The UN Tax Committee’s current proposals are at an early stage. If they do progress, we would anticipate the wording of Article 15(4) to iterate in the coming months. Furthermore, inclusion as a paragraph in the UN’s model tax convention does not automatically mean it will become a feature of all future tax treaties. Nevertheless, the UN’s proposals are noteworthy and may lead to further developments in the cross-border taxation of remote workers as their thinking evolves. Our initial reflections on the current draft can be found below:
Domestic taxing provisions
The UN’s proposal grants additional taxing rights to the State in which the employer is resident to the extent that the remuneration is paid by or on behalf of that employer, even if the employee concerned has never actually exercised their employment duties in that State. Non-resident employees are typically only taxed to the extent that employment duties are performed in a given country, so unless such countries alter their domestic legislation, draft Article 15(4) may have limited effect in practice. Of course, it is possible that countries may alter their domestic legislation to give broader scope to taxing non-residents, but that would run contrary to a general principle of residency-based taxation that a State does not tax individuals who have never performed employment duties in that location.
Winners and losers
One of the overriding problems with any measure to address the taxation of remote workers is that its likely popularity and effectiveness will be driven by the extent to which a Contracting State believes it will benefit from the measure. If the net inflow/outflow of tax revenue from remote workers is considered likely to be generally equal between Contracting States then the measure may gain acceptance, however, if instead there is a ‘Winner’ and a ‘Loser’ between the two parties, then adoption is far less likely. In the case of the proposed paragraph, granting additional taxing rights to the employer’s State of residence would seemingly favour more developed economies where an international employer would typically be resident, but would seemingly present far less upside for emerging economies with fewer employers whose employees work remotely.
Secondments
The position regarding secondments may also be tricky to navigate in practice. If a secondee’s remuneration continues to be paid by their contractual employer back in their home country, does this mean that Article 15(4) would ensure that the home country continues to have taxing rights, notwithstanding the possibility that they are neither resident nor performing any duties in that country whilst on secondment? The application of the economic employer concept may resolve the position adequately in some scenarios (i.e. if it is determined that the ‘employer’ for treaty purposes is actually the entity for which the individual is working in their country of assignment then Article 15(4) would not apply), albeit not all countries apply the economic employer concept and so anomalous taxing positions may ensure.
Overseas branches
In a similar vein to the inadvertent impact on secondments, the draft paragraph would appear to apply even where the employee is working as an employee of an overseas branch, perhaps unintentionally giving the provision broader application than standard remote work scenarios. By way of illustration, would it make sense for an employee of the UK branch of a Japanese bank to be subject to tax additionally in Japan despite living and working in London? Many would say not, so it would seem that the UN would need to give further consideration to scenarios of this nature and ensure that they are not affected by the proposed measure.
The UN’s timeline and next steps
The UN’s engagement with the growth in remote working and the tax challenges which it throws up is very welcome. However, the current proposals clearly demonstrate the practical difficulties in finding a way forward which works for the majority of Contracting States. It is to be hoped that these challenges can be resolved in time for the intended finalisation of the measures at the UN Tax Committee’s 28th Session next spring. In the meantime, we also await publication of the OECD’s scoping note on remote workers, which is expected before the end of the year and which should also explore the question of Permanent Establishment risks arising from remote work. There’s clearly more to come from the UN and OECD on the subject of remote work, though whether a workable consensus can be found on formal additions to their respective model conventions remains uncertain.
