Navigating the compliance risks of remote working arrangements across Asia Pacific

In an era defined by connectivity and technological advancement, the traditional boundaries of the workplace have blurred, giving rise to a new era of work that transcends geographical constraints. Working remotely from different jurisdictions is becoming a common occurrence with how organisations operate, particularly across Asia Pacific.

Whilst working remotely offers numerous benefits for both employers and employees, it also brings forth a set of unique challenges and risks for organisations. Understanding these risks and defining parameters of remote working arrangements is crucial for addressing and managing these risks effectively. 

In this article, we provide a summary of the common compliance risks associated with employees working remotely outside their normal employment jurisdiction on a non-permanent basis across Asia Pacific, emphasising the importance of establishing a clear governance framework.

Overview of key compliance risks for employers

Despite the diversity of laws and regulations in relation to remote workers across Asia Pacific, organisations operating in this region encounter a common set of risks. We will delve into four critical risk factors below.

Employment law considerations

When an employee performs services overseas, even for a brief period, local employment laws and regulations, including rules regarding working hours, overtime, leave benefits, and termination rights may apply.

The acquisition of local employment rights by an employee who chooses to work remotely in the region would depend on the specific labour laws and regulations of the jurisdiction in which they are physically working during that time. Whether or not local laws apply is a fact specific analysis that can depend on various factors including the nature and duration of the work, and the terms and conditions of the employment agreement.

For example, where an employee is based in Australia for a temporary period and is working remotely for an overseas employer, but the work being carried out has no connection to Australia, it is more likely that the employer’s "home" employment laws will apply. In situations where the work being done has a sufficiently strong connection with Australia, the likelihood of Australian employment law applying will increase.

It is critical for employers to advise employees whether the terms and conditions outlined in their employment contract, including the applicable governing law, will remain unchanged whilst working outside their normal place of employment.

Corporate tax obligations

An employee working remotely for a non-resident employer may give rise to company tax obligations if that employee creates a Permanent Establishment (PE) in that jurisdiction or it is found that an organisation is engaged in “doing business” in a jurisdiction.

The factors relevant to determining the existence of PE can include a combination of physical presence, the nature of the employees’ work, the duration of their stay, and the legal framework provided by Double-taxation treaties (“DTT”) or Double-taxation agreements (“DTA”). In New Zealand (NZ), A PE can arise where there is an employee (or dependent contractor) in NZ for an aggregate period exceeding 183 days or more in any 12-month period, or a person (other than an independent agent) who has, and habitually exercises, authority to substantially negotiate or conclude contracts in NZ on behalf of a non-NZ resident company. However, where an offshore jurisdiction (i.e. home jurisdiction) has a DTA signed with NZ (i.e. host jurisdiction) and contains its own definition of PE, then PE will have the meaning given by such DTA.

Similarly, rules usually require an organisation that is engaged in “business” in a jurisdiction to set up a corporate presence. In the Philippines, in addition to PE risk, the continuing presence of the individual as an employee of a foreign employer may give rise to the issue of "doing business" in the Philippines. If deemed as doing business in the Philippines, the foreign entity may be required to comply with the domestic corporate registration requirements in the jurisdiction.

It is critical for organisations to keep track of where their employees are located to monitor the risk of employees creating a permanent establishment or found to be “doing business” in that jurisdiction.

Personal tax implications

It is important for employers to determine whether the remote working arrangement creates a tax liability for the employee working in a different jurisdiction. Typically, the answer will depend on whether a tax treaty exists between the home working location and proposed overseas working location. Employers should be familiar with any tax treaties between the home jurisdiction and the host jurisdiction, as these treaties often contain provisions related to personal taxation, including rules for determining tax residency and allocation of taxing rights.

DTT or DTA often provide that an employee temporarily located in another jurisdiction is not subject to taxes if (i) that individual is paid by the original location; (ii) resides in the other location for no longer than 183 days – the rule used by most jurisdictions to determine if someone should be considered a resident for tax purposes (although this can vary); and (iii) the compensation paid to the individual is not borne by a PE of the original location abroad.

Where no double tax treaty applies or the organisation does not fulfil all of the treaty or agreement requirements, taxation usually sets in as soon as the employee exercises employment in the jurisdiction. Employers should be aware of the varying tax exemptions across jurisdictions. For example, in Hong Kong SAR, Malaysia and Singapore, there are specific tax exemptions on employment income for visitors/non-residents of that jurisdiction who exercise employment for not more than 60 days during the year of assessment.

It is important to ensure that appropriate advice is obtained before an individual starts working in the proposed overseas working location to ensure they are aware of their personal tax payment and filing obligations.

Employer obligations

It is important for employers to consider the obligations and taxes imposed on the employer in the proposed overseas working location of the employee. These obligations can range from withholding and reporting requirements, social security contributions and other employment tax obligations. To illustrate the varying employment obligations and taxes imposed on employers across Asia Pacific, we have provided examples below.