Internationally mobile employees are being penalised as they often have to pay double tax, while complex tax treaties leave them out of pocket and there is a lack of clarity on pensions and social security payments, according to a study of international tax practitioners around the world, conducted by Blick Rothenberg
The research, which was in collaboration with the Exeter business school and international accounting group BKR International, also found that mismatched relationship between simultaneous wage withholding obligations in multiple locations and receiving the benefit of tax credits.
Mark Abbs, partner and head of expatriate tax services at Blick Rothenberg, said: ‘We found significant risks and uncertainties attached to the complex interaction of national tax rules, together with bilateral and multilateral treaties that do not always eliminate additional taxes and charges.’
Abbs said there was a need for more treaties to eliminate those situations in which double tax does still arise. ‘For example, the UK has 195 treaties in place, but there is a notable exception. Surprisingly, it does not have such tax arrangements with a major emerging market such as Brazil,’ he noted.
Lynne Oats, professor of taxation and accounting at the University of Exeter business school, said: ‘The tax consequences of moving from country to country are complex. Not only is the tax code of the country in which the individual is supplying services relevant, but also the tax code of the country of which the internationally mobile employees is a resident, or even that of another country. This is further complicated by agreements at regional level such as within the EU and bilaterally between countries.’
In terms of social security contributions, the study found that expatriate employees sometimes do not have a choice as to whether to continue contributing to the social security system in their home country, or to switch to contributing in the host country. In many cases, they will be insured for social security purposes in both countries.
Abbs said: ‘This is a surprisingly complex area of law that is often overlooked. There are limited social security treaties in place between countries. Social security rules (employer and employee) are often separate to income tax rules, and you must understand these too as they may provide quite a different outcome to the rules on income tax. We need to increase the number of social security tax treaties to avoid double social security tax.’
The research suggested that all these complex issues result in negative cashflow problems for internationally mobile employees, particularly as it is becoming common for there to be payroll withholding in both the home and assignment countries concurrently, with often a significant time lag for the tax refund to be paid.
Abbs said: ‘Tax policy has a clear role to play in making it easier for employees to be mobile and paving the way for strong, sustainable growth, particularly now with the unprecedented growth in the number of employees working outside their home countries.’
Research carried out by PwC at the end of last year found that many businesses are facing a growing challenge to understand where in the world their people are working and what they are doing, which can impair their ability to manage their tax affairs and pose reputational risk.
PwC’s global survey, Managing mobility in a changing landscape, which polled over 200 organisations, reported 31% of companies did not know the exact number of their employees working internationally and only a third of companies feel their tax and mobility teams work closely together to monitor this.
Almost a quarter of companies, 24%, had seen a recent challenge from tax authorities relating to permanent establishment, while 60% already have, or recognise the need to, make changes to the way they manage mobility to ensure they are ready to comply with the forthcoming actions from the OECD’s Base Erosion and Profit Shifting (BEPS) project.
Blick Rothenberg’s report is here
PwC’s study on managing mobility is here