TAXING ISSUES
TAXING ISSUES Tax Considerations For Remote Workers The following is designed to provide general tax information for Americans living abroad or contemplating a foreign move. As with all tax and legal issues, seeking tailored advice from qualified counsel is advisable. A rapid advancement of technologies and resources designed to assist remote workers has been borne out of the global pandemic. This development may quickly become the catalyst for a dynamic transition to a permanent remote workforce driven by the elimination of employee commutes and ease of transition from one meeting to the next. With return to office policies being widely met with resistance, the combined productivity gains for organisations and lifestyle enhancements for associates may prove too difficult for the draw of traditional in-office camaraderie to overcome. The concept of a remote workforce will present many Americans with the opportunity to relocate to another part of the world where the cost of living is manageable, and a new cultural experience brings an exciting change of pace. All without sacrificing the stability of a current employment arrangement. Now with the proliferation of short-term vacation rentals and budget airfare options, the world can truly become the oyster of the remote worker. Breaking up the monotony of working from home every day by taking Zoom calls at the beach could become an increasingly desirable option. Once the decision has been made to make a move, the first issue to consider will be where to travel. American and British passports offer a tremendous amount of flexibility for short-term business and leisure travel. Nevertheless, every country will have unique rules with respect to the length of such stay and the type of activities that can be performed within the country under the terms of said visa. Undoubtedly, short-term and potentially even extended visa avenues will be available to Americans wanting to spend some time outside the United States while continuing to work remotely. Whether this means that tax relief would follow in the US or additional tax exposure will arise in the country where the remote work is being performed will depend entirely on the circumstances involved. The length of the stay, whether the United States has income and social security tax treaties in place with that country, and the extent of the company’s activities within that country, will all be important elements.
Short Visits Abroad
Short visits abroad will typically be neutral from a tax perspective. Pursuant to IRC Sec. 861(a)(3), WWW.THEAMERICANHOUR.COM
income from personal services is generally sourced to the location where the services are performed. This means that even though wages are being paid by a US company, the earnings would technically be classified as foreign source if earned while working remotely abroad. Income earned during short-term visits to countries with which the United States maintains an income tax treaty will generally be protected from foreign taxation. The flip side of this coin is that even though foreign earnings are produced, limited visits abroad will not qualify a remote worker for the foreign earned income exclusion, which allows up to $108,700 (2021) to be excluded from US tax if certain requirements are met. Eligibility for the exclusion requires at least a year outside the United States and these presence requirements cannot be accomplished with short-term travel. Furthermore, as local taxes are not being paid in that country on account of the treaty protection, no credit for foreign taxes paid will be available. Though in rare instances, foreign tax credit carryovers from a prior year working abroad could still produce a tax windfall from the short trip overseas and the “foreign source” income generated. Moreover, a temporary visit outside of a US state will always be insufficient to break state residency, requiring state-level taxes to continue to be paid on the foreign source income. Short-term travel outside the United Kingdom would also be insufficient to break domicile and discontinue worldwide taxation as a UK resident. Special relief may be available for certain remittance-basis taxpayers. Contrary to US policy, the United Kingdom does not maintain the same citizenship-based tax system, meaning that UK tax residency could potentially be terminated if sufficient time is spent outside the country. American expats in the United Kingdom who are able to break UK domicile would still have American taxes to manage irrespective of where they move. The experiences gained may be priceless, but a temporary trip abroad would offer no tax savings on the US side to offset any duplicated living expenses. To complicate matters, in the absence of protection from a US income tax treaty, exposure to foreign country taxation could conceivably arise, even in a short-term stay of only several weeks or months. For example, nonresidents visiting the United States from a non-treaty country are only afforded protection from US income tax if present in the United States for less than 90 days during the year, earn less than $3,000 in compensation, and are paid by a foreign employer.
Assuming 240 workdays per year, this would mean that a nonresident earning $100,000 annually would have US income tax exposure on or after his or her eighth remote work day. Fortunately, if foreign income tax is triggered by the short visit abroad, the tax paid can generally be credited back against the US liability for that year. Each country will have unique rules for how individuals working in the country on a remote assignment are classified and understanding the boundaries to stay within can go a long way to avoiding future hassles.
Impact Of US Income Tax Treaties On ShortTerm Travel
The United States has executed income tax treaties with over 65 countries. The specific provisions will vary, but the goal of all treaties is the promotion of cross border business by allowing business people from one country to spend limited amounts of time working in the other country, without needing to worry about local tax obligations. If working abroad remotely for a US company, the provision of the Treaty covering income from “employment” or “dependent services” would be operative. Article XV of the US-UK Treaty explains that an American working in the United Kingdom would not be subjected to UK tax provided: 1. The work is performed for a non-UK company; 2. The employment is not operated through a permanent establishment that company maintains in the United Kingdom; and 3. Less than 183 days is spent in the United Kingdom during any twelve-month period beginning or ending during the stay. Permanent establishment is a term of art, further defined in Article V of the Treaty to mean a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” The term specifically includes a place of management, branch, office, factory, or workshop. The term is clearly not designed to cover a makeshift home office in a short-term Airbnb rental, but given that it still leaves quite a bit of room for interpretation, ensuring that activities performed on behalf of the company within the country will not give rise to a permanent establishment is crucial. Client-facing associates or those in management positions would need to take even greater caution. Accordingly, with the protection of the Treaty, spending up to half the year in the United Kingdom, working for an American WWW.AMERICANINBRITAIN.CO.UK
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