The taxation of employees who work across borders

What is the issue?

The European Economic and Social Committee (EESC) have put forward a proposal for employees working across international borders (see Taxation of cross-border workers).

• Their employment income should only be taxed in the country where their employer is resident.
• A revenue-sharing mechanism should be implemented between countries to compensate the employee’s country of residence for the loss of tax revenue.
• The country where the employee’s employer is resident in should:
  • Act as a collection agent to obtain details of the days the employee has worked in each country.
  • Allocate the tax revenue it has collected to the countries the employee has worked in based on the percentage of the time the employee has worked in each of those countries based on their worldwide work days.

How are these employees taxed at the moment?

At present, employees are broadly subject to income tax on:

• 100% of their employment income in their country of residence.
• The percentage of their income is related to their workdays in other countries.

Relief from double taxation is then available by:

• Affording a credit for the tax paid in the countries the employee works in outside their country of residence against the taxes they paid in their country of residence.
• Their income is taxable in their country of residence being reduced by the amount of income that is subject to tax in other countries.
• Their income is exempted from tax in the countries they work in outside their country of residence if they meet the conditions outlined in the second part of the employment income article contained in the model OECD convention that is broadly adopted into most countries’ double taxation agreements with each other. i.e. an exemption from income tax applies in the country that the employee works in outside their country of residence if:
  • the employee spends ≤183 days in that country;
  • their earnings are not paid, nor ultimately borne by an entity in that country and;
  • they do not work for the economic benefit of an entity in that country.

Our opinion

The proposal put forward by the EESC is a dramatic departure from the existing basis of taxation for internationally mobile employees. However, it simplifies the taxation position of these employees and the payroll obligations for employers.

It also reflects the general direction of travel regarding cooperation between countries on the taxation of globally mobile employees and companies.

For instance, sharing and reporting data in real-time electronically, recognising the economic reward of work in the country that benefits from the profits, and ensuring a fair amount of tax is paid.

Additionally, the proposal has similarities to that proposed by the UN tax committee in affording taxation rights to the state an employee’s employer is resident in, even if the employee is not resident in that state and does not undertake any employment duties there. We dive more into that here.

As with any major change of this nature, it creates issues to consider:

• All countries would need to agree to this for it to be effective. This will be tough within the EU, let alone with countries outside the EU like the US that currently taxes citizens on their worldwide income and gains, regardless of where they are tax resident. Would a partial/regional implementation work and if so, how?
• It would require all participating countries to overhaul aspects of their domestic tax legislation.
• It would place a large administrative burden on the country collecting the employees’ data.  There will also be questions on the security, form and accuracy of this data, how it will be shared, and how long it will take each country to receive their share of the tax.
• Anti avoidance provisions and a global minimum rate of tax will need to be considered as the rules could be circumvented by employing employees via companies’ resident in low or no tax jurisdictions.
• The rules for determining which country the employee and employer are subject to social security in, are different and could create administrative complexity where tax and social security contributions are payable in different countries.
• How does this impact upon and interact with the permanent establishment and transfer pricing issues created by employees working in a country different to where their employer is tax resident?
• How would these rules apply to individuals who provide their services via personal service companies?

Finally, if these proposals were implemented, it could have a dramatic impact on the way a business manages its global workforce.  There will need to be new systems, incentive arrangements and a reconsideration of global mobility policy. 

Please get in touch if you would like to discuss the potential implications for your business of alternative approaches to employee taxation and the possibility of representations to policymakers.

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