying their taxes where they are performing their work, i.e., Spain and its DNV. With the 183 days condition the taxpayer would be obligated to file the income tax return in Spain and would fall under the non-resident tax rules and regulations in the country of the employer.
It is possible that we see also more agreements signed between neighbour countries, such as the case of Switzerland and France. The agreement between the 2 states, at the end of June 2023 to supplement the bilateral double taxation agreement, includes a teleworking threshold authorized up to 40% for all cross-border workers, regardless of cross-border status. Temporary assignments carried out on behalf of the employer in the country of residence or in a third country are considered in calculating the 40% and must not exceed 10 days per year.
To conclude and to answer my above-mentioned questions, I don’t think there is a one complete statement as a valid response. In the territory of residence, the digital nomads who do not meet the minimum threshold and conditions, for paying taxes, should be called to contribute to the social services they benefit from as well, if not through direct income taxes, at least through some form of a tax… Let us call it “digital nomad tax”?
In the meantime, I, too, embrace this reality and fulfil my duties from anywhere in the world, while writing this paper in the air and watching beautiful landscapes from the plane…. My country of tax residence is the beautiful sunny, warm, extraordinary… Spain!
To this, I say… Cheers!
[1] https://www.legaltoday.com/opinion/blogs/fiscal-y-legal/blog-fiscalidad-internacional/choose-your-tax-residence-envision-where-you-would-like-to-be-buried-2019-09-26/
[2] https://www.eesc.europa.eu/en/our-work/opinions-information-reports/opinions/taxation-cross-border-teleworkers-globally-and-impact-eu
