One of the biggest issues facing companies operating across borders is in which country should their geographically mobile staff pay income tax and social security contributions.
A great deal depends on the nature of the geographical mobility and the countries concerned. Generally an individual’s actual nationality is irrelevant to the issue about where they are taxed. The main exception to this rule is the USA which seeks to tax all its nationals wherever they reside. But even here there are special rules in respect to cross-border workers working in Canada.
In the US and Canada there are well established rules laid down by the 1984 Totalisation Agreement. Thus, if you live in one country and are sent to work in the other for less than five years you continue to pay social security in your home state. Only if you work longer than five years – or you are hired in the other country – will you pay social security in the host state. However, claims for social welfare benefits can still be made from the home state.
In the rest of the world – and apart from transport workers such as HGV drivers and airline flight crews which we do not deal with here – there are three principal types of employed cross-border worker and generally different rules apply in each case.
The first type of worker is the expatriate who settles in a host country permanently, or for any period in excess of six months. In the European Union (EU) they will normally pay both social security and tax in their host country, although certain transitional concessions may be made for the tax paid. If the employee is an EU citizen working in another EU country for up to two years they would be able to arrange payment for social security to continue in their home (or former EU) country for up to two years. Some host countries also require tax to be paid for all worldwide income in their jurisdiction. If the home country threatens also to charge tax on any of the same income then it will be necessary to resort to the appropriate double taxation agreement to sort it out.
The second category of cross border worker is the employee posted to complete an assignment in another country for up to six months. Special rules apply to the terms and conditions of posted workers in the EU and prior notification of a job posting normally has to be given to the host country’s labour inspectorate. The posted worker will normally continue to pay both their income tax and social security in their home country, although the criteria for tax residency in the EU is no longer purely defined in terms of a 183 days per year residency threshold. Other factors can be applied to determine if income is subject to the host country tax regime. This means that in some countries where the tax authorities operate in a draconian manner – such as France – it may be very difficult to avoid the payment of tax once tax officials are aware of employee’s working in the country. They can also insist that the employing entity register a company in France so that they can also be assessed for other tax obligations.
Finally, there is the complex and uncertain issue of cross-border workers. These are people who live in one country, but commute across a national border to work in another country each day. Such workers in much of Europe have been hindered in the last year by the re-imposition of border controls within the EU Schengen area. Fortunately in the EU there are special rules for the payment of social security, whereby cross border commuters always pay their social security in the country where they work, but have a right to claim most social benefits in the country where they live. The main exception being unemployment benefit where employment is intermittent due to temporary lay-offs. In this case, the benefit is payable in the host state. Income tax, on the other hand, is subject to bilateral agreements between countries and will vary throughout Europe. In general, however, employees pay income tax in the host (work) country, but are still required to submit an income tax annual return in their home state.
Further afield there are few countries outside Europe where there is a significant volume of daily cross-border commuters. India has hostile border regions with both Pakistan and – to some extent – with Bangladesh and, in any case, small companies are not obliged in India to register for social security. Where social security is paid the foreign worker can claim a deduction of up to INR 150,000 per annum from their taxable income in India.
In Africa the growth of Botswana’s mining wealth has meant an influx of foreign workers to the country and even cross border workers from South Africa (in spite of delays and demands made by corrupt border guards and South African police). An individual is subject to Botswana income tax on all income they receive or accrue from any source in Botswana – which means work undertaken there. There is no social security in the country so cross-border workers must make their own provisions in South Africa.
In South America few countries have safe and stable border areas and therefore cross-border commuting is not very common. The biggest issue is cross border migration, especially for Mexico which has a major problem along its southern border where the volume of illegal migration is growing fast. Reciprocal arrangements for social security and income tax are not major issues for these countries where the grey economy is generally much larger than the formal economy and affluent individuals are able to bribe officials to overcome any tax difficulties.