Tax Management of Mobile Employees: An Essential Item for the CEO’s Agenda
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Noiembrie 2010 |
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MADALINA RACOVITAN - Partener Divizia Consultanta Fiscala
KPMG ROMÂNIA S.R.L. |
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+40-21-201.22.22
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+40-21-201.22.11
Website
www.kpmg.md
www.kpmg.ro
The management of tax for a corporation's global workforce should be a key consideration for all business leaders throughout the world. Any senior executive thinking that this is a responsibility that can be left with the compliance officer, or the HR department, or even the corporate tax department, should think again. Expatriate tax management reaches into all areas of a business. Taking it anything other than seriously opens the way to problems that can be expensive both in monetary terms and for a company's reputation.
The traditional model under which international executives are seconded to work in a country for periods of between one and three years has changed somewhat in recent years. Today the pattern of an executive going on to what is now called "an extended business trip," working across a number of countries, is more and more common.
So the work pattern for many of today's executives often involves visiting several countries and spending short periods in each - perhaps a few days each month, or a few weeks each year. Experts are critical to the success of an assignment or business. Communications technology helps, of course, but being physically present in a specific location at the right time is sometimes the key to ensuring a successful result. Deploying resources still involves significant costs, and businesses are now more careful to allocate resources in the most cost efficient way, sending the people with the necessary skills to where they are required rather than keeping people in one place just for when they might be needed. At the same time, however, using this model of deploying staff overseas often involves complex tax issues, which companies do not always look into carefully enough. This can generate risks of unexpected tax demands.
Governments all around the world are also confronted with tight budgets, including in Romania, and therefore, they are under increasing pressure to collect revenues and to perform more rigorous checks on taxpayers to see that they have complied with all reporting and payment obligations. So they are becoming more sophisticated in their methods and correspondingly rigorous in the framing and application of tax rules. In some countries, like Romania, they have even changed the rules applicable to non-resident individuals working in the country, by eliminating certain exemptions which had been in place for a long time. So this is a potentially hazardous landscape for the unwary.
The latest edition of KPMG International’s regular publication Thinking Beyond Borders: Management of Extended Business Travelers aims to help companies and individuals address some of these issues. The publication gives key information on individual income tax, social security and other related considerations in over 70 countries, including Romania. We will briefly look into some of the myths concerning foreign workers on short business trips, to understand why these issues are important and why they must be addressed by any company which sends its staff overseas. We will also outline where the potential risk areas may lie.
Myth: Trips not exceeding six months mean no personal income tax liability
Many people believe that if a person is present in a foreign country for less than six months, there is no personal tax to be paid there. While this may be true in certain instances, it is however important to look at this on a case by case basis and to bear in mind that there might be administrative requirements even in cases where no actual tax liability occurs.
Romania is a very good example, as major changes were made to the Fiscal Code with effect from July 1st, 2010. These changes significantly tightened the rules on payment of income tax by non-resident individuals carrying out dependent activities in the country. Before July 1st, 2010, a non-resident individual carrying out dependent activity in Romania had to pay Romanian income tax if he/she spent more than 183 days in the country during a 12-month period, or the remuneration was paid by or on behalf of a Romanian resident employer or the remuneration was borne by a Romanian permanent establishment. However, as of July 1st, 2010, any non-resident individual performing work in Romania for even one day may become liable to Romanian tax. Of course, individuals can still benefit from protection under applicable tax treaties. However, an additional administrative burden is now imposed on these individuals as they need to demonstrate their tax resident status in a country with which Romania has concluded a tax treaty by providing a certificate of tax residence. For individuals who are residents in countries with which Romania has not concluded tax treaties (e.g. Brazil, Argentina), a tax liability occurs in Romania as from day one of being in the country, to be added to tax payable in the person's residence country. This significantly increases the overall cost either for the individual or his/her employer.
Myth: You don’t have to pay social security if you pay it at home
The rules on social security contributions (for health, state pensions, unemployment etc) payable by seconded staff are very complex, particularly for EU nationals. Since the start of the recession, tax authorities worldwide have become much more vigilant about social security as they seek to close gaps in budget revenue and finance over-burdened state pension systems. Romania is no exception, and the changes to the Fiscal Code which took effect from July 1st closed many loopholes which had allowed some taxpayers to escape social security payments.
Most employers consider social security as a tax, but in principle the system should provide benefits too. However, these benefits are often low in comparison to the amounts paid into the system in employers' and employees' contributions, and may be very difficult to enforce for seconded employees who only pay into the system for a short time, particularly bearing in mind that some benefits, like pensions, may only be payable decades after the secondment.
EU nationals working in another member state generally pay social security in the country where they work. There are some exceptions which can allow payment into the home country's system for up to five years, but the regulations and documentation requirements are very complex. Apart from countries within the European Union, Romania has not concluded too many social security bilateral treaties, meaning that persons who come from countries with which Romania has no social security treaty may end up being covered under two social security systems (in the home country and in Romania). As generally entitlement to social security benefits is strictly linked to minimum contribution periods, very often foreign nationals contributing to the Romanian system end up paying into the system without being able to benefit from any or very little benefits. So overall, careful research on potential social security liablities is essential.
Myth: Personal income tax rates are not relevant in managing business travelers, since they are not taxable anyway in the host country
We saw earlier that this may not always be true, as there are cases where even people travelling for business, as opposed to seconded expatriates, may incur personal income tax or social security liabilities in the host countries. If this happens then an analysis of the tax costs involved may need to be performed, where possible before the person starts travelling, so that the costs can be properly budgeted and the company is not faced with unexpected expenses.
KPMG issues regular surveys providing not only a snapshot of taxes on personal incomes around the world for the current year, but also a perspective on how taxes change over a period of time, with the aim of drawing conclusions on how people are taxed in different parts of the world, and how different governments approach the difficult task of raising funds for necessary public services without losing the support of their citizens.
The 2009 KPMG's Individual Income Tax and Social Security Rate Survey showed a global decline in top personal income tax rates with an average drop of 0.3% in 2009 as compared to 2008. The highest personal income taxes in the world are still paid by citizens of the European Union. The downward trend observed during the last few years has also been fuelled by Eastern European countries which have introduced flat tax rates (Estonia, Bulgaria, Latvia, Romania, Lithuania, Slovakia and the Czech Republic), although in 2010, an increase in personal income tax rates has been noticed in countries where traditionally flat tax rates have been used (e.g. Latvia) as well as in Western Europe countries, such as the UK, Ireland, Iceland, Greece, Portugal and even France.
The highest income tax rates in the world in 2009 were charged in Denmark, which had a top rate of 62.3% in that year. In 2010, Denmark reduced its top rate to 55.4%, and so Sweden now has the highest top tax rate in the world - 56.6% in 2010. However, these figures should be treated carefully, because a country's highest personal income tax rate is only one indicator of what individuals pay on their income. For example, in Denmark, the rates quoted also include social security contributions which are now combined with income tax in the Danish system. So as well as looking at income tax rates, one needs to assess whether there are other taxes a person has to pay, on which income such other taxes may occur, and whether there are thresholds placing an upper or lower limit on the income which is subject to each type of tax. This is the case for social security payments, which for some are just additional tax, whereas for low earners, these need to be viewed as providing coverage for much-needed assistance.
The KPMG survey compared effective tax rates (combined personal income tax and social security contributions) on annual income of USD 100,000 in more than 80 countries.
Romania is number 35 on the list, with an effective tax rate at the level of the employee of 29.9% (personal income tax and employee social contributions), meaning that it is lower than the European average (36% in 2009).
