If one of the two certainties in life is tax, then one of the certainties about taxation is that when you cross a border and earn money in another country, it can become a complex matter. Teresa Russell gets some simple answers to complex international taxation and visa questions
In Mercer’s worldwide individual tax comparator report, released in November 2007, Belgium, Hungary and Denmark were ranked as the least attractive personal tax environments, while the United Arab Emirates, Hong Kong and Russia were considered the most attractive among the 32 markets surveyed. The report analyses tax and benefits systems, with specific focus on personal tax structures, average salaries and marital status.
Asian markets dominated the top rankings, with Hong Kong (3), Taiwan (4), Singapore (5), South Korea (6) and Beijing (7) outshining European markets that dominate the lower rankings. India, Australia, UK and USA all shared equal 14th position, however India was the lowest ranked Asian market and the UKwas the highest ranked European market in the survey.
Marital status still plays a part in determining local tax rates in many jurisdictions. Notable exceptions are Brazil, India and Turkey, where married and single employees are taxed at similar rates. In general, married employees with two children fare better than both single and married employees without children.
John Fauvet, tax partner in PricewaterhouseCoopers’International Assignment Solutions group, says that because international taxation is a very complex area, most companies outsource to specialists. “It’s an area of deep specialisation which is constantly changing. If you don’t seek advice, you will trip up, there is no doubt about it,” he says. “It is critical to manage people’s careers throughout an international assignment. If you get it wrong, you may lose skilled resources that are expensive to replace,” adds Fauvet.
Melissa Blackley, director of remuneration and benefits at WorleyParsons, says that they chose PricewaterhouseCoopers as their global partner for international taxation because they needed a partner who operated in the geographical locations that they did. WorleyParsons is one of the top 30 publicly-listed companies in Australia. It employs around 27,000 people in 30 countries and provides engineering professional services to the energy, resource, mining and oil industries.
Blackley is responsible for the global strategy and infrastructure that supports around 1,200 employees who are currently on international assignment. They are not all expatriate Australians. “They come from the USA, Australia, Canada, China, the Middle East, the Philippines, India – everywhere; and they are transferred to the Middle East, Africa, Central Asia, South America and Eastern Europe – basically wherever there is oil, gas, mining and power stations,” says Blackley.
When international treaties, domestic legislation or visa requirements change in any country, an assignee’s compensation may be impacted. Fauvet says that Australia currently has 44 double tax agreements – (with our neighbours such as Papua New Guinea, New Zealand, Fiji, etc, and also Western Europe generally). This is often more important for inbound assignees because tax will not be payable in both the home and destination countries. “However, we don’t have treaties with most South American jurisdictions or countries that used to be a part of the Soviet Union. These are important destinations for mining and engineering companies,” says Fauvet.
WorleyParsons’ global mobility program is a living document that changes as the needs of the business do. “We have a standard set of principles that apply to all assignees, regardless of their seniority. We have a commitment to a duty of care to all. Our mobilisation allowance is indexed according to family size. Both the family size and country of destination inform the type of remuneration package that will be provided,” says Blackley.
All assignees leaving Australia attend a pre-departure tax briefing at PricewaterhouseCoopers and may have assistance with completing their tax returns in Australia and Singapore at present. “This service is being systematically rolled out around the organisation. We definitely see a need for it,” says Blackley. Additionally, assignees departing for some countries undertake a cultural review of the destination.
WorleyParsons also uses a single global provider for visas. “We sometimes have assignees who need to move to obscure locations in a short timeframe. The main issues we have with visas are turnaround time and information on getting the appropriate visa. We need accurate information about tax issues at these destinations, because the way someone is remunerated and taxed can often determine the type of visa they need to obtain,” explains Blackley.
Fauvet says that inbound individuals find our fringe benefits tax and salary packaging arrangements to be strange concepts, even though Australians consider it par for the course. “Australia now has a sensible and generous regime for a living away from home allowance, which has helped attract highly-skilled people. So has not taxing foreign income. We still have quite a high headline tax rate, but our overall average rate is now much less punitive than previously,” he says.
For outbound employees, questions frequently revolve around superannuation. Fauvet says most people ask if they can remain in their superannuation schemes – most can. “There may be some costs involved in that, depending on other jurisdictions’ laws. Every country is a new jigsaw to deal with,” he says.
Fauvet describes every jurisdiction as complex. “Each one is a new jigsaw to have to deal with.” He says, “Everywhere has issues, but perhaps the UKand Hong Kong have fewer than others.”
PricewaterhouseCoopers has a comprehensive checklist of things that need to be addressed for both inbound and outbound assignees. (See box for an abridged version.) One of the trickier areas is how salary and investment income is dealt with in different jurisdictions. “Share schemes can be a minefield. Exercising options may require an individual to lodge tax returns in several different jurisdictions. Bonuses paid after a project has concluded – even if the assignee has returned to his or her home country – can also be taxable in the country where they were earned,” says Fauvet.
The poor handling of an overseas assignment can result in losses for both the individual assignee and their employer. Fauvet points out that companies understand their own tax affairs in the countries where they operate, so they should do the same for their employees as well. “It’s a high-risk area with many opportunities to trip up,” he cautions.
“Policies need to be flexible to meet the needs of the business,” says Blackley. “The old type of expat is not sustainable – either economically or culturally today,” she says. At WorleyParsons, Blackley says that they always try to strike a balance between the cost impact of an assignment and their duty of care to the assignees.
“The one size fits all approach is difficult these days because new graduates have vastly differing needs to those of an experienced executive on an international mobility program with their family. But the one thing they all have in common is the need for open communication at all times. Silence is very negative,” she says.
She also believes it important to set up relationships with tax advisors in both the host and destination countries. “It can also become a negative experience for the assignee if things are not coordinated effectively. Make sure they get put on the payroll and have adequate health insurance, for example,” says Blackley.
Although Fauvet recommends HR undertake in depth consultation with firms like his, he stresses the importance of delegating the management of, but not abdicating responsibility for, overseas assignees.
For personal tax matters
1. Establish tax residency status
2. Consider tax equalisation policy
3. Consider Australian and foreign tax treatment of:
Foreign and Australian investment
Foreign currency rules
Capital gains tax on becoming or ceasing to be a resident
Employee share and options plans
Private health insurance
Source: PricewaterhouseCoopers. This list is indicative not all-inclusive