Is now the time to put remote working policies into effect to reduce employee taxes and allow group benefits?
A permanent change resulting from the Covid-19 pandemic, is how employers view remote working. Working from home is quickly changing to working from anywhere. Many employees have revisited their hierarchal needs, placing a higher value on family, security, and work-life balance. In turn, many employers are now rolling out their return-to-work policies allowing for more flexible work arrangements post-pandemic, based on this shift in their employees’ priorities.
Likewise, many countries are now offering attractive visa and tax frameworks to cater to these remote workers, who typically earn well and bring much-needed spending power. Ironically, just as the G20 cracks down on multinationals reducing their tax bill by pushing revenues to low-tax revenues, now many countries are using tax breaks to lure these digital nomads to their shores. So with the crackdown on corporate tax, governments are now targeting the personal tax pie.
So what does this mean for multi-nationals and is there scope to turn this to the benefit of employees and employers alike?
To date, employers were wary of having staff spend more than a couple of weeks working away from their home base for fear of triggering tax tangles in the other jurisdiction. For example, an extended employee presence could create a permanent establishment (essentially a taxable branch) of the employing entity in the work location and hence myriad compliance requirements and a corporate tax risk, and concomitant transfer pricing complexities. Similarly, this corporate presence often extended to the employing entity being deemed to have a payroll withholding obligation and more often than not a social security. All in all, a massive pain, so in the old days, employers, like Nancy Reagan, just said no to remote working.
Now employers are being forced to be more flexible – as employees have legitimately needed to work from different jurisdictions during the pandemic, due to family or other personal obligations, or simply because quarantine or lack of flights required them to be elsewhere from their employing entity. At the same time, many countries are offering very attractive regimes for in-coming professionals, and smart multinationals are understanding that if they can facilitate their staff having significantly reduced tax costs (and / or a reduced cost of living), they can reduce their overall salary bill. A big potential win-win if carefully planned!
Last year, Greece announced a tax break where in-coming workers halve their tax bill for the first five years. Portugal, Italy, the Netherlands, and Mauritius (for returning Mauritians only, referred to as the diaspora regime) all have similar tax breaks for in-coming residents which are attracting more and more skilled workers, particularly where remote working is becoming accepted by their non-local employers. There are also many shorter-term tax and visa incentives, like Mauritius’ Premium Visa regime, aimed at attracting digital nomads for one or two years, rather than as a permanent move. Under this regime, the worker has no Mauritian tax obligations for up to two years, provided she works remotely, and her earnings are not paid into a Mauritian account. While this won’t lead to Mauritius earning tax revenue, the focus is on the spending power the remote workers bring.
This is a great opportunity for businesses to retain their work-force and keep them incentivised while reducing the employers’ costs.
For South African businesses, in particular, setting up or repurposing an existing Mauritius structure is ideal to unlock these benefits and manage the underlying risks. A Mauritian entity can be used to house remote workers, similar to how a global employment entity was typically used to manage global expatriate employees. This will not only better manage permanent establishment risks but can be used to ensure payroll and social security obligations are met. More excitingly, this in-country presence can be used to the overall corporate tax benefit of the group, as specific functions, and thus revenue streams can legitimately be housed in tax-favourable jurisdictions. So the employee tail can be used to wag the corporate dog and pay for its supper by the tax savings crystallised without (to stretch the metaphor) creating a dog’s dinner.
This is an exciting and eminently feasible solution which can unlock material tax, exchange control, and currency benefits for your group.
As with any solution the starting point is to understand your unique circumstances. Contact us to arrange a workshop to start the process today.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.