Global race to attract high earners threatens governments’ tax revenues

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International tax updates

Just as the global race to the bottom in corporate taxation is ending, a new threat to governments’ tax revenues is emerging in the form of countries competing to lure high-earning remote workers.

Governments recently agreed a deal to introduce a minimum rate for the world’s largest corporations but, as officials hammer out the details, the pandemic has turned many well-paid individuals into transient nomads.

Many professionals are already merging work with holidays — joining Zoom calls as they quarantine in foreign villas before taking leave with their families. Others are expats who are working remotely back home to stretch out the time they can spend there.

Petros Kremonas is running campaigns for a Brussels-based NGO from his family home in Corfu, Greece, for a few weeks. The pandemic has made him, and many others in his social circle, “re-evaluate where time is being spent and the priorities in life”, he said. In principle, he would like to work close to his parents for two or three months a year.

The main barrier for him and others is not the nature of his work, but the potential tax implications.

Employers are wary of allowing staff to work from a different jurisdiction for more than a few weeks at most, in case they incur tax or social security liabilities in the other country. Even one employee working remotely could in principle lead aggressive authorities to decide that a company had established a taxable presence there, making its profits subject to corporate levies.

Anyone asking to work cross-border long-term would be likely to face “powerful inertia and fear of tax risk” from their employer, one tax lawyer said, adding that his own firm had recently refused requests from prospective new hires to initially work from their home country.

But tax practitioners have also said that businesses competing for talent are under growing pressure to let employees work from their preferred location.

“This has become so common,” said one practitioner, whose multinational clients started from a “very conservative position” but found that they had to compromise because “the business needs to be able to hire where they want in the current environment”.

Meanwhile, countries that have suffered a brain drain of talented workers are competing to lure their citizens — and those of other countries — back on a permanent basis.

Greece passed a law last December that will allow some new arrivals to halve their income tax for several years. Portugal is advertising hefty tax breaks for new residents with certain skills and Italy stepped up its inducements for workers to relocate last March.

Other European countries have followed some Caribbean nations in offering special visas for “digital nomads”.

Many governments have not yet realised just how big a threat this represents to the stability of their tax systems, according to Rita de la Feria, professor of tax law at Leeds university.

In most countries, personal income tax represents a bigger share of government revenues than corporate income tax. It is also a tax that is disproportionately paid by the high-skilled workers that are most easily able to work remotely.

“With increased mobility comes more significant change to the tax base — as has clearly been seen in [corporate income tax] over the last 40 years,” De la Feria wrote in a paper co-authored with Giorgia Maffini, a tax policy adviser at PwC and research fellow at the Oxford University Centre for Business Taxation, which was published last month.

Countries such as the UK, which relies heavily on taxes paid by a relatively small number of highly paid professionals, are especially vulnerable, they said.

De la Feria and Maffini have estimated that between £6.5bn and £32.5bn of UK revenues from personal income tax and social security contributions could be at risk if a third of higher-rate taxpayers were able to work remotely and 10 to 50 per cent of this group chose to leave. Even at the low end, this would wipe out more than half of the gains expected from the pending increase in corporation tax.

“All the reform efforts have been focused on corporate income tax. This has much wider consequences,” De la Feria said.

An exodus of high-skilled workers would also hit productivity and reduce the take from consumption taxes, she warned. “There are very wide societal and economic ramifications. And no one has even noticed . . . that a much bigger crisis could be brewing.”

 

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