Cross-country remote working arrangements: An overview of tax implications

Business needs may require cross-country remote working arrangements. However, it is critical to factor country-specific regulatory and tax considerations.

The prolonged COVID-related travel restrictions have led to situations where numerous individuals are employed in one country but are actually working remotely from another country.

Some of such situations are described below:

# Indian / foreign nationals who were working outside India, came on vacation / family events/ business events to India and are stuck in India;
# Indian / foreign nationals who are working in India but are stuck outside India;
# New locally-hired employees from another country who are currently unable to move to their new employment country and thus, working from their existing countries.

Business needs may require such cross-country remote working arrangements. However, it is critical to factor country-specific regulatory and tax considerations.

For employees having such remote working arrangements and who are working from India for their overseas employer or working for Indian employer from outside India, following key tax considerations will be worth noting from an employee and employer perspective.

# For employees working from India for overseas employers, such additional physical presence in India could trigger a Resident and Ordinarily Resident (ROR) status. An ROR is taxable on global income subject to relief as per relevant Double Taxation Avoidance Agreement (Treaty). Due to COVID-19, limited relaxation has been extended by India tax authorities for excluding the days of presence in India, while computing residency for tax year 2019-20. Circular number 11 dated 8 May 2020 covers specific situations for individuals stuck in India within specified dates and / or on account of quarantine requirements. Similar relief clarifications for tax year 2020-21 (i.e. 1 April 2020 to 31 March 2021) have not been announced yet.

# Further as the employees are working in India they will be taxable in India, irrespective of their residential status, unless they are eligible for short stay exemptions as per relevant Treaty. Foreign nationals can also explore short stay exemptions as per provisions of the Income-tax Act, 1961 (the Act). Specified conditions as per provisions of the Act or respective treaty need to be satisfied to claim short stay exemption.

If the employee is eligible for short stay exemption, potential double taxation could be avoided. However, in case of non-availability of short stay exemption in India, relief / benefits in the home country need to be explored. Also, if the employee is tax equalised / protected, additional tax costs for the employer need to be considered as the same could impact the overall assignment costs projections.

In case of Indian employees with payrolls situated in India and working from outside India for the Indian entity, taxability will need to be evaluated in detail in India and in the current country location. The tax implications will be based on several factors such as residency of the individual in India and current work country, location of payroll, implications in work country etc.

Apart from employee tax considerations, it is also imperative to evaluate corporate tax implications i.e. permanent establishment exposure on account of presence of employees in India who are working for the foreign entity. The same is an important consideration and could have additional tax implications for the employer.

Due to COVID-19, there would be many cases where an individual is employed in one country and is working remotely from another country. Unplanned remote working arrangements without considering the tax and other implications could lead to additional tax outflow for the individual and the company, burdened with additional compliances. Employers should plan and frame appropriate policies and clear guidelines on responsibility of additional tax liability, compliance, etc, on account of cross-country remote working.

In addition to the above, other implications such as employer withholding tax obligation, permissibility of work from immigration perspective, labour and employment law obligations will need to be evaluated.

(By Homi Mistry, Partner, Deloitte India. With inputs from Jimish Vakharia, Senior Manager, and Yaseen Boxwala, Deputy Manager with Deloitte Haskins & Sells LLP)