Tax Officials Warn Against Underestimating Impact of Telework

By: Elodie Lamer

Although cross-border telework might seem like a limited issue, the consequences to tax competition and taxing rights should not be underestimated, OECD and European Commission officials said.

Telework can drive workforce participation and have environmental benefits, but countries need to be careful regarding tax competition, said David Bradbury, deputy director of the OECD’s Centre for Tax Policy and Administration.

“If you put the personal income tax and social contributions together — and those two taxes are much more affected by cross-border remote working [than corporate tax], they account for around half of the tax base in OECD countries, and that is broadly the case across European jurisdictions,” Bradbury said February 28 at the Inter-Parliamentary Conference on Stability, Economic Coordination and Governance in the EU, organized by the European Parliament and the Swedish Riksdag.

Stefan Olsson, deputy director-general at the commission's Directorate-General for Employment, Social Affairs and Inclusion, said that in recent years the peak number of cross-border remote workers in the EU was around 400,000.

“You may think this is a relatively low number, but we have to keep in mind that this has much broader repercussions and implications,” said Reinhard Biebel, head of the unit for direct tax policy and cooperation at the Directorate-General for Taxation and Customs Union (TAXUD).

EU citizens may face tax, labor law, immigration law, and social security issues when they telework from a country other than that of their employer. “Is it a big issue or a smaller issue? Is it a regional issue between two countries? Is it a European issue? Or is it probably a global issue? I think in that respect, it's not 100 percent clear, it's a little bit of everything,” Biebel said.

Bradbury noted that a recent U.K. study found that 75 percent of respondent companies said that “teleworking is now one of their No. 1 priorities when it comes to retaining and attracting talent.” He added that one in 16 workers now intends to work from abroad.

Minor clarifications to address the issues facing businesses and teleworking employees “are unlikely to address some of the more fundamental questions that are equally unlikely to go away, so I think there will be a need for a longer-term discussion” that the OECD would be keen to lead or be a part of, Bradbury said. He said the OECD is committed to carrying out more work on the issue, the question being the extent of that work.

“To what extent are we able to deal with these issues with some minor clarifications? And to what extent does there need to be a broader discussion that really does open up some of these questions around cross-border mobility that go to the heart of these questions of taxing rights in which countries have the right to tax the economic activity that's occurring as a result of cross-border remote work?” Bradbury asked.

TAXUD faces the same kind of questions. It previously concluded that the tax issues faced by individuals when teleworking from abroad do not constitute an infringement on EU freedoms. Biebel said that while he agrees with the suggestion of the European Economic and Social Committee to set up a one-stop shop, he said the commission doesn’t have this “in the drawer.”

Setting up a one-stop shop "would not be very simple; it would require the adoption of or the amendment of existing tax treaties,” Biebel said. “And the member states involved would have to agree on the competent tax office that would manage the one-stop shop. That's another difficulty.”

There is also the need for a "neutral mechanism, budgetwise" to resolve situations in which one member state would collect less taxes than the other one, Biebel said. He mentioned bilateral agreements such as the one reached last year between Switzerland and France, which will include compensation for the state of residence. Charles Margue, a Luxembourg member of parliament, said it would be unacceptable for Luxembourg to be adversely affected by this agreement. Because Switzerland is not an EU member state, “we cannot accept that there would be a distortion with neighbors which are not members" of the EU, he said.

Bernardo Blanco, an MP from Portugal, said the tax benefits for foreign digital nomads are more favorable than for nationals, giving digital nomads more purchasing power and exacerbating inflation — for example, in housing.

Bradbury also noted the potential for permanent establishments to be created by cross-border work and the fact that if decision-makers of a firm operate abroad, that “may constitute a place of effective management for the firm.” Transfer pricing issues may emerge as well, if decision-making employees telework from abroad or if a PE has been triggered, he said.

If the public goods and services that the state is required to provide and the taxing rights are geographically separated, “that actually will go some way towards undermining the very premise of the social welfare state that underpins our Western liberal democratic systems,” Bradbury warned.

Despite all these concerns, Biebel said it would be difficult to find unanimity in the EU Council to act on the tax issues because not every member state is affected the same way, and some states prefer to resolve the issue at the bilateral level.

“So for the time being, we are more looking at removing obstacles for the proper functioning of the internal market and analyzing the cases where problems are really burning and detected,” Biebel said.