International tax updates
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As the global race to the bottom in corporate taxation comes to an end, a new threat to government tax revenues emerges in the form of countries competing to attract high-income teleworkers.
Governments recently reached an agreement to introduce a minimum rate for the world's largest companies, but while officials work out the details, the pandemic has turned many well-paid individuals into temporary nomads.
Many professionals already combine work with holidays – they participate in Zoom calls while being quarantined in overseas villas before vacationing with their families. Others are expats who work remotely from home to increase the amount of time they can spend there.
Petros Kremonas has been running campaigns for a Brussels-based NGO from his parents' house in Corfu, Greece, for the last few weeks. The pandemic made him and many others in his social circle “rethink where time is spent and what priorities are in life,” he said. Basically, he wants to work near his parents for two to three months a year.
The main obstacle for him and others is not the nature of his work, but the possible tax implications.
Employers are careful not to allow employees to work from another country for a maximum of a few weeks if they have tax or social security obligations in the other country. Even an employee working remotely could, in principle, lure aggressive authorities into deciding that a company has established a taxable branch there and that its profits are subject to corporate income tax.
Anyone looking to long-term cross-border work is likely to face "severe indolence and fear of tax risk" from their employer, a tax attorney said, adding that his own law firm recently turned down requests from potential hires to work from there initially Homeland.
However, tax experts have also said that companies competing for talent are coming under increasing pressure to have their employees work from their preferred location.
“This has become so common,” said one practitioner whose multinational clients assumed a “very conservative position” but found they had to compromise because “the company needs to be able to recruit in the current environment where you want it ”.
Meanwhile, countries that have suffered a brain drain of talented workers are competing to draw back their citizens – and those of other countries – permanently.
Greece passed a law last December allowing some newcomers to cut their income tax in half for several years. Portugal is promoting hefty tax breaks for new residents with certain skills and Italy increased its incentives for workers to move in March.
Other European countries have followed some Caribbean states and offer special visas for “digital nomads”.
Many governments have not yet recognized the threat to the stability of their tax systems, says Rita de la Feria, professor of tax law at Leeds University.
In most countries, income tax accounts for a larger proportion of government revenue than corporate income tax. It is also a tax disproportionately paid by the highly skilled workers who can most easily work remotely.
"With increasing mobility, there is a more significant change in the tax base – as has been clearly shown in the last 40 years with [corporate income tax]," wrote De la Feria in a joint with Giorgia Maffini, a tax policy advisor at PwC and a Research Fellow at Oxford University Center for Business Taxation, published last month.
Countries like the UK, which relies heavily on taxes paid by a relatively small number of highly paid professionals, are particularly vulnerable, they said.
De la Feria and Maffini estimate that UK income from income taxes and social security contributions between 6.5 and 32.5 billion this group chose to go. That would wipe out more than half of the expected profits from the upcoming corporate tax hike, even at the lower end.
“All reform efforts have focused on corporate tax. This has far more far-reaching consequences, ”said De la Feria.
An exodus of highly skilled workers would also hurt productivity and reduce consumption taxes, she warned. “There are very far-reaching social and economic effects. And nobody noticed. . . that a much bigger crisis could be brewing. "