WITH technology advancement and innovation as well as generational shift, accelerated by the pandemic, many organisations are prepared to embrace remote working as a permanent employment feature.
Employees are able to work from different locations with relative ease, as governments and most employers encourage remote work. Employees are also adjusting their expectations on work-life balance, together with family support requirements.
What comes next? The bureaucracy of remote work must be managed.
The government, in March 2021, announced that it is proposing amendments to the Employment Act to support the working from home (WFH) culture. However, in a world that has been borderless for so long – WFH may also mean cross-border remote working.
This and its ensuing legalities will not just be confined to employment laws, but also encompasses immigration, tax, and social security laws.
Are these laws adequate to facilitate cross-border remote work with minimal disruption? We discuss some areas to note in the following example.
Meet the candidates
> JB is a Malaysian citizen residing in the country. She is employed by SG Pte Ltd as a graphic designer and reports to a marketing manager in Singapore. SG Pte Ltd is registered and based in Singapore, with no business presence in Malaysia.
> SK, a South Korean citizen is married to PNG, a Malaysian citizen. She is employed by KR Ltd, a company based in South Korea with no business presence in Malaysia. She provides human resource support to her employer in South Korea, while holding a spouse visa in Malaysia.
> AM, an American, prefers to spend the winter months in tropical countries. As such, he is opting to work remotely from Malaysia between September and January. However, since his employer (a company registered and based in the United States) does not have a business presence in Malaysia, AM enters Malaysia on a social visit pass.
Catch me if you can
Let’s set out the broad rules/principles with respect to the Malaysian personal income tax, immigration and social security laws:
> Employment that is exercised in Malaysia shall be taxed in Malaysia.
> A foreign company that does not have a business presence in Malaysia is practically not viable to fulfil employer’s tax and social security obligations in Malaysia in respect of its Malaysian employees.
For example, such companies are practically not able to register as an employer for tax and social security purpose. Employees will thus have to make voluntary contribution or tax payment to the relevant authorities, such as the Employees Provident Fund (EPF) and income tax.
> A non-Malaysian citizen can only work in Malaysia if they possess a valid work pass, of which is required that they are employed or sponsored by a Malaysian entity.
Now, with these broad principles in mind – how do you think these requirements will affect JB, SK and AM?
> Technically, all three are liable to personal income taxes in Malaysia. However, the local tax authorities are not aware that they are working in Malaysia.
> It is practically not viable for SG Pte Ltd and KR Limited to fulfil the Malaysian employer’s tax and social security obligations on the basis that it is a foreign entity with no business presence in Malaysia.
> JB will not be covered by the Social Security Organisation (Socso) or Employees Provident Fund (EPF) despite being a Malaysian citizen, simply because her employer cannot be registered with the EPF or Socso and she does not have a Malaysian employment contract.
> The remote working arrangement of SK and AM will not be regulated with a valid work pass as they are not able to obtain one without a local sponsor.
These remote working individuals are slipping through the cracks, as there is no avenue or guidance provided to facilitate tracking, and ensure that they comply with local laws and regulations. This in turn, would result in a potential loss of tax revenue for Malaysia.
How do we track them?
Before we can regulate and tax, we first need to track.
When it comes to employees, the tax and social security authorities rely on employers for notification and payment remittance purposes.
As such, the same obligations should be extended to foreign companies if they have employees working remotely in Malaysia for them. The key is to have these foreign companies create a presence in Malaysia, thus ensuring that they are bound by the Malaysian employer tax and social security obligations.
An option that authorities can consider is a representation office equivalent – Remote Work Office (RWO). Generally, a representative office is an office of a foreign company approved to collect relevant information on investment opportunities in the country especially in the manufacturing and services sectors, enhance bilateral trade relations, promote the export of Malaysian goods and services, and carry out research and development.
An RWO would help in establishing an employer’s presence in Malaysia. This can help regulate activities performed by remote workers. If any such activities fall out of the permissible parameter that could be deemed as “doing business” in Malaysia, then they should register their business presence, in compliance with local regulatory requirements.
To facilitate its purpose as a “shadow employer”, the RWO, in addition to being under the purview of the main approving authority (i.e. the Malaysian Investment Development Authority, Bank Negara or the International Trade and Industry Ministry), should also be allowed to register with the Human Resources Ministry, Inland Revenue Board and Immigration.
This creates a presence while minimising the additional costs, red tapes and tax implications that come with the setup of a full-blown branch or subsidiary in Malaysia, eg be incorporated under the Malaysian companies law.
Once they are established in Malaysia, by virtue of Malaysia’s tax and social security laws, the companies shall automatically act as a conduit between their remote workers and the relevant local authorities. This will ensure that authorities are informed of the remote workers presence in Malaysia. This will also mean that individuals like JB will receive adequate local employment law and social security protection as a Malaysian citizen, exercising employment in Malaysia.
At the same time, the Immigration should consider the creation of a remote work visa, which can then be made available to an RWO.
Generally, a remote work visa allows an individual to live in a country while they continue to work for their employer, who is based in a different country.
As of July 2021, there are 24 countries issuing variations of remote work, digital nomad, independent contractor visa, with varying qualifications, e.g, the long term visa for remote work of Iceland and digital nomad visa of Estonia.
This should provide a clearer insight to the relevant authorities on the number of individuals who are exercising employment in Malaysia for foreign companies.
With greater connectivity between tax and immigration authorities, the issuance of remote work visas to individuals like SK and JB would also alert tax authorities that such individuals are exercising employment in Malaysia, and therefore liable to Malaysian personal income taxes.
Tax me if you can
From an individual income tax perspective, Malaysia’s domestic income tax laws can be applied in determining how much tax these remote workers should pay, while taking into consideration any tax treaties for double tax mitigation.
We believe that in most cases, while double taxation can be mitigated, it is important for the tax authorities to plug any leakage of tax revenues.
Another relevant issue would be the risk of a foreign employer creating a taxable presence or permanent establishment in Malaysia.
This would depend on the duration of employment, type of duties or work an employee is allowed to perform with a remote work visa.
A starting point
The above is not a fix-all solution – for example, the issues require a deeper probe, and there should be further research on the adequacy of our employment law on cross-border remote work, and how the employment contract should be governed, among others.
However, it is no secret that employers are grappling with foreign tax and social security laws meant for local employment, as they allow their employees to remotely work from various countries.
From a Malaysian perspective, I firmly believe we are already halfway there. The relevant laws are already in place.
However, the authorities should take appropriate action to ensure that there is clarity on how foreign employers can comply.
Once the rules are in place, tax and social security matters will fall into place naturally.
The creation of an RWO and the issuance of a remote work visa will demonstrate the authority’s flexibility in adopting a middle ground approach to accept foreign direct investment while also protecting Malaysian citizens’ interest.
The establishment of clear rules regarding the governance and ownership of tracking remote workers may also be a catalyst for further regulation of cross-border remote work and beyond.
Chee Ying Cheng is the global employer services executive director of Deloitte Malaysia. The views expressed here are the writer’s own.