Taxes on personal income and wealth across the EU aren’t harmonized, meaning countries in principle are only permitted to limit their tax jurisdiction to income earned within their territory. However, the rise of cross-border teleworking, originally fueled by the Covid-19 pandemic, has amplified challenges on the taxation of remote workers’ income.
The possibility of remote working abroad, and an employer’s remote working and work-life balance policies, are now key considerations for those entering the labor market. This leaves many companies with no choice but to adopt these expectations in their company policies.
This trend will remain a significant and integral part of the global labor market, leaving taxation of income earned by teleworking from another country a growing concern. Should there be a specific set of harmonized rules for remote workers that applies regionally or globally, and if so, how would such rules be administered?
Even as teleworking expands across the global labor market, there seems to be limited openness of countries to review their existing tax treaties on personal income and decide whether they need to change the rules that specifically address remote work.
The European Economic and Social Committee (EESC) calls on EU member states to agree on a common solution in the form of specific taxation rules for teleworkers and simplification of administrative procedures for collection and payment of taxes. The EESC reflects a concern that personal taxation in this context could become yet another battlefield for EU member states to compete for workforce (and business).
If member states don’t take a coordinated approach to the taxation of income for remote working, it could negatively increase the competition among them. Aggressive prioritizing of the interest of national labor markets would come at the cost of the European internal market and the fundamental freedom of movement for people, businesses, services, and capital.
The EESC suggests that EU member states agree to tax remote workers only when the worker exceeds 96 working days per calendar year in a given jurisdiction. As for administration, the EESC emphasizes that a “one-stop shop” similar to the one for value-added tax could be introduced in taxation of remote workers.
Reaction From EU Member States
The EESC recently hosted a public hearing in Estonia. Their suggestions to adopt a common threshold for the taxation of remote working and simplified administrative procedures were met with questions and general skepticism about the potential administrative burden to make these proposed solutions happen. There was no exploration of more substantive issues linked to taxation of remote workers.
Some attendees wanted to know if the recently enacted EU agreement for social security for teleworkers that allows 49% of telework from home (which is generally more than 96 days), without triggering the application of the rules in the country of employee’s residence, should be replicated for income tax. “Telework” in this context refers to work done exclusively using technology, including, phone, laptop, etc. Client visits, meetings, and manual labor aren’t included in the definition of telework.
This is difficult to envision.
Social security contributions are usually linked to the specific worker. Taxes on income are a part of the revenue that states and local municipalities use to operate various functions in society, so they aren’t linked to a specific personal benefit—tax revenue is for the benefit of all, such as the building of schools, hospitals, and roads.
The threshold of 49% without triggering the application of local rules is therefore more sensible for social security than it is for taxes, as a remote worker would enjoy benefits financed by taxes but wouldn’t contribute with taxes as much or at all, while working in the country for almost 50% of their time.
Even though a threshold of 49% therefore seems unlikely for income taxation of remote workers, a potential solution for EU member states could be to agree on a common threshold or even a range of teleworking days necessary to trigger tax liability on income that each country could adopt.
It should be possible to consider the suggestion for more efficient administrative procedures regardless of what happens with the material rules for taxation of remote workers. However, at the EESC public hearing in Estonia, the reaction to the proposal for the employer’s country to settle all taxation and transfer tax revenue to other countries wasn’t enthusiastic.
What the Future Holds
Although the EU can’t regulate taxation as such, the European Commission can adopt different legal instruments, including directives, that can impact processes for how taxation is implemented and how EU member states cooperate on the topic.
The current proposals by the EESC haven’t been enthusiastically accepted, so adoption of a directive is unlikely right now. However, the European Commission can adopt recommendations that, although not legally binding, often serve to move things in a certain direction until a legally stronger document can be adopted, such as a directive or a regulation.
Tax administrations can hardly argue that collection and payment of taxes on personal income couldn’t be improved and that it couldn’t be made much easier for users to comply with the rules. It’s often the administrative burdens such as manual administrative processes that cause non-compliance. Suggestions such as a one-stop shop would contribute positively to that aim.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Daida Hadzic is KPMG head of quality for global mobility services (EMA).
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