Digital nomads - challenges and opportunities

On 20 April, we heard from OECD adviser Olivia Long who's tasked with looking at this issue, Karine Halimi-Guez, Vice President-Head of Tax at Booking.com and a panel of Simmons & Simmons tax experts who discussed the latest on taxation of Nomad Employees. During this session we addressed:

1. The tax challenges resulting from Nomad employees
2. An update on recent developments at UN, OECD and EU level
3. Quick wins versus long term solutions

External speakers:

• Olivia Long (Adviser in the Tax Treaties Unit, OECD)
• Karine Halimi-Guez (Vice President-Head of Tax, Booking.com)

One of the most pressing issues facing businesses today, is how to ensure that the international tax rules do not adversely impact on the recruitment of internationally mobile employees (nomad employees). At present, those rules give rise to a number of challenges that can adversely impact on recruitment and these were explored in our recent podcast.

A panel of Simmons & Simmons tax and employment experts were joined by Karine Halimi-Guez, Vice President-Head of Tax at Booking.com, and Olivia Long, who has been tasked with looking at this issue as an OECD adviser, to discuss the problems and consider what solutions might be possible.

What is the problem?

Karine Halimi-Guez (KHG) explained that since the COVID pandemic, the world of recruitment has changed. People are no longer willing to relocate, especially for recruitment in the IT sector. The reality is that those people can work from anywhere and have no need to relocate. Asking them to relocate from, for example Germany to Amsterdam, is simply unrealistic now. This is an issue that is driven by the demands of employees, not the companies employing them. And this is a real challenge that is happening now.

However, employing people located in a different jurisdiction to the business can be problematic. It gives rise to a range of tax issues, including:

• Employment taxes, social security and pensions issues (a compliance headache)
• Exposure to permanent establishment (PE) risk (do you need a critical mass of people or what if you recruit one very senior employee?)
• Residency risk (where high-level executives are recruited).

KHG explained that speed and flexibility are needed in the recruitment market and the tax issues do not remotely help -- indeed they are proving a real barrier with many employers having lost recruitment opportunities due to their impact. What is needed is short-term, practical solutions now -- not a ten year project to change the international tax rules.

The PE angle

Mark Sheiham, a tax partner at Simmons & Simmons, explained the PE issue in more detail, noting that there is not a single approach in all jurisdictions and this leads to a confusing tangle of rules. However, there are two broad themes that need to be identified:

• Place of business PE issue - here a home office will not normally be a place of business (or premises) PE due to the lack of control an employer has over the premises. The issue is however more difficult where an employee goes into a local office owned by the employer and different jurisdictions may take different approaches on this issue.
• Agency PE issue - here the question is really about what the employee actually does. There is clearly a higher risk if the employee has client contact or deals with sales or is a senior manager.

The employment issues

Mandy Perry, an employment partner at Simmons & Simmons, noted that it is not only tax issues that can get in the way of recruiting internationally mobile employees - employment law issues can also have an impact. In particular, confidentiality and privacy rules, data protection, immigration, benefits and contract governing law issues can be problematic.

As regards short term working abroad, businesses are tending to take one of two approaches in this context:

• A complete ban on short term working abroad (though there may be issues over enforcement in practice)
• Allowing short term working provided it remains under a set level.

As regards permanent nomad employees, then it is important to determine their rights (on a jurisdiction by jurisdiction basis), for example as regards dismissal. Some employment business offer their services as "employers of record" in a jurisdiction. However, whilst these may help with certain issues caused by nomad employees (such as payroll taxes and social security), these do not generally assist with other issues such as the existence of a PE or fixed establishment. In addition, it was highlighted that it is not simply tax and employment rules that can be an issue in this context, there can be very real concerns over the "soft" HR issues around loyalty and culture as well as perhaps concerns over IP issues where the employment contract is not with the relevant business.

Equally, descriptions of the role a person performs (such as contractor or consultant) does not in general provide a solution to the issues. For most of the issues, the question is what the person actually does rather than what they are called. Only if a person genuinely performs an independent role (perhaps advising several clients, for example) might this have an impact on the PE issue, for example.

The VAT angle

Jo Crookshank, a tax partner at Simmons & Simmons, explained that the issues are not simply limited to those in the direct tax field. In particular, nomad employees can give rise to "fixed establishment" issues in a VAT context. The definition of "fixed establishment" is a difficult one to apply and it gives rise to issues around where VAT is due on supplies and VAT reporting obligations. In particular, it can be difficult to establish how much "permanence" is needed for a fixed establishment to exist and questions around this issue can be very fact specific.

What is the answer?

The panel recognised that individual jurisdictions have rules which apply to these situations (albeit that they can be difficult to apply with different interpretations). What is needed is international organisations to be involved to bring consistency to the issues that arise.

OECD involvement

Olivia Long, OECD advisor, confirmed that the issues around nomad employees are currently on the OECD programme for work for 2022/23. The current priority is the two Pillar approach, but that is due to end in summer 2023 with the OECD looking to move onto the nomad employee issue.

Of course, the OECD did issue guidance on the treaty issues during the pandemic, which was broadly welcomed. But it now recognises that there is a call for more certainty and predictability from businesses in the post pandemic phase. Accordingly, the OECD is currently looking to scope the project looking at:

• The PE issue, especially the need for more certainty around common fact patterns
• TP treatment - in particular, there can be problems where a business recruits an employee in a jurisdiction through a local subsidiary (to help with local compliance issues) but where that employee performs functions that are not related to that local entity
• Compliance burden
• The mismatch between social security contribution arrangements and personal tax treatment.

International solutions

Monique van Herksen, tax partner at Simmons & Simmons in Amsterdam, explained how repeated queries from business on these issues led to a realisation that each required individual jurisdiction specific advice and solutions. It was against this background that Simmons & Simmons had put forward the proposal to the UN Tax Committee to consider this issue as part of its work stream.

What was needed was an international solution, ideally involving the United Nations, OECD and the EU. Monique noted that the European Economic and Social Committee (an EU advisory body) has issued an opinion proposing measures to remove the cross-border tax obstacles in this context.

Any quick wins?

What is needed is immediate solutions - not long term solutions which might take ten years to implement. What is also needed is a positive mindset from those involved and a recognition that this issue is not about tax avoidance or tax evasion, but about dealing with recruitment issues in the post-pandemic world.

Ideally, international agreement is needed around safe harbours, such that if a situation falls below certain thresholds it can be ignored from a PE perspective, for example.

One possible example, in the context of the PE issue, would be to introduce a safe harbour for non-business purpose locations. This would provide that where the location of an employee is purely for personal reasons, then that location is not to be treated as a PE. This would rule out almost all home office scenarios, especially where an employee is not visiting/selling to clients.

Ultimately, there was broad consensus that what is needed (in the short term at least) is changes to the existing guidance, especially in the OECD Model Treaty. Better and more relevant examples to modern working practices would provide more certainty and consistency. Changes to the actual international tax rules are a matter for the longer term, but changes to the guidance could bring real and immediate benefits now.