IAS Offerings:A whistle stop tour through the world of

Expatriate TaxNick Knight, Reading IAS

5 August, 2015

Tax is a funny old game

• ‘He was incredibly rich, occasionally buying star systems, and once spent a year dead for tax reasons.’ (Douglas Adams, The Restaurant At The End Of The Universe)

• ‘The hardest thing to understand in the world is the income tax.’ (Albert Einstein)

• ‘A fine is a tax for doing something wrong. A tax is a fine for doing something right.’ (Anon)

What do we do?

• International Assignee Services deal with individual and corporate compliance/advisory issues arising from employers sending their staff to work in other tax jurisdictions. We mainly deal with individuals assigned to work for a period of time in another tax jurisdiction, but in theory working just one day in a foreign country can give rise to tax compliance issues in that country.

Assignment Life Cycle

Tax

The tax treatment for expatriate employees can be dealt with in one of three ways:

• Tax Equalisation• Tax Protection• A ‘laissez-faire’ arrangement

Tax Equalisation• This is the most common method.• It ties the individual to a ‘stay at home’ tax (and possibly social security)

liability in the home country, with the employer paying the taxes in the host country. The employee remains employed in the home location.

• The assignment is therefore ‘tax neutral’ and the individual does not need to worry about whether they are going to a country with high or low taxes as the tax they pay will be the same as if they had never gone on assignment. It does mean that the individual cannot take advantage of any tax breaks for breaking tax residence in the home location.

• Tax equalisation is an advantage for the individual where a UK national is going to a high-tax country (such as the Scandinavian countries).

• It is potentially a disadvantage if going to countries like Singapore (15% tax rate) and the UAE (with no income tax!).

Tax Protection

• With tax protection the individual pays the lower of the home or host-country tax liability (so UK to Singapore would pay the 15% Singaporean taxes, rather than the higher UK rates). Again home employer is maintained.

• This can be expensive for the employer and may sway individuals against travelling to some (higher tax) countries, so we don’t tend to see this very often.

Laissez-Faire Arrangement• Here the individual pays their own taxes in each jurisdiction and usually changes

employer to the host location.• This is becoming a more popular option with employers, as it is generally cheaper

for the employer (with no ‘grossed-up’ tax liability).• If the individual moves to a low/no tax country, then they will generally be

amenable to this.• If the individual moves to a high tax country they would normally want additional

compensation to counter the higher taxes to be suffered.• Where the individual moves to a local contract in the new jurisdiction, this can have

issues around social security, pensions and employment rights for continuous employment, which may not otherwise be in play where the home-country employer is maintained (it’s never just about the tax).

• This arrangement doesn’t really work unless there is a clean tax break with the home country and they break tax residence there. If not then there is likely to be taxation in both countries, possibly with withholding due in each and which can cause hardship for the individual in terms of cash flow.

Examples for each method

• Assume the following:• Salary – 100,000• Home tax rate = 30%• Host tax rate = 20% (25% grossed-up rate)• Individual does not remain liable to home-country taxes

whilst in host location (but situation if they do also highlighted).

• Hypothetical rather than actual taxes are paid (so usually included as negative salary) other than laissez-faire example.

Tax Equalisation Example• Home country ‘stay at home’ liability = 30,000. • Host taxes are paid by the employer, so 20% becomes 25% (20 x 100/80)

and host liability is therefore 25,000.• Here there would be a 5,000 tax ‘windfall’ for the employer, but there

would be other costs (accommodation, travel, etc.).• The home-country tax return will probably show a nil liability (as the

individual has broken tax residence in their home location).• Note: If home country taxes are due, then a Foreign Tax Credit (FTC) is

claimed re host-country taxes paid. In this example full FTC could be claimed, but where the host-country tax rate is higher than home country, then FTC is limited to the tax due on the same income in home country. The residual host taxes, as paid by the employer, are then taxable in the home-country, which would then have to be grossed up for home-country tax purposes at 42.85% (30% x 100/70).

Tax Protection Example• Assignee pays home-country taxes based on host-country

taxes of 20,000 only, being lower than the home liability.• Nil home country liability (as for tax equalisation).• Host country liability is based on salary net of

hypothetical taxes, so 80,000. This is taxable at grossed-up 25% rate and so 20,000 due (which is covered by hypothetical taxes in this example).

• If home taxation still applies then employer pays grossed-up tax rate in both locations after FTC claim in home country.

Laissez-Faire Example• Individual pays their own taxes, so no gross up or hypothetical taxes.• Host liability is therefore 20,000.• Home liability is nil, so individual is happy at saving 10,000.• If they didn’t break tax residence in home country then it gets

problematic. • The liability there would eventually be 10,000 (30,000 less 20,000 FTC),

but unless there is a ‘net of credit’ arrangement (or equivalent) that credits the FTC via the payroll, the full 30% should usually be paid via tax withholding and the FTC refund claimed later, giving serious cash-flow issues with an effective 50% initial withholding over the two countries (30% plus 20%).

• Note: Where double taxation is involved, the eventual overall tax payable is equivalent to the highest rate between home and host (so home here).

UK Tax Residence

• Statutory Residence Test (SRT) in the UK aims to simplify tax residence (which was previously largely based on case law going back decades). It often does no such thing!

• A UK tax resident/treaty resident will be taxed on UK income and gains. The treatment of non-UK income and gains will depend on their domicile. If a UK domicile then these will also be taxable in the UK.

• A non-UK tax resident will normally only be taxed on: days worked back in the UK (in some instances), UK rental income and UK dividend income (to the extent that this has already been taxed). This will depend on any tax treaty held with the other country and the wording of this (a standard-model treaty is referenced above). If there is no tax treaty then all UK income is potentially taxable in the UK (as exclusion is claimed via a tax treaty).

Domicile• Highly complex area.• Tax resident but not UK domiciled individuals can be taxed on the arising (worldwide income

and gains) or remitted (UK income and gains taxed, but non-UK only taxed where brought into the UK) basis.

• Remittance basis filers will lose personal allowance where non-UK income is over £2,000 and will be subject to a ‘Remittance Basis Charge’ (RBC) after they have been UK tax resident for 7 of the last 9 years (£30,000), 12 of the last 14 years (£50,000) and 17 of last 20 years (£90,000).

• New ‘deemed domicile’ rules (July 2015 Budget) effectively remove the £90,000 RBC from 2017/18.

• Overseas workday Relief available for first three years, where non-UK work days are not taxable in the UK, subject to certain conditions.

• We can assist individuals to UK with bank structuring and remittance issues (subject to FROR restrictions).

• If an account contains ‘mixed funds’ (earnings, interest, dividends, capital gains, etc.) then there are strict ordering rules around which elements are remitted to the UK. Ideally there are separate accounts for each.

Short-Term Business Visitors to the UK

• Technically all those who come on short business trips to the UK should have PAYE applied to their earnings.

• Administratively, this does not make sense, as normally the tax would then be repaid via a UK tax return.

• As such, employers can make a STBV agreement (Appendix 4) application to HMRC not to withhold UK PAYE for inbound travellers to the UK in certain circumstances.

• Visits will then need to be tracked and reported to HMRC at the year-end, with the level of detail required based on the number of days spent in the UK (so only names of employees coming for up to 60 days from countries with which the UK has a tax treaty).

• Recent HMRC Expatriate Forum is proposing changes for STBV to the UK where there is no treaty exemption, with a separate annual return (and PAYE reference) and with the tax due for these paid by 22 April after the year end.

Shadow and Modified Payrolls for Inbound Assignees in Host Location

• Known as a ‘modified payroll’ (Appendix 6).• More relaxed format than a standard payroll and estimates

can be used, with later P11D deadline.• Employee must be tax equalised back to their home

country.• There is also a social security version of this for inbound

assignees (Appendix 7A), where needed, as well as for equalised outbound assignees to report NI on the NICable assignment expenses in the host location (Appendix 7B).

• Note other potential payroll issues in home location (such as ‘No Tax’ codes in the UK).

Social Security

• If local hire then immediately pay social security in host location. Where assigned to host location depends on the countries involved.

• EEA Countries – usually can elect to remain in home scheme (via A1 application) subject to assignment-length limits.

• Totalisation Agreement countries (USA, etc.) - usually can elect to remain in home scheme (via E101 application) also subject to limits.

• Non-totalisation agreement countries (Australia, India, etc.) – remain in home scheme for first 52 weeks and then move to host scheme.

• Multi-state workers – special rules.• Hypo social security – may be considered for non-totalisation agreement countries

after the 52 weeks have expired, with actual social security in host location paid by the employer (therefore forming part of taxable remuneration there).

• Voluntary NI contributions – available in some countries (such as the UK) although may be a financial decision as to whether worth making (so we cannot advise on this, just state the facts).

Other issues

• Trailing liabilities following the end of the assignment (stock and bonuses – possibly years later).

• UK outbound business visitors (track for any compliance issues in countries visited – if tax is due then Foreign Tax Credit in UK).

• Senior Accounting Officer reviews (ES Team).• Share plans for globally mobile work force are

complex and we have teams who can also assist with these.

Summary – ‘hooks’ for meetings

• Does company have employees working in overseas jurisdictions?

• Do they have business visitors to the UK?• Do they have people on an extended assignment

to/from the UK?• If so, are they doing anything formally for these

individuals?• IAS team can offer initial free meeting where

there may be issues of concern re above.

Questions?