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Employer withholding tax obligations on cross-border assignments
There are business advantages for multinational operations who share executives and other skilled employees across borders. It is important that cross-border assignments of employees do not result in financial burdens for the employees or tax compliance issues for the organisation. Taxand's global compensation tax team provides a brief review of the withholding tax considerations when an employee is transferred to another country on a short-term assignment.
Potential for Double Withholding
In general, the country in which an employee is resident is entitled to tax that employee’s worldwide income, wherever it is earned. The employer (wherever located) is required to deduct and remit the withholding tax imposed in the employee’s home country (the country of residence)’. Where an employee is performing services in another country (commonly referred to as the ’source country’ as it is the source of the income being earned by the employee), the source country may also require the employer to deduct and remit withholding tax on that same remuneration. The result may be double withholding of payroll taxes. While the employee will generally be entitled to claim a foreign tax credit when the employee files his or her tax return for the country of residence, double withholding creates a significant cash flow problem and potential hardship for the employee.
There may also be social security deduction and remittance requirements imposed on the employer by the country of residence, and by the source country. Many countries have entered into social security agreements with each other. These social security agreements may provide relief from the source country’s social security remittance obligations during a short-term assignment of an employee to the source country.
Employer Has No Presence in Source Country
The domestic law of some countries, including Finland, Denmark, Switzerland, the Netherlands, Poland, Mauritius and Mexico, may not impose an obligation to withhold tax on remuneration paid to employees temporarily working in that country, if the employer paying the remuneration is not a resident of that country; is not registered as an employer or withholding agent in that country; and does not have a permanent establishment in that country.
Most other countries require tax withholding by an employer who is not resident in the country and has no permanent establishment there, if the non-resident employer is paying an employee for services performed in that country.
Impact of Treaty Exemptions
Many countries have entered into tax treaties providing relief from tax payable on employment income earned in the source country in certain limited circumstances. These treaty exemptions generally follow the OECD’s Model Convention. In general, an employee resident in one country is not subject to tax on remuneration for services performed in the other, source country, if:
(a) the employee is in the source country for less than an aggregate 183 days in any 12 month period
(b) the remuneration is paid by, or on behalf of, an employer who is not resident in the source country
(c) the remuneration is not borne by a permanent establishment in the source country.
With respect to the conditions in (a) and (b) above, some countries, including Canada, consider that these conditions are not met if the employer paying the remuneration is reimbursed by a person in the source country.
Some countries, including Brazil, Colombia, Denmark, Greece, Italy, Malta, Mexico, Romania, Spain, Thailand and the US do not require employers to remit withholding tax on remuneration for services performed in the source country if the exemption in the relevant treaty applies. The employee may be required to provide the employer with a certificate of residency or other documentation supporting the claim for the treaty exemption. In Romania, there is no withholding tax if the employee provides the employer with a certificate of fiscal residence in another country, even if a treaty exemption does not apply.
Where a treaty exemption applies to exempt the employee from tax in the source country, but tax is withheld and remitted by the employer, the employee should apply to the taxing authority of the source country for a refund of the tax, instead of claiming a foreign tax credit against tax payable in the employee’s country of residence.
Waivers and Other Relief From Taxing Authorities
In a number of countries, including Austria, Canada, China, India, Malaysia and Norway, an employer is required to withhold and remit tax, whether or not a treaty exemption is available.
In some of these countries relief from the withholding obligation can be obtained by application to its taxing authority. In Canada and Norway application may be made to the taxing authority for a waiver from withholding tax based on the treaty exemption. The waiver is obtained by, or on behalf of, the employee who delivers the waiver to the employer. In Austria, relief may be available if the certificate of residency requirements are met or a waiver of the employer’s withholding obligation is obtained from the relevant taxing authority.
Ireland and the Netherlands do not require withholding tax for ‘short business visits’ of up to 60 days when certain conditions are satisfied. There is also a 183 day exemption with approval of taxing authority if other conditions are met, including evidence of withholding tax in the employee’s home country of residence.
Your Taxand contacts for further queries are:
Ignacio Rafael Vélez Vergara
Mauricio Piñeros Perdomo
Gonzalo Fernandez De Lorenzo
Knowledge of the withholding tax and reporting rules, and requirements of the source countries where employees will be performing services is an important part of strategic planning for cross-border assignments. Multinationals would be prudent to familiarise themselves with the applicable rules and requirements as a first step to planning and dealing effectively with the tax compliance implications.