Taxation of cross-border remote working arrangements
Advances in technology enabling many employees to perform their duties from anywhere in the world, combined with enforced changes in working practices brought about by the COVID-19 pandemic, have revolutionized the world of work. These remote workers, or teleworkers, can be defined as employees who work for a company outside of the traditional office environment, and may also consequently work outside that company’s physical location and jurisdiction of tax residence. This article will review the current tax laws in Ghana that apply to remote working regimes, and discuss whether the Ghana Revenue Authority (GRA) should be concerned about this apparent shift in behavior.
The rise of remote working
Employment income is normally taxed in the location in which an employee is physically located. Before recent technological advances, individuals employed in a foreign country generally had to relocate to that country to carry out their employment. However, with the prevalence of remote working, employment “norms” have drifted significantly away from the traditional “work from office” setting.
The tax rules have not kept pace with the changing working arrangements. This new method of working has defied many jurisdictions’ attempts to adequately tax employment income. Now, several years after the pandemic, employers are beginning to incorporate remote working into their employment arrangements, with the result that what had begun as a temporary solution is now becoming permanent, and tax rules will have to change to remain effective.
Tax on employment income
Section 105(i) of Ghana’s Income Tax Act, 2015 (Act 896) provides that income from employment has a source in Ghana if the “employment is exercised in the country” regardless of the place of payment. Ghanaian tax legislation does not define “employment is exercised” but interpretative statements, and the commentary in the OECD’s Model Tax Convention on Income and Capital, provide guidance that employment can be treated as exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. An employee is therefore taxed in the jurisdiction in which the work is physically carried out.
But should all employees of entities in Ghana, who physically exercise their employment outside Ghana, be treated as outside the scope of Ghana’s tax laws? A closer look at this question highlights the differences between the taxation of resident and nonresident individuals. In Ghana, resident individuals are taxed on their worldwide income, while nonresidents are subject to tax only on Ghana-source income. It could therefore be argued that resident remote workers may be liable to pay tax in Ghana irrespective of where that worker exercises their employment. However, a question remains over whether Ghana has the right to tax income generated from non-tax resident remote workers’ employment income, if the remote worker is working outside Ghana for a Ghanaian entity.
Tax avoidance
If a nonresident remote worker continuously exercises their employment outside Ghana for a Ghanaian employer, is there a possibility this could be seen as a tax avoidance scheme? What if the locations chosen by companies and their employees offer lower tax rates?
Section 99 of the Revenue Administration Act, 2016 (Act 915) gives the GRA the power to adjust, reclassify, and recharacterize any transaction that they view as part of a tax avoidance arrangement. However, is this reliance on post-transaction adjustments really necessary? Could a more proactive approach be more beneficial to all concerned?
Spirit of the tax laws
A remote worker located outside Ghana is carrying on employment in that other jurisdiction. Generally, employment income arising outside of Ghana remains outside the scope of Ghanaian tax, other than for remote workers who remain resident in Ghana for tax purposes.
To the extent that the remote worker is residing outside Ghana, but works for, and receives income from, a Ghanaian entity, that employer may have an obligation to withhold and remit to the GRA the tax from the gains and profits of employment. However, what happens if the employer fails to carry out this withholding, or engages another related entity to bear the cost of employment?
Taxing rights
For a country like Ghana, with significant pressures on national revenues, the impact of losing income tax as a result of remote working could affect the national economy.Several other countries have already put in place measures to retain their taxing rights in these situations. Some have concluded special bilateral agreements and memoranda of understanding, while others have issued specific guidelines on remote and hybrid work patterns. Realistically, Ghana cannot be left behind. Just as the Value Added Tax (Amendment) Act, 2022 (Act 1082) enabled nonresidents who provide telecommunications and e-commerce supplies to register and pay for VAT in Ghana, a similar amendment to Ghana’s income tax laws could be considered to address the tax issues created as a result of remote working.
Deloitte Ghana comments
A new workplace reality has emerged, and tax authorities and employers should not ignore the issue of employees working in other tax jurisdictions. Where employees work remotely, employers may be at risk of inadvertently creating permanent establishments in other countries, as well as substantial fines for compliance failures. Employer payroll and general compliance processes must adapt.These developments around remote working have clearly shown the inadequacies of the source rule for taxing employment income in many countries, including Ghana. Policymakers may decide that a physical presence test may no longer be a de facto rule for determining employment taxes in Ghana, but this must be considered in light of global tax policy developments, and the administrative burden of the resulting compliance processes.
