Labor has been increasingly flexibilized for decades. This flexibilization encompasses various aspects, including the duration of employment, the nature of the work, and also the location of work. Concerning the latter, it pertains to the rise of remote work, primarily driven by the COVID-19 pandemic, which has continued to some extent thereafter, albeit in a much more limited manner. Strictly speaking, these forms of flexibilization are hardly associated with any tax consequences. However, the situation may be different when it comes to geographical flexibility in labor. There are various examples of this. First and foremost, it is relevant due to the increased prevalence of remote work among individuals residing in one country while working regularly or even daily in another. We typically refer to these individuals as cross-border workers when it concerns neighboring countries, but it can also apply to the Caribbean islands. For many types of work, the location where people perform their duties has become irrelevant; their work is entirely electronic in nature. For instance, last week, I came across an old colleague from the Netherlands on LinkedIn, who is currently sailing around the world on her sailboat and running her tax practice from the sailboat two days a week, coincidentally from Bonaire and Curaçao at that moment.
All of this is interesting and appealing, but it does raise some tax-related challenges when it comes to income taxation. The international tax system is not well-equipped for these situations. The same applies to social security obligations. It is not easy to regulate because it depends partly on the specific circumstances of each case and partly on the rules in the legislation of countries and tax treaties between them. Consider the case of the former colleague. The first question is where she is considered a resident. She lives on her boat, which is in different locations. In such a situation, there is often no country that can impose taxation. Some countries do have rules stating that if someone is not a resident for less than a certain period—usually a year—and did not reside elsewhere during their absence, they are considered to have remained a resident in their original home country during that time. This is a sensible rule. However, if someone stays away for longer than the specified period, this rule no longer applies. Therefore, it is recommended to adopt a relatively longer time frame. Continuing with the example of the former colleague: suppose she provides tax advice from her boat in Bonaire and Curaçao. Will there be taxation on the income generated? Can value-added tax be imposed, for instance? The answer is typically negative because the stay is too short, and there is, in fact, no fixed location where the work is performed, which is usually a necessary condition. But if there are rules that formally allow taxation, it remains a question of how to enforce them. The local tax authorities are unlikely to be aware of the stay and the generated income, and the chance of the worker spontaneously reporting to the Tax Office is minimal as well. Hence, it is of great importance that countries applying this residence fiction address these issues, as otherwise, taxation on income in such cases can easily fall between the cracks. This cannot and should not happen. Moreover, there have been suggestions to introduce an explicit exemption in tax legislation for workers who stay abroad for a somewhat longer period. The idea is that this would attract work nomads who could have a positive impact on the economy of the temporary host country. This may indeed be the case, but as mentioned earlier, there is a risk that those involved do not pay taxes anywhere. In my opinion, this cannot be the intention.
Work nomads constitute a relatively small group. I mentioned other cases as well, such as cross-border workers, but also think of detached employees who increasingly work from home. Regarding cross-border workers—those who reside in one country and work in another country one or more days a week—many countries and tax treaties have rules stating that these individuals are only and fully liable for tax and often social security in their country of residence. This deviates from the usual rule that individuals are liable for income tax in the country where they perform their work. In such cases, the rise of remote work does not lead to complications because the taxing authority was already assigned to the country of residence. If the conditions for such an arrangement are not met or if the treaty does not have a residence-country rule for cross-border workers, then increased remote work can shift the taxing authority to the country of residence, which also becomes partly a work country. Often, the nature of work is highly flexible, so this can vary from week to week. In short, there can be very complex and varying situations. Something similar can occur with expatriate employees who increasingly work from home. In such cases, there should ideally be a kind of threshold. One could consider a rule that if work in the country of residence, over a longer period, on average, constitutes less than a certain share of total work, it is not taken into account. In European social security rules, there were already some such provisions, but they have recently been partly adjusted to accommodate the increasing prevalence of remote work. In tax treaties, such rules do not (yet) exist, but, for example, the Netherlands is an advocate for including such rules, especially with neighboring countries like Belgium and Germany. However, these countries have not shown much enthusiasm in this regard so far. As mentioned earlier, this is a sensible approach that should be applied more broadly. The OECD should play a significant role in this.
Peter Kavelaars is a Professor of Tax Economics at Erasmus University and of counsel at Deloitte Dutch Caribbean.