Hiring overseas remote workers can result in unexpected tax bills, warns RSM Australia

Australian technology businesses should be prepared to deal with potential tax-related headaches while employing remote workers based overseas, according to professional services firm RSM Australia.

In its report, titled “What Australian tech businesses can expect in the next two years”, RSM Australia international tax and transfer principal Danielle Sherwin said that while she is all for globalisation, she warned that any type of economic activity Australian businesses engage in overseas can potentially result in unexpected tax bills, specifically transfer pricing traps.

“If economic activity is occurring in a country, that country will typically want to derive some tax revenue from it,” Sherwin said. “If Company X is based in Country Y but selling into Country Z, Country Z will almost always levy one or more taxes on Company X.”

“Working out how much tax Company X pays in total, and how that tax revenue is split between Countries Z and Y have always been fraught. Things have become even more complex in the digital age, where it’s not clear where the economic activity is occurring.”

Sherwin said turf wars between different tax jurisdictions would see a range of factors come into play, like where the company that owns the intellectual property is based, and whether that company is selling directly into a foreign country or selling into it via an entity.

“For instance, many Australian tech businesses selling into the US market set up an LLC – a limited liability company,” she added.

“Whether a company is selling directly into a market or doing so via an entity then impacts things such as licensing agreements, withholding taxes on royalties and franking credits.”

Sherwin noted how most tech companies would sell into multiple foreign markets, all of which have different tax regimes in place. “Things get very complicated, very quickly, which is why people like me spend many years at university studying this stuff,” she added.

Remote worker income tax

Skills shortages have resulted in Australian technology firms not only dealing with transfer pricing issues, but also paying tax to countries like Estonia and Vietnam if they have remote workers based there.

“If an Australian company is just sporadically outsourcing work to a single, or even a handful, of contractors based in a foreign county, it’s unlikely – though not impossible – they will hear from the local taxation authority,” Sherwin says.

“Things start to get trickier when the remote worker is classified as an employee. Or if a company is seen to have effectively set up a branch office in a country by virtue of the number of remote workers it’s sending work to in that country.”

Sherwin recommended business consult an international tax expert before doing anything that could potentially be flagged by a foreign revenue agency.

“Contrary to popular belief, I’ve found the overwhelming majority of tech companies are happy to pay their fair share of tax,” she said.

“But if they are operating in more than one tax jurisdiction, as they usually are, it can be challenging to work out exactly what taxes they should be paying in what countries.”