The study, which contacted international tax practitioners around the world, found that internationally mobile employees often had to pay double tax, that complex tax treaties left them out of pocket and that there was a lack of clarity on pensions and social security payments.
Entitled Taxation of Internationally Mobile Executives ("TIME"), the study was jointly conducted by Blick Rothenberg in collaboration with the Exeter Business School, a leading centre of international business education and research, and international accounting group BKR International.
Mark Abbs, Partner and Head of Expatriate Tax Services at Blick Rothenberg, said: “The study shows that the current global tax system has a number of challenges and potential barriers at a time when business and political leaders are extolling the virtues of globalisation and international trade deals.”
Focusing on the movement of international directors, executives and employees, the research revealed tax and cash flow issues affecting internationally mobile executives ("IME") with regards to pensions, social security liabilities, double tax agreements and the mismatched relationship between simultaneous wage withholding obligations in multiple locations and receiving the benefit of tax credits.
Mark said: “Globalisation has dramatically changed the way in which multinational enterprises conduct their business across the world, increasing the demand for internationally mobile employees to exploit the rapid growth of emerging markets.
“The tax and social security systems in individual countries are the product of long history, adaptation to worldwide developments and political, cultural and social considerations. While there are similarities between each set of rules and practices, the detail varies significantly from country to country. 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.”
Lynne Oats, Professor of Taxation and Accounting at the University of Exeter Business School, said: “While much of the world’s attention is currently focused on the taxation of corporate profits, the complexities and risks associated with other aspects of tax systems go largely unnoticed at the international level, in particular, the personal and business tax liabilities associated with IMEs.
“The knowledge, skill and experience of IMEs are very important elements in the generation of value for a company and economy, but the tax rules can be particularly complex for those employees who are treated as short term business visitors.”
She added: “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 IME 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.
Mark 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.”
He added: “We have seen that tax treaties benefit IMEs as they help resolve certain tax conflicts, including the elimination of double tax and social security tax. We need 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.”
All these complex issues result in negative cash flow problems for IMEs, 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.
Mark said: “We should encourage governments to use tax policy as a tool to make it easier and less complex for internationally mobile executives to work across borders. 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.”
He added: “Changes to tax treaties are long overdue so that they are more efficient at avoiding double tax. It is also critical that we move to a universal tax measurement or index to help mobility.”
To view the study please click here
For more information about the study please contact expatriate tax specialist partner Mark Abbs at firstname.lastname@example.org