Taxation of cross-border teleworkers worldwide: the European Economic and Social Committee’s opinion 

Published in the EU Official Journal, C series, on 23 April 2024, the opinion of the European Economic and Social Committee (EESC), C/2024/2479 analyses the current European and global employment framework, which has been increasingly shaped by globalisation, digitisation and the pandemic, and the critical issues related to tax aspects, which are progressing slowly in comparison to the changing world of work.

The new employment framework 

The EESC’s opinion on “Taxation of cross-border teleworkers globally and the impact on the EU” opens with an overview of today’s working world: early changes can be traced back to globalisation and the development of digital tools and new technologies, that have been affecting companies for decades. In recent years, the companies themselves and their workers have also unknowingly contributed to the acceleration of the digitisation process, having to resort during the Covid-19 pandemic to the use of “new technologies” that would ensure that they could carry out their daily work activities – by necessity carried out remotely – without it affecting their work.   

The unintended result was the realisation that the exact same work could be done without having to be physically present, as well as the recognition of the effectiveness of the new mode of remote work, not only by the companies that now benefit in terms of reduced costs related to the space formerly used by employees, but especially by the workers, in that remote work has improved the quality of life by increasing the work-life balance. And while worker welfare has always translated into a productivity benefit for companies, in this case remote working is also believed to promote increased corporate sustainability through a reduction in the environmental impact generated by commuting, furthering EU goals in this regard. 

As noted above, while remote working has many positive implications, on the other hand, when workers employed in a foreign state other than their country of origin work remotely, several critical issues emerge, including (i) the social security and tax aspects relating to the worker’s income and (ii) the impact that remote work has on the States involved. 

After analysing the current regulatory framework, the EESC opinion affirms the need for updated tax rules that reflect the new way in which work is carried out, and which also reflect the fact that a worker’s choice to live in a given country has implications in terms of public spending and tax revenues of the countries involved. 

Current tax legislation 

Where a person resides in one state and works in another, the general rule on the taxation of employment income set out in the OECD model gives the right to tax the employment income to the state where the work is carried out. This is subject to bilateral agreements derived from this model, signed by the countries concerned, aimed at avoiding double taxation on transnational income, for example in the case of European cross-border workers. 

However, the EESC’s view is that the increasing presence of workers working remotely in their State of residence, while their employer is located in a different State, means that both bilateral and multilateral agreements need to be reviewed. 

In this regard, the opinion refers to the recent agreement between Switzerland and France, which has been updated to deal with taxation of the income of cross-border telecommuters. The existing agreement between the two states stipulates that frontier workers residing in France who work in the canton of Geneva are subject to taxation in the Swiss canton by withholding tax on wages received. Under the new agreement, if the hours of cross-border telecommuting are less than 40% of total working hours, the tax regulations for cross-border telecommuters will remain unchanged. From the perspective of the countries involved, the agreement provides for a revenue-sharing mechanism under which the Swiss canton will pay compensation to France of 3.5% of the applicable tax revenue. 

While noting the need for countries to agree specific solutions to regulate cross-border telework, the Committee hopes, that by expressing its opinion, general principles can be established. These can then be transposed by bilateral agreements, to avoid ad hoc solutions among individual states resulting in a set of internationally applicable standards and rules that would lead to inconsistency in regulations. 

The Economic and Social Committee’s proposal 

The EESC’s proposal sees a possible solution in the taxation of telecommuters’ income in the country where the employer is based. This would simplify and harmonise the tax rules for cross-border telecommuters and would facilitate international mobility and its benefits.  

In its opinion the Committee also analyses the impact that this solution could have on the country where the worker resides, in terms of increased public spending and failure to increase tax revenues, its main source of financing. Indeed, the fact that a worker remains in his or her own State will result in greater use of public services, subsidised by the public expenditure of his or her own State, which, in contrast, will not be financed by the tax on the worker, as this will be applied by the employer’s State. To obviate this burden on the first state, the EESC believes that the countries concerned could decide to share the tax revenue, for example, on the basis of the actual presence of the workers in the countries concerned, through the data provided by the employer to its tax authority (acting as a “one-stop shop”), a mechanism that would also ease any double taxation issues. 

In a globalised and digitised world, there will be more and more cross-border telecommuters, free to choose the country in which they reside and “connect” regardless of where their employer is based; faced with this prospect, it will be easier to apply the tax law of the country in which the work is performed, rather than the country in which the worker lives. 

The EESC concludes its opinion by speculating that the implementation of such a proposal could take place through “introducing alternative model provision(s) in the commentary of the OECD Model Convention to be used by countries in bilateral negotiations. This would facilitate a more uniform set of rules”. 

If you want to learn more about the topic:

• New social security agreements between Italy-Albania and Italy-Japan: updates  – HR Capital
• Entry into Italy of highly qualified personnel: changes and simplified procedure for companies and workers (Norme e Tributi Plus Diritto – Il Sole 24 Ore, 14 May 2024 – Valentino Biasi, Andrea Di Nino, Giorgia Tosoni) – HR Capital