Welcome to the third edition of Payroll Pundit. Today I would like to touch on the subject of expat taxes- the how, the why and the when.
There are many factors to consider when working and paying tax abroad. The main questions usually posed are the following
If the contractor is working for only a short period of time, will they still have to pay taxes locally?
Why do they have to pay taxes if they are working there for a short- term assignment only?
Does the contractor have to pay taxes in both countries?
Are the any other deductions besides tax?
There are no yes or no answers as each country has a different set of rules and regulations. We will start with the definition of a Non- Resident. A Non- resident person is classified as someone who resides in a country for less than 183 days in per year.
In some countries, Non- residents do not have to pay taxes while working on short term assignments abroad for up to 6 months, particularly if the income is sourced from abroad.
What if the contractor has to work for longer than 6 months, you ask?
If the contractor is to work any longer than 6 months, it would be incumbent on the contractor to pay tax in that country from month 7.
If the applicant is going to work for a longer period, it is recommended that the applicant apply for a 6-month work visa first and then apply for a longer work permit thereafter. The reason for this is that if the contractor was to apply for a long -term work permit from the offset, it is considered an intention to become resident and the contractor would therefore have to pay tax and any other contributions from day one.
Some countries do not differentiate between a Non- Resident and Resident and the contractor would therefore have to pay tax regardless of the period they are working there or whether the income is sourced from abroad or not. In this scenario, they countries usually have a lower tax rate for expats working less than 183 days.
Paying taxes in two countries.
It is not unheard of whereby the contractor has to pay tax on his salary in more than one country. This is referred to as double taxation and the text book definition is a “taxation principle referring to income taxes paid twice on the same source of earned income.”
Double taxation is seen as a negative element of taxation and believe it or not, Tax authorities attempt to avoid it where possible. To avoid these issues, countries have signed hundreds of Double Taxation agreements (DTA’s), which means that you are only liable to pay tax in one country. The tax is usually paid in the country where the assignee is working.
If your country does not have a DTA with another country, this means that the contractor will be liable to pay tax in both countries.
Besides income tax, there are other deductions to consider, such as Social Security, unemployment fund contributions and skill development levies. We can only advise the contractor on a per country basis as again, different strokes for different folks. In some countries, expats will have to pay Social Security contributions as well as skill development levies. The employee contributes a portion and the employer matches the contribution.
What is the point of paying Social Security contributions abroad when one has no intention of living there on a long- term basis, one might ask?
The countries accrue interest on the money collected and it is then ploughed back into social welfare or skills development. The contractor can reclaim the social security upon the end of his assignment.
As mentioned, there are too many variables to provide a ‘one fits all” scenario. We can provide a country specific in depth salary breakdown upon request. Email us at firstname.lastname@example.org for any payroll or immigration solutions.
Have a fantastic weekend- Adieu, until next week.