Understanding Individual Tax Risks When Working Overseas

In our previous Knowhow, we skimmed the surface on risks of working abroad. Now, we'll dive into the specific tax risks for individuals working overseas and the implications for employers.

Tax Residency and Non-Residency 📑

Generally, if an individual is tax resident in a country, then they will be liable to tax in that country on worldwide income and gains. However, most countries will also, in the first instance, tax a non-resident on earnings for days worked in that country. So this means that an individual who chooses to work elsewhere may create a tax exposure in that country, as well as in their "home" country, even if they are only working in the new country for a short period. 🏦💸.

The 183-Day Misconception 🗓️

Probably one of the most common misunderstandings is that individuals can work in a country for up to 183 days without triggering a tax liability there. 🌐📝 Exemption from  income tax for trips under 183 days relies on Double Taxation Treaties (DTT) between countries 🌐📝. To assess this, first, identify if a DTT exists between the home country and the work country. If no treaty exists, income tax may be due from the first day.

If a treaty is present, it's vital to review its specific conditions to ensure the employee qualifies for income tax relief in the working country as there are many other conditions that need to be met, including who employs and who pays the individual, whether any costs are recharged and whether they are tax resident in a "home" country. In addition how the 183 days is counted and in what time period will also vary between treaties.

Multiple Locations and Local Employers 🌍

An individual who moves to multiple locations to work may not be resident in any country and therefore will not be able to avail themselves of a treaty. In addition, an employee moving to a local employer, whilst they are working in a different country, will be in the same position and liable to income tax for the days spent working there. 

Double Taxation💰

Double taxation might occur, especially with real-time income tax collection in some countries. Cash flow issues and residual home country tax liabilities may arise if not carefully planned.

Benefits Mismatch 💼

Another point to consider is the potential mismatch in terms of certain benefits which may be taxable in the overseas location, but were not taxable in the home country. The most common examples of this are employer pension contributions and contributions to medical plans. These may be exempt from tax in the country in which they are established, but may not qualify as tax exempt in the overseas location. As such these items could create additional taxable income for the employee. 

Understanding the complexities of tax laws, treaties, and potential liabilities is crucial. Proper research and planning will help avoid unpleasant surprises for both employers and employees when working abroad.