In the wake of the pandemic, taxation challenges affecting cross-border commuters have increased: how can companies remain compliant in a rapidly changing landscape?

14 June 2022 | Shadow Payroll, International Tax

In the wake of the pandemic, taxation challenges affecting cross-border commuters have increased: how can companies remain compliant in a rapidly changing landscape?

Karen McSharry

The expression ‘cross-border commuters’ is used to indicate those employees who work in one EU country and reside in another. They usually live close to the border and commute daily from their home country to the country they work in.

Numerous European countries have in place cross-border agreements that incorporate special tax regulations for cross-border commuters. Such agreements, it should be stressed, come as an addition to the double tax treaties that may already be in force.

Whereby no special agreements are in place, cross-border commuters are taxed in the country in which they work. If, on the other hand, a special agreement is in place, taxation can also be in the country of residence. This is usually dependent on a set of conditions, such as, for example, the number of miles between home and the border, and the number of days spent away from the work location for work purposes. 

As far as social security is concerned, EU regulations ensure that employees are covered by only one scheme. For cross-border commuters, this tends to be the scheme in place in the country where they work, rather than the one in their country of residence.

Ensuring payroll compliance can be more challenging in cases where cross-border commuters work from home or in any other location other than their workplace for an increased number of days per week, as this could invalidate the special agreements in place.

The effects of the pandemic on cross-border commuters

The pandemic represented a watershed for the world of work, and influenced the regulations impacting cross-border commuters. The lockdowns that were enforced in most European countries meant that cross-border commuters — like all workers – turned to home working. This meant that additional agreements needed to be introduced, stipulating that the days that cross-border commuters worked from home were treated in the same way as working days in their work location. With pandemic restrictions coming to an end, these agreements may have now ceased to be binding, or are about to.

If cross-border commuters resume the working habits they held before the pandemic, commuting daily from their home country to the country where they work, the situation will be fairly simple for organisations. It is possible, however, that many workers will not resume their pre-pandemic routines.

The pandemic has provided a moment of reflection for many. Employees enjoyed the multiple benefits of working from home, including a better work-life balance. In all likelihood, cross-border commuters will not want to give up on their new work-lifestyle, and will express the intention to work from home for part of the week.

As a consequence, the pre-pandemic cross-border agreements may no longer apply and companies will need to carefully consider the implications of a switch in taxation and payroll compliance to the host country or even, in two different countries. 

Social security may also be affected. With cross-border commuters working from home, social security may be payable in the country they live in rather than where they are employed which could have major costs implications e.g. Swiss v French social security. 

How companies with cross-border commuters can face the challenges of the post-pandemic world of work  

The new challenges the pandemic has generated highlight the need for those companies employing cross-border workers to introduce a robust policy on home working. This needs to take all the compliance issues that can arise in the case of cross-border commuters into careful consideration.      

Companies should also consider what their payroll obligations are and if this can’t be managed through internal payroll mechanisms, whether shadow payroll is required. Shadow payroll, it is worth recapping, is the mechanism that allows employers to meet their local payroll tax payments and reporting obligations by “shadowing” the home payroll compensation reporting. You can read more about shadow payroll here

Shadow payroll plays a critical role in ensuring that employers are payroll compliant. It also benefits employees, as it enables cross-borders commuters to become fully aware of all the hidden implications of taxation in two countries. They come to know if and how their net pay will be affected and accept accountability as stated in the home working policy.

Clarity on tax obligations leads, in turn, to a better employee experience. Employees, for example, can save time in auditing payslips, once provided with accurate and transparent payroll instructions.   

While employers need to make employees aware of their obligations, should a non-compliance issue arise, employers, rather than employees, could be deemed responsible by the competent authorities. Shadow payroll therefore represents a valuable tool by which employers can ensure tax compliance, safeguarding both their interests and their employees’. 

In Conclusion

The prominence hybrid working has acquired in the wake of the pandemic has numerous and significant implications on the regulations affecting cross-border commuters.

Employers can navigate the new taxation challenges in several ways. They can, for instance,  seek advice from specialist tax advisors, introduce a comprehensive policy on home working and, if appropriate, introduce shadow payroll. A combination of all of these elements may well be the ideal solution.

The importance of payroll management cannot be understated. Managing payroll effectively benefits employers and employees. It allows the former to meet their tax and reporting obligations while providing the latter with a better employee experience. In a job market where attracting and retaining talent proves to be increasingly difficult, offering the best possible employee experience will likely be a winning card.

To find out more about our automated shadow payroll platform, you can book a consultation with one of our experienced consultants.      

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