A basic guide to tax liability in a foreign country

With globalisation continuously increasing in business the need for mobility in the workforce is, for companies, like BPS World a growing requirement.

Of course, this is not a new phenomenon. Lots of businesses are in business to support global mobility and transience of the workforce. It can however be a challenge to mobilise personnel quickly and to the layperson the laws on working legally and paying the right tax, social security etc. in a ‘foreign’ country can be overwhelmingly complicated and mystifying.

It is no longer the case that global mobility is such a rarity that tax authorities are unaware of who’s working where. As the world of work becomes more globalised, so does each countries immigration and taxation regimes.   Authorities across borders are working together more consistently and taxation treaties make international working easier from some countries, the rules vary from one country to another. In some countries a foreign national can work and continue paying tax in their home country for a short period – often either a 90 day or 183 day rule applies. In other countries, the tax is due to be paid from day one. Most of the international workers, clients and agents I speak to often struggle to work out where to begin.

As part of a review of international payroll service providers recently, I was introduced to a “3 pin” rule of thumb which, although possibly over-simplified, is a reasonable basis on which to start to determine where a worker who is working in a foreign country should be paying their taxes. Here’s how the 3-pin assessment works.

Imagine a map in front of you. Take 3 pins and place them as follows;

Pin 1: Place where the worker is living (tax residence, home country)?

Pin 2: Place where the location of work is being done?

Pin 3: Place where the company is located (the company that is receipt of the work being done)?

If all 3 pins are in the same country then that is almost certainly where the taxes need to be paid. If two pins are the same country, then it is likely that this will be where the taxes will need to be paid. If all the pins are in different countries then although it is likely that the taxes will be paid where the working is a tax resident you’d be better to seek advice than presume.

Independent contractors working abroad should take extra care. Without being able to fall back on their employer to support them if they pay the wrong tax or worse still no tax at all in the country where it is due, then they can be left widely exposed. The consequences for tax evasion are severe in any country and will far outweigh the effort required to get it right from day one.

Citizens of EU countries can travel, live and work freely across borders in EU countries but all too often the worker is oblivious to fact that when they are working in a foreign country they must also abide by the tax laws of that country – just to continue paying tax at home indefinitely is not often enough.

So if you are totally perplexed by all the rules, regulations, laws and practices then try starting with the “3-pins” and go from there.

For further information please contact David Shuttlworth on 01628 857325 or david.shuttleworth@bps-world.com