To be fully compliant, companies with globally-mobile employees must follow not only 'home' tax rules but also host country regulations.
Compliance is always top-of-mind for multinationals and it should be high on the priority list for HR and payroll departments managing expatriate employees. Non-compliant employment situations can result in penalties and reputational damage.
To be fully compliant, both the employer and employee must follow not only 'home' but also host country regulations. Here are nine key factors to consider.
*Expatriate tax regulations differ country-to-country and this article is not intended to provide specific advice.
1. Registration in the host country
Usually both the expatriate employee and their employer must register with the host country's relevant tax and / or labour authorities. It's important to consider the timelines for such activities. For example as a general rule, if a person spends 183 days of a calendar year in France, they are considered fiscally resident. Host country registration may result in the issuance of a tax ID number to the employee and employer.
2. A1 certificate of coverage – or equivalent
Obtained from the relevant authority, an A1 certifies that an expatriate within the EU remains subject to their home country social security system, and that no social security is payable in the host country.
3. Tax and social security withholding
If home country social security is possible based on international legislation, it is important to apply for a Certificate of Coverage (CoC) from (usually) the home country's social security authority. It is generally the employer making the application.
4. Shadow payroll
Payroll should be performed in both the home (actual payroll) and host country (shadow payroll). Local regulations, deadlines and processes should be adhered to in both countries.
5. Tax payment in the host country – is it an employer or employee responsibility?
Once the payroll run is completed, the tax (advance) should be also paid. In Hungary for example expatriates are liable to pay this on non-Hungarian sourced employment income each quarter. In each applicable country it should be ascertained whether the employer pays on the expatriate's behalf or if the expatriate pays it personally. The accepted currency for the tax payment should also be clarified. To avoid penalties, deadlines should be met and international bank transfer timelines should be factored in to your payment scheduling.
6. Social security payment in the home country – if a CoC is available
The social security payment and process depends on whether A1/CoC or equivalent is available. If an international social security agreement is in place between the home and the host country, it is generally sufficient to comply only with one country's (usually the home country's) social security rules.
7. Social security payment in the host country – if a CoC is not available
If there is no social security agreement in place, there is a chance of dual social security payment liability.
8. Annual personal income tax return filing
At some point in the year, countries require annual personal income tax returns to be filed. Both employment and private income should be reported. It's quite common for expatriates to need to file returns in at least in two countries at different times in the year, depending on their home and host countries.
As with payroll, the tax return procedure should follow the processes, forms and deadlines set by the jurisdictions. Your payroll departments must be aware of their obligations to provide expatriate employees with the relevant payment summaries to meet their income tax filing deadlines.
9. Consider hypothetical or similar tax protection methods
Tax protection policies such as tax equalisation should be considered for all the above-mentioned points. If there is a hypothetical tax to be deducted but actual tax to be paid, it should be calculated and monitored appropriately so that the relevant company policies are followed.
Talk to TMF Group
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.