In accelerating the trend toward remote and flexible work, the COVID-19 pandemic has also raised tax challenges for not only employers and employees, but also for the tax jurisdictions that rely on employment-based taxes. Will large-scale adoption of work-from-anywhere policies result in a shift in the tax base sufficient to prompt changes in traditional employment tax frameworks?
Employment taxes are an essential source of revenue for taxing jurisdictions around the world. Employment tax revenue accounts for about half of the total tax revenue collected by the 37 member countries in the Organization of Economic Co-operation and Development, according to 2018 data.
Current tax principles typically assign the primary right to tax to the jurisdiction where the employee works. This tax framework is based on the presumption that an employee’s physical presence is associated with a business purpose and value creation. In many jurisdictions, tax withholding systems simplify and ensure efficient tax collection, especially when nearly all employees work in the same tax jurisdiction as their employer, or in a jurisdiction with a cooperative tax agreement.
This framework is challenged when employees work miles away from their employers, or even in another country. Developing a tax framework more suited to this new reality is a challenging task, with potentially significant financial implications for jurisdictions that are losing large numbers of workers, and so stand to lose significant tax revenue at a time when public sector finances are already severely stressed by the COVID-19 pandemic.
If the trend to remote working continues unabated, taxing authorities may seek to revise requirements for employer tax reporting and withholding, and reconsider corporate tax policies, leaving employers to navigate new multijurisdictional complexities to determine an individual worker's tax obligation. In the short term, jurisdictions may respond by increasing detection and enforcement efforts to enhance, or at least claim, taxing rights on earned income.
Taxation is becoming an even bigger factor in jurisdictional competition for talented workers. For example, in August 2020, the New Hampshire Department of Justice announced it would review Massachusetts' assertion that residents of New Hampshire and other states who worked in Massachusetts before the pandemic would continue to be subject to Massachusetts income tax while working from home. New Hampshire Governor Chris Sununu said in a statement, “We need to maintain that New Hampshire advantage at all costs." Similar disagreements could erupt between other states’ taxing authorities.
Employers and workers may also have to make some adjustments. Employers seeking to attract and retain talent may have to balance their need to provide flexible work arrangements against the challenge of additional tax management complexity. Employees will have to more closely examine and consider the tax implications of remote work before making decisions about their workplace location.
In the midst of a pandemic that has upended so many aspects of modern life, it is hard to predict precisely where the trend toward remote work will lead. But this trend began well before the pandemic and it is not likely to end when the threat of COVID-19 recedes. And the implications for employment taxation could be profound.
