Capital Quarter: Working overseas – understand the tax

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The lure of a foreign posting can be considerable. However, employers must research carefully the impact of tax and social security on both their companies and employees.

Firms that work internationally often attract the brightest candidates, as employees look for an enriching experience, as well as a good salary and working conditions. The opportunity of a secondment can be a real differentiator when looking for a new job.

From an employer’s perspective, having an international presence provides access to a bigger talent pool. It means they can take advantage of regions with access to specialist skill sets. They can locate resource in the most appropriate country. This may save money if it’s more geographically central, offers location incentives, or if costs of employment are lower and of course, an international presence often opens up new markets.

There is a lot to consider when working overseas. We look at some of the key tax and social security considerations.

Beware the complexities

It is a common misconception that as long as you pay tax somewhere, everything is ok. This could not be further from the truth. When sending someone overseas or employing an individual in an overseas territory, many companies believe they are doing the right thing by keeping them on (or adding them to) a home country payroll and deducting home country taxes. This is a mistake.

Tax systems are different in every single country even within the UK, since Scotland and Wales now have their own variations on the UK tax regime.

Employers and employees need to be aware of the impact of differing tax and social security regimes when working overseas and how this affects tax returns both in the home and destination country.

‘Permanent Establishment?’

It is important to assess whether an individual working overseas creates a ‘Permanent Establishment’ for the home country entity in the host country. If it does, the company must weigh up the pros and cons of having a corporate presence overseas and decide what form this presence should take. The structure should reflect the group’s commercial operation and ambition. Corporate filing responsibilities may arise in the overseas territory and transfer pricing may be relevant. Even without a Permanent Establishment, there may still be payroll obligations.

The role of Double Tax Treaties

Double Tax Treaties (“DTT”) and social security agreements between home and host countries provide a framework for international taxation. Most treaties follow the OECD model but there are nuances in all of them, so companies should always check the relevant DTT before sending an employee overseas, even as a business visitor.

Another misconception is that a person can spend up to 183 days in a country without triggering any tax or social security issues. Day count is one consideration but there are others too. Who bears the cost? Are there recharges? What is the person going to do whilst in the overseas jurisdiction?

A person can be taxed as a non-resident or, if sufficient time is spent in a country, they may find themselves domestically resident in more than one country. It all depends on the local tax rules. The DTT provides the clarity needed in terms of the period the day count is assessed over but local rules determine the initial residency position.

If there’s no Tax Treaty?

From an employment tax perspective, it means that there is no agreement between the countries in respect of who has the taxing rights over income.

For example, someone coming to the UK from Bermuda is taxable in the UK from day 1 and should be added to the UK payroll. There is no consideration of taxes due in Bermuda and no relief available. A non-resident taxpayer visiting the UK is not entitled to a UK personal allowance unless they become UK tax resident in the year.

Interestingly, Bermuda does have a social security agreement with the UK. This means a certificate of coverage can be applied for in Bermuda and the individual will be able to remain in the Bermudan social security scheme and not have to pay UK National Insurance for a specified period of time. The same is true in reverse.

The importance of payroll

Payroll can also be complicated. There may be a requirement for the company to run a payroll in both the home and overseas countries. Clearly, if tax is withheld in both countries, there will be very little money left over. So it important to understand what agreements are available to mitigate the double withholding on a real time basis – rather than just through the individual tax return at the end of the year.

Social Security: which rules?

It is worth noting that tax and social security are completely separate from one another and have different rules and regulations around determining things such as residency – and whether or not there is a liability.

Broadly, social security rules mean you pay where you work. However, in the international arena this is not necessarily the case. For assignments of less than five years, where there is an agreement in place, it may be possible to remain in the home country social security scheme.

What are assignment letters?

Many individuals who go to work overseas will have an assignment letter so that they remain under their original contract of employment where they will retain all the benefits of their accumulated years of service. The assignment letter outlines the terms and conditions of the assignment overseas.

The assignment letter is important and the wording can affect subsequent tax treatment in the destination country. It should be supported by a well written company policy document which sets out who is responsible for what. The policy acts as a reference document for the HR team and helps should a dispute arise.

Tax Rates

The rate of tax in the overseas country, and whether it influences an individual’s willingness to go and work in that country, is also pertinent. Unsurprisingly, employees are very willing to go to a country with a zero rate of tax but no one is keen to lose a significant amount of their usual net income in a country with a very high tax rate. One solution is to adjust salary so that take home pay is in line with the rate for the same position in the home country but this can be very difficult to maintain, particularly where there is no in-house global mobility team.

Some companies have a tax equalisation policy which essentially keeps the employee ‘whole’. They do this by deducting a hypothetical tax from the individual’s payroll, based on their home country income (not including assignment specific payments). The company then pays the tax in the host country, using the hypothetical amount to help offset the cost. However, this is an expensive undertaking, as the fact that the company paying the tax is considered a taxable benefit in itself, and so creates an additional tax liability.

Some companies link equity to performance and this too can have its pitfalls, as each country has its own tax and social security rules as to how equity is treated and what is a tax efficient scheme in one country is unlikely to have the same status in another.

Short-Term Business Visitors

Finally, for the purposes of this article we should also consider individuals who are employed in one country but visit another group entity in a different country in the course of their duties. Many assume this is simply business travel with no tax or social security consequences. Not so.

The UK, for example, has legislation specifically designed to capture business visitors where there is a tax treaty between the UK and their home country. This requires a Short-Term Business Visitors (STBV) agreement with HMRC. Without this, the individual should be added to UK payroll, even if only for one day.

Different legislation applies to countries where there is no tax Treaty with the UK and yet another set of legislation for Statutory Board Members of UK companies who visit the UK for work purposes but who are UK non-resident.

Be proactive

There are mechanisms to help deal with international tax and social security issues, but proactivity is the key. It may be possible to claim treaty residence which supersedes domestic residence; foreign tax credits may be available to offset taxes due in both countries on the same income; there may be the possibility of registering with the tax authorities for special agreements. The important thing is to recognise and understand the position, and the tools available to ensure the best outcome.

As with many things, it takes a lot longer and is much more costly to put things right once they have gone wrong. International travel will always involve at least two countries and what works in the first country is unlikely to follow the same pattern in the second. We recommend you seek professional advice in what is a very dynamic technical space to support your decisions. Your PKF Global Mobility team have extensive experience and are very happy to help you navigate the international tax arena.