Topic: Review of the company requirement and legal responsibilities for global reporting with a focus on strategic and legal responsibilities.
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Module_7_Section_3_Legislation_and_payroll.pdf
Module7 Unit 3 Legislation and payroll Page 1
Master of Science in Business and Reward Management
Module 7 V 1 01.01.15
In Partnership with
The University of Derby Corporate
Managing International or Global Remuneration Practice
UNIT 3 – LEGISLATION AND PAYROLL
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TABLE OF CONTENTS
LEARNING OUTCOMES 4
LEGISLATION 5
Area of organisational consideration 5
Legal development 7
Impact of European Social Chapter legislation to UK legislation 9
Treaties 10
Conflict of laws 12
Effect of EU law 12
Global and international legislation 14
Organisation for Economic Co-operation and Development (OECD) 15
LEGISLATIVE IMPACT 17
Taxation implications 17
Legal entity structures 17
Incorporation of an organisation 18
Payroll and HR legal duty 20
Employment regulations 21
Statutory deductions 22
Tax planning for seconded employees 23
Double taxation 24
The liability of double taxation on income. 24
UK Double Taxation Treaties 28
Advise on treaty options 29
Tax status of an individual 29
Tax protection or equalization 31
Understanding forms of assessment of residency 34
Social Security liability 34
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Employee consultation - Work councils 40
TUPE and legislation interpretation 40
Money laundering 41
Foreign Exchange 43
OFFICIAL DOCUMENTATION 45
Immigration 45
Tax 45
Social Security 45
Pension 46
Payment 46
CONTROL OF DATA 47
SUMMARY OF PAYROLL PRACTICAL ISSUES 50
Gov.uk - Statutory Instruments for tax treaties 52
Appendix: Statutory Instrument numbers 64
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Learning outcomes
On completion of the module learners will be able to:
● Appraise the cultural impacts of developing and implementing
global remuneration systems
● Critically review a strategic approach to integrated reporting and
processes, reflecting on the implications for performance
management and financial control
● Design and create an implementation plan for a remuneration
process for overseas employees, critically evaluating the strategic
and operational opportunities and risks
Upon completion of this unit it is expected that you will have adopted the skills
to be able to:
● Understand requirements for assessment of social security,
pension and employment legislative issues for countries other
than home office.
● Appreciate the impact of European social chapter legislation to
UK legislation.
● Review the implication of global legislation and perception of best
business practice
● Understand the role of Tax planning as involving equalisation or
protection.
The intention of this section is not to provide guidance of legal responsibility for
a specific country but for a general appreciation of the topic.
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Legislation
The challenge for any organisation is to understand the requirements for
compliant behaviour. In most countries the duty is on the organisation as
managed to recognise what is required of them – ignorance is not an
acceptable argument for breaching any required legal duty.
Area of organisational consideration
The key considerations for an organisation will be:
● Comply with all legislation responsibility for basic registration and
reporting of business activity for location.
● Compliance in duty of working process – that the method and
materials being used in order to create their target product or
service meet statutory standards.
● Compliance of treatment of employees meets health and safety
standards – that all working activity follows use of appropriate
safe machinery, protective clothing and following required
training.
● Compliance in treatment of working relationship with employer
meeting all employment regulations including not breaching
actions on discrimination, discipline or inappropriate behaviour as
specified in legislation.
● Compliance in payment – that the working payment rates and
benefits provided meet minimum reward standards related to the
profession concerned.
● Compliance in deductions – that the employer takes only
deductions that meet statutory regulation standards where they
exist.
● Compliance in taxation, social security and insurance – that the
employer makes appropriate calculation and deduction from pay
for taxation and social security, plus any other appropriate
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deductions specified by the state, and pay over those sums
identified (whether from employee or employer) to the relevant
party.
● Compliance with information – that the employer only uses
information, keeps and maintains data storage, destroying
material, and be subject to best legislative practise, but also
supplying relevant and required reports of data whilst meeting
any data protection or freedom of access regulations as
legislated.
● Compliance with taxation – that the employer calculates, reports
and pays over any required taxation and insurance charges on
business finance including profit meeting legislative regulations.
The challenge of an international or global organisation is that it faces
understanding of requirement from more than one location – each of which may
and will have their specialisms.
The development of duty in legal requirement has various facets for
consideration and each of these influencing areas will lead creation of a
different final legal structure.
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Legal development
Review legal development - consider Module 4, section 2, chapter 3.3.
Make a note of key observations considering legal development.
Form of law
Style of law - criminal/civil
Law creation power-
political/reigious/ dictator
Internal/External focus
State of guilt/presumed
innocence
Punishment form -
fine/custodian/ physical/capital
National/regional empowerment
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On reflection, it should be identified that the cause and method of development
of law will depend on the country concerned. In some locations legal duty is
developed on the basis of common law, built as a result of either civil or criminal
focus.
Laws normally start with a legal edict or announcement having been agreed by
the authorised power of the country. These then further evolve either as a
result of secondary legislation change – by formal presentation by a nominated
or authorised agent, or because of practical experience in the court. Normally
that would be to establish clarity rather than create a new legislation focus.
However not all countries use the method of debate and elected officials for
assessment and agreement of any legislation point or idea. Instead the rules
are created through religious edict, becoming instantly valid (theocracy), or in
the case of dictatorship led by a tight power base of control (bureaucratic law).
In some situations a mixture of national and regional requirements influences
the law. This can make it very complex where an organisation is not just
situated in one locality – just think of USA where the individual states each have
their own legal structure built inside the nations’ legalisation regulations.
These differences impact not only on what are the laws but on the nature of
punishment for infringement. The punishment may vary, in some locations the
same infringement can result in corporate punishment or imprisonment, in
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others some activities will be legal whilst in other places they are not. The
same challenge occurs in understanding duty for taxation or rights for
employment by the individual. State to state can be very different.
Another concern is where the law and the imposition of compliance is not stable
or equitably implemented – for strategic planning it is important that the status
of regulation is stable to ensure action can be prepared and completed
effectively. Where legal stability is not regular, organisations will struggle to
meet their duty.
Impact of European Social Chapter legislation to UK legislation
(Summarised from Wikipedia)
European Union law is a formal body of legislation and treaties, built as
regulations and directives that impact either directly or indirectly on the laws of
the different member states that are part of the European Union. (Europa)
Just as with UK legislation, these have three sources of development: primary,
secondary and supplementary:
● Primary law is created through the treaties that have been
established by the European Union.
● Secondary law is then sourced through regulations and
directives, which have been built through the treaties content.
● Supplementary then expands following judicial review of cases
that challenge meaning of the secondary laws using case law
heard in the Court of Justice, and international hearings.
The legislature section of the European Union is in principle that of the
European Parliament. The Council of the European Union can then establish
secondary law in order to develop and meet the treaties objectives.
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Cases listening to challenges on European law are heard by The Court of
Justice of the European Union. This includes the Court of Justice, the General
Court and specialist courts. Their duty is to ensure the interpretation and
application of the Treaties of the law is observed.
The Court of Justice is made of one judge from each European Union member
state. The General Court includes at least one judge from each member state.
Judges are appointed for a renewable six-year term.
It is the role of the Court of Justice to rule, in accordance with the Treaties, on
cases brought by a member state, a European Union institution or a legal
person. The Court of Justice can issue preliminary rulings, because of a request
by a member state's courts or tribunals, on the interpretation of European Union
law or the validity of acts by European Union institutions and may also make
rulings on other cases if they are provided for in the Treaties.
These rulings create the supplementary source of EU law and are used by the
Court of Justice of the European Union where primary and/or secondary
legislation have uncertainty or cannot resolve the issue.
Directives are required to be transposed into the member states regulations.
Each member state has to apply the European Union law through their internal
courts, but if their law does not meet the level of the European requirements the
European court can enforce the higher requirements.
If the member state fails to transpose the laws such as the directives, the
European Commission can take proceedings through the Court of Justice of the
European Union. This is the highest court able to interpret European Union law
and applicants from members’ states can appeal to have cases heard as the
final point.
Treaties
The primary law of the EU is mainly based from the treaties of the European
Union, also known as the treaties of European Union (TEU). The Treaties
contain ‘formal’ and ‘substantive’ provisions, and are responsible for the framing
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of policies for all the different institutions within the European Union. It
establishes the scope of effect on members.
Unless specifically stated, Treaties apply as soon as they ‘enter into force’. All
of the member states are subject to the obligation of cooperation, by being
members making pledge not to take measures which would jeopardise the
attainment of the objectives. The Court of Justice may interpret but do not rule
on the validity. That is subject to international law.
European Union law general principles are called regulations and are applied
by the European Court of Justice and the national courts of the member states.
The European Court of Justice has recognised fundamental human rights, legal
certainty and equality before the law as general principles of European Union
law. General principles are distinguished from rules of law by being more
general and open-ended. They need to be assessed and refined for application
to specific cases.
It is aimed that general principles are developed and applied in order to avoid
the denial of justice and to fill gaps in European Union law in order to
strengthen their coherence.
The European Court of Justice is focused on creating rulings on various areas,
including human rights. International treaties are designed for the protection of
human rights, acting as guidelines as part of community law and should be
followed by the member states who have collaborated or signed to.
An important concept for European legislation is that it has to be shown to be
certain, clear and precise and any adoption of law is only valid where there is
proper legal basis. This means the general principle prohibits retroactive laws
and that they cannot be active before they have been published.
This gives some security in knowing that the past will not be changed. Also it is
required that legislation in member states which implement European Union law
must be worded so that it is clearly understandable by those who are subject to
the law.
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Conflict of laws
The courts of member states apply European Union law. However, where the
member states laws only provide for lesser rights, European Union law can be
enforced by the courts of member states. When the European Union law should
have been transposed into member states law the European Commission can
take proceedings against that member state and can be directly enforced. This
is described as being able to have direct effect.
Effect of EU law
The ability to impose by direct effect means that individuals in a member state
can pursue legal challenges outside of the direct legal jurisdiction of the state.
This is so long as there are legal arguments that can be raised in the European
Court of Justice, where those provisions can be said to be sufficiently clear and
unconditional and that there is no scope for member states to exercise
discretion in implementation.
The challenge will be to establish that there is a suitable directive that has clear
and specific requirements that can be assessed as having a direct effect on the
member state. It is not acceptable to rely on ideas that were recommendations
or opinions, as they are not intended to be binding. However, they should be
taken into consideration when interpreting the European Union law as
supplement or the national law that they implement.
In principal, indirect effect describes the situation where the court in a member
state use European Union law to interpret national laws. This is not the same as
direct effect where the European Union law is applied directly.
Case law has established both that compensation is due to individuals by the
member state if they fail to properly implement the requirements of a directive
and that where there is conflict between the member states law and European
law, it is European law that prevails.
So this means national law, if less stringent, is subject to European control.
However, it has been established that member states can maintain or introduce
more stringent laws on working conditions, social policy, consumer protection
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and the environment as long as these laws are compliant and not opposing
European regulations.
As would be expected, this has led to some concern as member states
politically and within their courts may resented the supremacy of European
regulation, although it is unusual for direct challenged.
The European Court of Justice has being inclined to encourage legal
interpretation within member states rather than needing to repeal or amend the
laws which conflict to European law.
Unlike the UK, most continental European member states have written
constitutions and some have constitutional courts with the exclusive power to
interpret the national constitution. The European Court of Justice has rules that
such courts must apply European Union law in its entirety, to avoid any
conflicting provisions of national law.
Until recently, the French constitutional court has regarded itself not empowered
to review administrative measures, as it did not recognise the review power and
duty provided to it by European Union law. The German and Italian
constitutional courts initially refused to strike down national laws, which
conflicted with European Union law.
The legal system of the European Union depends heavily on the courts in
member states to acknowledge and uphold European Union law and to follow
the interpretation of the European Court of Justice if there is one.
Practical outcome
The challenge of the UK court has been to implement and follow the European
requirement whilst not seeming to indicate the UK law is non-compliant. It has
not always been possible and in some situations it has led to individuals taking
cases to Europe. An example of one situation is that of the maternity rights as
challenged by Alabaster.
The creation of rulings from Europe has meant there are situations of conflict
between differing legal guides and it takes tribunal and court findings to
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effectively create secondary legislation which can then be used by later court
rulings.
A classic example is the intention to reduce discrimination on grounds of age
and one proposition was that long service holiday awards were unfair to young
staff. The purist could argue this is a symbol of discrimination but the pragmatic
view was this was not meant as such. The government indicated a state of
amnesty with an indication that they would be creating legislative ruling about
this in the future. That action has still to occur and meanwhile employers
continue to run processes as before.
The control of impact is sometimes dependent on the level of willingness to fight
on the issue – taking cases to Europe is not cheap. However, it does mean
there are ambiguous legal positions that are reliant on case law and the specific
focus of the judge reviewing a case at any time. An example of this is the
complexity for handling holiday pay and leave to staff in situations of sickness or
maternity.
Another problem is that when running a business in a cross European situation
it is not possible to assume standard approach – each member state still has
different rulings.
Global and international legislation
As global and international activity has expanded, so there has been greater
concern about the impact of organisations being based in one location but
breaching legal responsibility intending to avoid penalty.
There have always been forms of international country pacts for committed
policy and approach to reciprocal action. These have become sophisticated
relationships and are driven normally by country locations having voluntary
involvement.
The areas of agreement range from proposed best practise, through to
legislation commitment. Some of these have already been discussed – anti
corruption, anti-avoidance of legal duty, equitable treatment, environmental
standards, financial and economic standards of behaviour.
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Organisation for Economic Co-operation and Development (OECD)
The UK is keen to encourage and maintain an international consensus on
cross-border economic activity and is committed to the promotion of
international trade and investment. In support of that interest, the UK plays an
active role in the Organisation for Economic Co-operation and Development
(OECD).
The (OECD) is an international organisation that is concerned with the
economic welfare of member countries. It had originally been an organisation
focused on European countries but that group was extended to involve other
countries. It was reformed in 1961 into the OECD and now consists of 34
countries. The OECD's headquarters is at the Chateau de la Muette in Paris,
France.
The countries involved are committed to democratic political structures and are
regarded as developed. The original OECD consisted of a number of European
founder countries plus the United States, and Canada.
The official founding members from 1961 are:
Austria Belgium Canada Denmark France
West Germany Greece Iceland Ireland Italy
Luxembourg The Netherlands Norway Portugal Spain
Sweden Switzerland Turkey United Kingdom United States
During the next 12 years Japan, Finland, Australia and New Zealand also joined
the organisation.
In 1989 the OECD started to assist countries in Central Europe to prepare
market economy reforms.
Since 1990 there had been effort to help specific countries, including the
creation of a program "Partners in Transition" for the benefit of Czech Republic,
Hungary and Poland. This led to these countries plus the Czech Republic,
Slovakia, Mexico and South Korea becoming members of the OECD followed
by Chile, Slovenia, Israel and Estonia all becoming members in 2010.
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The EU is lobbying for admission of all EU members. In 2003, the OECD
established a working group to work out a strategy for the enlargement and co-
operation with non-members. This has resulted in a proposal that all candidate
countries selected should meet four criteria: "like-mindedness", "significant
player", "mutual benefit" and "global considerations".
The OECD Ministerial Council decided to open discussions with Chile, Estonia,
Israel, Russia and Slovenia as well as strengthen co-operation with Brazil,
China, India, Indonesia and South Africa.
OECD mandate covers economic, environmental and social issues claiming to
provide a platform to compare policy experiences, to seek answers for common
problems and to identify good practices and coordinate domestic and
international policies of its members.
The OECD promotes policies that are said to be designed in order the member
countries can:
● Achieve the highest sustainable economic growth and
employment, with a rising standard of living whilst maintaining
financial stability, in order they can contribute to the development
of the world economy.
● Contribute to sound economic expansion both for member and
non-member; and
● Contribute to the expansion of world trade on a multilateral non-
discriminatory basis in accordance with international obligations.
The OECD members continually review and identify new provisions to be found
within their model treaty. The model and the definitions and supporting
comments are commonly used as basic guidance for interpretation by each
member country.
Other areas that the OECD has worked on include money laundering, economic
development and energy. As a result of this, the OECD has created agencies
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such as the OECD Development Centre, the International Energy agency and
the Financial Action Task Force on Money laundering.
It acts by peer pressure in order to improve policy and implement non-binding
instruments (sometimes referred to as ‘soft law’) that can occasionally lead to
binding treaties. In this work, the OECD cooperates with businesses, trade
unions and with other representatives of civil society.
LEGISLATIVE IMPACT
When understanding the influence of legislation it should be recognised it can
impact at various points – from strategic decision to practical activity. In a
global organisation there is a need for some flexibility to ensure compliance in
all the various locations.
Taxation implications
The influence of legal responsibility will be discussed in a separate section. It is
mentioned now just to reflect how important legislation and country special
conditions are for influencing both the business structure and its business
strategy for processes and practise.
Legal entity structures
Registration of the business as a legal entity is normally necessary in most host
countries but not all. Whilst for business regulations the organisation may not
wish to register, it may still be necessary to meet employment tax regulations
where employees are involved. The organisation may only have employment
tax obligations and it would not necessarily have any corporate tax obligations,
however the application process is the same.
Depending on a country’s legal requirements, there is normally a need for an
organsiation to make some form of legal registration within a country to carry
out any business activity. Depending on the country this may be necessary
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where there is a wish to trade, to purchase property and/or to hire for
employment to occur. Every country however handles that process in a
different way.
The outcome of that registration will be recognition and the potential to make a
form of statutory payment to the country – possibly as taxation on revenue and
also potentially for social payments.
Incorporation of an organisation
A country in which an organisation is incorporated can affect how the
government of a host country will assess seconded employees for tax. For
example, employees of a Not-for-Profit or Non-Governmental Organisation
(NGO) seconded to certain countries around the world may not be deemed to
have a tax liability by the host. However, these arrangements should be
regularly reviewed as any government has the right to withdraw the
arrangement at any time.
An example of where the tax status of an employee and the country of
incorporation are a key factor in tax liability and status is for employees of a US
incorporated organisation who are seconded to other countries. Where they
have US citizenship and/or residency they will continue to have a liability to US
taxes whatever the liability in the host situation.
The structure of the organisation will help define where duty falls for making
decisions and actions that can influence legal responsibility. The more senior
the role held in the structure the greater the influence for cross border
implications are likely to be, and the lower in the structure the more practical will
be their involvement (for example direct creation of calculations and reporting
of activity).
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● The most senior level will have corporate responsibility and it will
depend on the country the level of criminal or civil duty this will
encompass
● Divisional level that is international will influence expansion and
labour movement – they are more likely to be involved with the
decision to subcond activites and transfer management control
● The lower the level the more interaction here is focused with
specific locations and the direct line management of local labour.
Of course in major reviews and strategic restructuring there will be some
overlapping of such responsibility. Part of the influence will be how the
countries regulations are built – for example some countries have specific
legislation tailored to focus on the senior management as being accountable
regardless of who in the organisation takes action. The ‘buck stops at the top’
has become specified in some legal cases. The nature of punishment for
breach however can vary – fines, custodial requirement or corporal punishment
will depend on country, nature of infringement and, in some localities, the extent
of public pressure in reaction to the situation.
ABC ltd
ABC international
ABC Finance ABC Germany
ABC American Inc
ABC America ABC Canada
ABC Australia PTY ltd
ABC Australia ABC New Zealand
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Payroll and HR legal duty
Managing a UK payroll and constantly ensuring compliance in an ever-changing
world of rules and regulations, presenting daily challenges for even the most
knowledgeable of managers. The process is made even more complex when
the legislation and processes are to cover an international capacity.
Every country has different legislation and regulations about the way employees
need to be treated.
Payroll focus for legal consideration is encompassed within three areas
● The legal treatment for the way the individual is treated in their
person (i.e. selection of employment, physical care requirements
whilst an employee, the way decisions and actions are taken
concerning the work that they are given), the way they are talked
to, disciplined or selected for dismissal.
● The legal treatment in regards of payment – the level of pay, the
way pay is calculated, the amount and types of deductions that
are required to be taken or may be taken from pay, and the
format and method of payment.
● The duty of treatment of information and knowledge about the
employee specifically data control or data release.
The rules concerning employment rights of the individual may cover not just the
responsibilities for employment conditions when a person is working for an
organisation, but may extend to the duties before and after, for example the
process of selection for hire or what must be done after a person has left.
It is never safe to assume the legal responsibilities for treatment of potential
present or past employees will be the same, not even where the involvement is
for countries that are within a perceived group such the European Union. Every
country will have different nuances as to what is meant by an employee,
employment rights and individual privacy regulations.
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Employment regulations
Different countries have a variety of expectations about the way staff are
selected and then treated for employment.
Depending on the country, will be the duty of confirmation on employment – the
need to provide written contracts and the nature of the content that these will
specify can vary substantially.
In addition care is needed to understand what will be inferred and become legal
right if conditions are specified in the description of the role. For example, in
some countries there can be specific payment implications through describing a
person as hourly paid which will differ if the role is said to be annual – it can
lead to different rights for overtime payment, limitations on hours that they can
be expected to work and how to calculate compensated if dismissed.
In some countries there are restrictions about how an organisation can select
staff when reduction in labour is necessary – there can be statutory requirement
to select by service or the complete opposite where it is a requirement to not
use service as a means for assessment.
Care is needed to understand that in some situations the rules and regulations
are not just legal but have an integral cultural expectation. For example, in
some situations the suggestion of asking an employee to use a loan process
where they work with a float, which must be repaid on leaving, could be taken
an insult to their religious ethical standpoint. In some beliefs the offering of a
loan is entrapment to get the individual into financial risk. This would be seen
as unethical behaviour and therefore a potential breach of employment right in
that country.
Some countries have specific organisations responsible to support negotiations
and settlements where there is a dispute about employer/employee relations –
however in less sophisticated states the requirement is it use the common court
system to address cases of contractual dispute.
The challenge is identifying what are employment rights. Using technical
experts is of course highly recommended, particularly in those countries which
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are less well known, but it will come at a cost. Taking short cuts by guessing
can prove to be an expensive attempt at saving costs.
Employee contracts
Employment regulations include legal requirements for contracts. It normally
involves agreeing in writing employment conditions, but verbal agreement will
also be treated as legal liability.
Different countries make the contract more important than others. In some
countries, such as UK, the contract is the major definer of treatment of the
employee and mistakes in descriptive content can be a serious cost for the
employer.
It should also be recognised that in some countries, such as many of the
European community, verbal promises and repeated practise can have as much
legal commitment as the written contract.
This can be a cultural challenge to an organisation that is based in a country
where the contract is a minimal influence.
Statutory deductions
Key to careful assessment of international payment is to understand what the
nature of statutory deductions will involve. This will differ depending on the
regulations of the country concerned. Statutory deductions are sums of money
that employers are required by law to withhold from the employees pay.
The most common deduction will be income tax. The amount will depend on the
regulations under the national or regional laws.
Many countries also have a further requirement for charges of social security or
some form of health insurance. This liability may involve a form of taxation on
the employee but might also be one affecting the employer. In some countries
healthcare is funded by workers and employer, and described as a national
health service. In other states health is treated as a personal insurance issue
where it is necessary to pay into a scheme in order to qualify for treatment.
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Other social deductions can relate to national pension plans that are funded by
wage deductions or possibly unemployment insurance programs. It all depends
on the country as to whether these will be national, regional or in fact both
approaches to funding.
Besides deductions that are tied to government legislation and regulation,
statutory deductions can also include those raised by courts or other official
government bodies.
Tax planning for seconded employees
The involvement of the Payroll Manger at an early stage in tax planning can
help to establish good practice from the start, by assisting in the design of
policies and employment contracts.
Tax planning is not only about saving money. It is also about understanding the
tax obligations of both the employee and the organisation in a given situation.
These obligations can be different for employees who, on the surface, look as
though their circumstances are identical. It is important that the recruitment
process gathers all the relevant information in advance of a secondment.
Any single one of the following factors can affect the tax obligations of the
employer and employee. Additionally, a combination of two or more can also
have an impact.
● Tax status of an individual – citizenship, residency and domicile
● Country that the organisation is incorporated
● Secondment contract
● The tax legislation and regulations of the host and home
countries
There are other areas in a secondment terms and conditions that affect tax
planning, such as length of the assignment.
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Double taxation
When being resident in one country it is possible for an individual to get
earnings in one place whilst making a profit in another. This is particularly true
for seconded staff (for example shares dividend or rental income on their home
country property). This can lead to a requirement to pay tax in the country they
are resident in and in the country the gain was made – hence the description
double taxation.
As this seems inequitable, many countries have agreed a policy of relief
described as double taxation agreements. In some cases it means the tax
liability will be paid in the country of residence and to be exempt in the country
in which the gain came from.
In others it is the opposite: Tax is taken in the country where the gain was made
– which is described as withholding tax. The individual then receives a ‘foreign
tax credit – which is a compensating amount to reflect they have paid the tax
already. However to qualify the individual has to declare where the residency
exists i.e. they can only be a resident in one country. This can have associated
impact to other aspects of their rights.
It is necessary if the double taxation relief is to be achieved, the two taxation
authorities for the related countries will need to exchange declaration of that
person’s situation. They will check to ensure that this is not just tax avoidance
by laying claim to be exempt when the individual is still liable because of
remaining officially a resident of the country concerned.
The liability of double taxation on income.
With global business activity it is not unusual for individuals, resident within one
country to work in another country, so to earn income in a locality other than
their home. They can find themselves liable to pay tax on the gain not just in
their country of residence but to also have a need to pay again in the country in
which the earnings were made.
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This double charge seems unfair and to help deal with this many nations have
agreed to form double taxation agreements with each other. Such treaties
cover income tax, inheritance tax, or taxation on goods such as value added
tax. This can be commonly seen with Switzerland and the bordering countries
of Germany, France, Italy, Austria and Liechtenstein.
The stated goal for entering into a treaty usually would be to reduce risk of
double taxation and to eliminate tax evasion, but often it also includes the
intention to encourage cross-border trade efficiency. A common view is that tax
treaties will improve certainty for taxpayers, businesses and tax authorities on
what is going to occur in their international dealings, that is once the process
has been understood.
The core content of treaties will normally include:
● A definition of taxes that are to be covered, the nature or
residency and impact on eligibility for benefits
● A definition of circumstances in which income of individuals
resident in one country will be taxed in the other country,
including salary, self-employment, pension, and other income
● Provide exemption for certain types of organizations or individuals
● Provide the procedure framework for framework on rules and
dispute resolution.
Many countries use Organisation for Economic Co-operation and Development
(OECD)’s model treaty as a starting point for designing their treaties OECD
(2002).
There are believed to be more than 3,000 double taxation treaties world-wide,
and the UK authority indicate that they have the largest network covering
around 120 countries.
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The purpose of double taxation treaties
Agreements between two countries are called bilateral treaties, whereas groups
of countries making a number of cross agreements are called multilateral
treaties.
Double taxation agreements usually operate in one of three ways:
● Pay tax in the country of residence and get an exemption or relief
from tax in the country where the income has been made or
gained.
● Pay tax in the country where the income or gain has been made
and get an exemption or relief from tax in the country where
resident.
● Tax is deducted in the country where income or gain has been
made and this is then declared as tax already paid on the tax
return made within the country or residence.
Where an agreement exists the definitions and agreement work the same way
for the residents of both the countries involved. However, there can be specific
rules about how things are processed depending on the agreement made or
even the nature of income that is being considered. An example mentioned by
HMRC is that of Spain where the relevant agreement guides the treatment of
nature of reliefs a person from the UK going to work in Spain can claim. That
the same rules exist for someone in Spain coming to work in the UK.
If a person is identified as a resident in the UK then it may be possible to gain a
credit for the tax that has been paid in the other country. This is called 'unilateral
relief’. This will depend on the nature of the agreement made between the two
countries. Each situation needs careful examination.
So in some cases, the tax is agreed to be paid in the country of residence and
be exempt in the country in which it arises. In other cases, it is the country
where the gain arises where taxation is taken and it is this which is normally
called withholding tax. The taxpayer then receives a compensating foreign tax
Module7 Unit 3 Legislation and payroll Page 27
credit (FTC) in their country of residence to reflect the fact that tax has already
been paid. In order to apply a foreign tax credit, the taxpayer must make a
declaration that they are a non-resident in the foreign country.
In order to control this the two taxation authorities involved need to be able to
exchange information about any declarations, and to be able to investigate
anomalies which could in fact raise a concern about indicate tax evasion.
The European Union member states have agreed a multilateral agreement,
which is focused on information exchange. This means that each country will
report to the others information about individuals claiming exemption from their
local taxation through claiming not being a resident of the state where the
income has arisen. The intention is there should be clarity over what is
occurring, as these individuals should be declaring the foreign income in the
country where they are resident. If they do not then this would be tax evasion –
trying not to pay tax at all on earnings they have achieve.
The agreement does allow for a transition period. Depending on the particular
state, some offer a part year, first year or early year’s alternative arrangement,
when the non-resident individual can choose the tax method.
They may either chose to pay in their home country of normal residency using a
declaration of non-residency at the host location, or they might take deductions
of local tax as a resident.
The treaties usually focus on the insuring only single taxation occurs for the
same income. There are differences between the agreements as the
relationship and nature is influenced by the specific expectations of taxation
rules within the countries involved. Of course, this means agreements are liable
to change as each country involved can alter their local expectations.
Under most double taxation agreements, if the person is an overseas student or
apprentice visiting the country solely for full-time education or training they will
not pay tax on income payments from sources outside of the resident country
that is provided for maintenance, education or training.
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In some circumstances, the tax authorities may require payrolls to be run in
both countries to ensure detailed recording of the individuals’ relevant income
and foreign tax credits being applied specifically to that income.
Some double taxation agreements will also provide that students or apprentices
coming into a country for limited periods will be exempt from the local tax on
certain earnings from employment there. It will need to review each individual
agreement for details.
Double taxation agreements will normally allow tax relief on some income by
the following costs:
● Pensions and some annuities (except government provision of
pension)
● Earnings from employment or professional services - but not if an
entertainer or sportsperson
● Royalties
● Interest
● Income distributed by real estate investment trusts (UK-REITs)
and property authorised investment funds (PAIFs)
● Dividends
UK Double Taxation Treaties
To help avoid being taxed twice, 'double taxation' the UK, recognises the
benefits for having double taxation treaties, has negotiated double taxation
agreements with many countries.
The government suggests they find benefit in such agreements in order to:
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● Protect against the risk of double taxation where the same
income is taxable in two places
● Provide certainty of treatment for any cross-border trade and
investment
● Prevent excessive foreign taxation and any possible forms of
discrimination against UK business interests abroad
UK specifically state that their DTA’s are also drawn up in order to help protect
the governments taxation rights and to help protect against attempts to avoid
tax. They also recognise it is essential to have reciprocal agreements about the
exchange of information between the differing taxation authorities of other
countries in order to help fight evasion of genuine tax liability.
Advise on treaty options
The HMRC offer a report, ‘Digest of Double Taxation Treaties’ which helps
identify the key working relationships with other countries. However, it will
depend on which localities that are involved as to whether it will be simple to
identify if one exists. HMRC (August 2013).
The company has a duty to help identify what the taxation requirements will be
for any staff they employ. The only full advice that can be offered is to take care
to investigate the specific rules for the countries involved. It means finding out if
there is a treaty between the place the employee comes from and the place that
they are working in.
Tax status of an individual
● Citizen
● Resident
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● Ordinary Resident
● Non- resident
● Domicile
This is a very technical area and it can be that an individual’s residency status,
determined at the start of an assignment, can change during the period of the
secondment. If this should occur it may be necessary to confirm with the
statutory body of that country the implication on tax liability. It is also important
to ensure that employees understand they have an obligation to inform their
employer of any change in their tax status, this can be done by including the
information within the terms and conditions or in other policy documents that the
employee should refer to for their assignment.
The terms and conditions of a secondment will be expected to outline whose
responsibility the tax liabilities will be. There are different terms for the various
distributions of tax obligations.
Within the UK the HMRC websites and accountancy firms are useful starting
point for investigation.
Of course, the difference in taxation treatment country to country will make
some places more attractive than others as far as remuneration is concerned.
Because of this, employers sometimes elect to offer a form of tax
reimbursement when they send employees overseas. This is done to ensure
the employee has a settled net payment and can help protect them from the
impact of different taxation liability from various countries.
Such arrangements usually offered as either tax projection or tax equalization.
The main reasons for doing this is to:
● Ensure employees do not have to pay more tax than they would
when employed in their home country
● Encourages global mobility for employees with the skills the
employer needs
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● To attempt standard remuneration (compensation) amongst staff
in the organisation
● To encourage compliance to the relevant country’s tax and social
rules
Tax protection or equalization
Leung suggests that whatever type of support is offered concerning tax
protection or equalization the employer will have to perform multiple calculations
of tax liability. Leung (2009).
These fall into three areas:
● Hypothetical tax is used for the home country – so that the tax is
calculated as if employment was performed at home.
● Actual home country tax liability so that tax is calculated strictly
according to the rules – so only the real liability identified
● Host country tax liability – the tax due on the income paid within
that country under the assignments country tax law.
Tax equalization means the employee is responsible for the first liability – that of
paying the tax that they would have been due to pay as if working at home -
and the employer covers payment for the other two liabilities. In this situation
the employee will not be worse or better off as a result of working overseas.
Tax protection allows the employee to pay either the hypothetical tax or the
actual tax and host tax – whichever is the lowest.
Under this the employee will not suffer financially, as the employer will protect
them from paying more tax than if they were working in the home country, but if
the tax liability is lower in the host country the employee can benefit by paying
less tax. It also means under tax protection the employee has some protection
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from increased taxes that may occur during the full length of the assignment in
both the host and home countries.
Looking at these differences it might seem that employers would elect to always
suggest tax protection but that is not the case. Part of the preference for tax
equalization is that the employee has the same equitable value on net pay for
home or overseas work. By having equal treatment it makes the employee
more likely to accept global assignments – increased net pay does not become
a dominant influential factor in the decision making for the employee.
Localities, which may have caused a lowering of net income, would not be a
concern. This will be important where the organisation is involved in multiple
locations and wants to motivate individuals to work where there is less attractive
taxation on pay.
Clearly such compensation can be expensive as it involves the employer
settling some or all of the pecuniary liability for a personal tax liability for an
employee and this may attract a tax charge. Each case would need to be
checked on the basis of amount, timing and which country it has occurred in.
Tax equalization is the offsetting of any difference, which occurs because of
double taxation issues. The principles behind a "tax equalization policy" is that
the employee will not suffer either a financial hardship or experience a financial
benefit as a result of tax consequences when undertaking an international
assignment.
The idea is that the employee should have to pay no more or no less tax than
they would have paid had they never left their home country. The company
could pay all related worldwide effective taxes for the assignee or enough to
ensure they personally pay the same as they would in their home country.
Such a policy will put the assignee in a tax neutral position during the
assignment. This means mobility is promoted because several assignment
locations are producing no tax benefits or detriment to the employees’
assignment. Compliance with both home and international location tax laws is a
must. Under this policy, the company (using the tax withheld from the
employee) will be paying all worldwide actual taxes and the employee only
paying an amount equivalent to their usual home country taxes.
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The intention is that by the employer, by taking steps to compensate or adjust
any difference in pay that has been caused by different or double taxation, will
make the impact tax neutral to the employee. After all, if they are going to
suffer extra taxation than they would have experienced when working in their
home country it may become demotivating to work overseas.
Tax equalization is also known as hypo-tax, deriving from the worked
"hypothetical". This is because the employer could adjust the individuals pay in
order that the impact leaves them getting as much net earnings as they would
have if still resident and working in their home country.
The use of tax equalization is very often used in a multinational company as it
helps promote international movement within a company by employees. Without
it, there may be some localities where employees would not want to go to work.
It is important to understand that tax equalization can work both ways. The
employer will benefit if the tax rates are lower in the host country to the tax rates
usually experienced in the home country on which the hypothetical tax
deduction from the employee will be based.
If the tax impact is higher or lower when working abroad then a full tax
equalization program will make the pay equal in both situations and all
employees being treated the same irrespective of the host country they are
working in.
If the policy only benefits the employee by reducing the impact of higher taxes,
it should be called a tax protection system.
Where an organization does not offer a policy to adjust pay for individuals on
international assignments, where there are higher tax implications the employee
could find their salary depleted and so effectively their purchasing power could
be reduced in comparison to if they were still in their home country.
In order to implement the tax equalization policy, the company will have to
withhold a hypothetical tax amount from the assignee when the international
assignment starts.
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Understanding forms of assessment of residency
Key to determining a tax liability is the nature of residency that the individual
has. It is possible in some countries to be classified as a resident because of
being present in the country a minimum period of time or it could be the
ownership of property or the presence of specific family links. It really does
matter as to the specific countries regulations and each case of placement to
work in a different country than existing residence will need careful review.
As of 6 th
April 2013, the UK set new rules for determining if someone is resident
in the UK for tax purposes. These rules are known as the Statutory Residence
Test (SRT). For the majority of people, whether or not they are resident for tax
purposes, is quite straightforward under the test and their position will not
change. For those with complex circumstances the SRT will provide more
certainty about their residence status.
HMRC have tried to help individuals and organisations understand and assess
the assessment of residency by providing an online tax residency indicator tool.
It is a matter of answering questions in an honest manner to achieve an
assessment, testing such things as how many days have been spent in the UK,
where the home is believed to be based and the existence of family ties.
Booklet RDR1 offers a formal guide for UK information. Gov.uk (no date).
If there is no double taxation agreement between the country of residence and
the country where there has been income or capital gains achieved, then the
income or capital gains may be taxed fully in both countries.
Social Security liability
Generally, the term social security is used to describe a program for use of
public funds that provide benefits for older residents, individuals with disabilities,
widow or dependents support and supplementary income for individuals in
hardship.
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Different counties handle the issue of social security in different ways. The
provision of benefits and support vary, ranging from sophisticated
infrastructures to no provision at all. The type of benefits that can fall in this
area range from pensions, income support for unemployed or payment to
individuals unable to work.
An example is that in the UK it is recognised as national insurance payments, in
the US it is referred to as trust fund taxes.
It must be stressed not all countries work under the same guise as the UK in the
matter of social security/National Insurance. There are differing levels of social
security support required and care is needed to ensure the employer satisfies
the local expectation.
In some countries this involves the employee and the employer making a
contribution as a separate tax deduction from pay. In other cases the funding is
allocated from core taxation.
USA Social Security Agency (SSA) provides a full descriptive listing of the
different provisions for over 170 countries. Many of them involve a % deduction
as an insurance contribution.
Just like tax, some countries have established agreements concerning social
security liability when the individual is employed in one country but retaining
residency with a home country.
There are a number of different circumstances and processes to be considered
when looking into Social Security of a seconded person. There are three key
processes that could be applied:
● Certificates of coverage: An example would be one issued by the
US authorities. These certificates allow the resident of a country
like US Citizens/Nationals to be maintained in their home country
social security schemes
● Certificate of continuing liability: An example would be those
issued by the UK. Here the certificates allow certain international
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employees to be maintained in their home country social security
schemes
● A1 or pre May 2010 E101: Specifically related to Europe. These
are issued between member states of the EU/EEA allowing a
European citizen/national to be maintained in their home country
Social Security scheme while seconded to work in another
EU/EAA country.
The UK also has a fourth option known as the ’52 week rule’. For an employee
who works in a country that is not covered by the certificate of continuing liability
or A1, it maintains them in their home country social security scheme for a
period of 52 weeks from the start of their secondment to another country.
As in other countries, the UK has a number of reciprocal agreements (RA), as
well as double contribution conventions (DCCs) in order to ensure individuals
can make reasonable contributions either in their place of residents or place of
earning.
These agreements differ depending on the countries involved.
Commonly it is expected that the individual will pay any social security value in
the country where they are working. Certainly this is what is expected as far as
residents of UK working overseas UNLESS there is a RA or DCC.
In that situation the employer and employee remain liable for Class 1 NIC where
the employee:
● Is employed in the UK; and
● Posted to work in another RA or DCC country; and
● The posting is for a period not exceeding the maximum posting
period, which allowed for under the terms of the RA or DCC.
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If a RA or DCC exists the employer needs to obtain a certificate of continuing
liability from HMRC Residency (Newcastle) in order to prevent a demand for
payment of contributions from the employee in the other country.
The amount of time the posting period will cover does vary country to country as
indicated in the table below:
Country Posting
Period Notes
Barbados 3 years -
Bermuda 12 months -
Canada 5 years -
Guernsey 3 years -
Isle of Man -
This agreement is limited and liability is
generally determined under place of
residence. There are no time limits
Israel 2 years -
Jamaica 3 years -
Japan 5 years -
Jersey 3 years -
Korea 5 years -
Mauritius 2 years -
Philippines 3 years -
Turkey 3 years -
USA 5 years -
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Yugoslavia 12 months Including former Republics - EC Rules
apply to Slovenia from 1 May 2004
When working in a country with which the UK has a reciprocal agreement or a
double contribution convention the individual is usually insured under the social
security laws of the country that they are working in, and will mean that they do
not usually have to pay UK National Insurance contributions. However, they
may wish to maintain some payment to ensure link to the specific area of UK
pension.
The same situation can occur when coming from a different country. They may
elect to make a contribution in their own country for specific conditions.
In the situation of the UK, this can lead to the individual deciding to pay the
voluntary sum of national insurance – which is a standard rate per week that
can actually be paid in lump sums per quarter, half year of full year.
Members of European commission have an agreement, which is a co-ordination
pact, which does not replace the national system of the specific countries but
provides some common rules to protect the individual’s rights when moving
around Europe to work. There is a useful guide available on the following web
site. European Commission (no date):
http://ec.europa.eu/social/main.jsp?catId=858&langId=en
By selecting the appropriate flag for that country it is possible to identify the
rights and options of what is available under that countries regulations. This
includes indicating any specific forms or cards that need to be held in order to
qualify for receiving care or treatment in those locations.
The following provides a list of links for finding more information on the
indicated countries social security systems using Wikipedia.
● Australia: Social security in Australia
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● Canada: Social programs in Canada
● Finland: Welfare in Finland
● France: Social security in France
● Germany: Welfare in Germany
● Greece: Social Insurance Institute
● Indonesia: National Social Security System (Sistem Jaminan
Sosial Nasional)
● Iran: Social Security Organization
● Mexico: Mexican Social Security Institute
● Netherlands: Social security in the Netherlands
● New Zealand: Welfare in New Zealand
● Philippines: Social Security System (Philippines)
● Singapore: Central Provident Fund
● South Africa: South African Social Security Agency
● Spain: Social security in Spain
● Sub-Saharan Africa: Social programs in sub-Saharan Africa
● Sweden: Social security in Sweden
● Switzerland: Social security in Switzerland
● Turkey: Social security in Turkey
● United Kingdom: National Insurance
● United States: Social Security (United States)
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Employee consultation - Work councils
Another requirement in some countries is the need for organisations to work
with work councils. These are bodies that allow employees to interact with their
employer via a third party as an opportunity to discuss new ideas and explain
the focus and objectives of the organisation. Not all work councils have legal
backing. However, Germany places a lot of legal emphasis on the work council
duties.
They should not be looked at negatively – work councils can be a source of
knowledge as employees have skills and expertise.
TUPE and legislation interpretation
An organisation may be familiar with transfer of undertaking regulations in their
own country but these vary considerably country to country. The challenge is to
identify when the acquisition or divestment has occurred, particularly when
located in another country. These localities may have their own requirements.
In some countries the purchase or disposal of a business has no particular legal
issue for the employees who work within those entities. The action of
movement means simple they do not work for the original employer, if they are
to be employed with the new owner it is a matter of being hired as a new starter
– a standard hire and fire situation.
However, particularly in the more developed countries there are usually some
level of legal control about how staff must be treated - although these
regulations will vary in extent and impact.
European Union legislation was the legal driver for most of the UK regulations
under TUPE, and it is likely that other member states will have some legal
requirements in this area. Certainly the UK regulations can extend to provision
of care for staff that are working overseas where the organisation has
recognition within UK and where the majority of its employee activity is
performed inside UK. If employees are normally overseas they still could get
some protection.
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Money laundering
The growth in concern about the ability for individuals and businesses
conducting criminal activity being able to hide the money has led to many
countries working in agreement to try and prevent the transfer of criminal
resources into legitimate economic environments. This is partly covered by
legislation within the country and also by support of international standards of
protocol.
As payroll is so involved in cash movement it is obviously going to be an area
that can find itself involved in anti-money laundering activity. A global
organisation will naturally find itself subject to some security and risk
assessment to show it is taking care to be effective in financial control.
Some countries have rigorous regulations about money movement, including
control of banking and money transfer internationally, and this can have a
serious impact on how organisations are able to ensure payroll processing.
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Research into the issue of financial restraint and how global overlap through
electronic payment is raising concern. Identify what is meant by Financial
Action Task force.
A concern is growing that international cross border payments, with increased
electronic mobility, is making it harder to fully meet global standards to avoid
money laundering. There are several banks now struggling to meet practical
solutions for monitoring validity of finance transfer.
The Financial Action Task Force on money laundering (FATF) was established
by the G-7 Summit in Paris in 1989. It was developed to coordinated
international response in reaction to concern over money laundering. One of its
first tasks of the FATF was to develop Recommendations set to offer measures
that national governments should take in order to create effective anti-money
laundering programs. There are now 40 acts of recommendations available for
consideration. (FATF no date).
It is recognised that, whilst activity is needed for each specific country, there is
also an issue of an international problem. It was therefore quickly established
that a state of international co-operation would be critical.
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As early as the 1980’s some International organisations, such as the United
Nations or the Bank for International Settlements, started taking steps to try and
build cooperative behavior between agreeing countries.
Regional groupings such as the European Union, Council of Europe and the
Organisation of American State began establishing anti-money laundering
standards for their member countries. This has now extended into regional
areas such as the Caribbean, Asia, areas in Europe and Southern Africa
creating task force-like organisations to combat money laundering. Other
countries are now considering getting involved.
Tax auditors now are expected to consider the challenges of proving awareness
of anti-money laundering practice. Banks are required to set up special
qualification procedures to attempt to ensure only valid accounts are created for
legitimate business entities and this can mean in some countries it is necessary
to have sponsorship before an overseas company will be allowed to open an
account. It is normally easier to arrange banking facilities using a large cross
border entity where trading is known at the head office but it depends on the
country and the bank as to the specific evidence that will be needed.
Foreign Exchange
One of the issues for payroll is the processing of payment in different countries
where the transactions cross borders and different currency. The mechanism
for changing money between one currency and another is referred to as foreign
exchange.
There are issues in that in some situations the country controls the amount of
exchange value an organisation can transfer into a country. It can also be a
cost in that each time money is ‘bought’ or ‘exchanged’ there is likely to be a
value charged for providing the service.
Governments may elect to have a fixed exchange rate where they set the value
between one currency and another for a set period. Alternatively they can use
a floating exchange rate where literarily the value is assessed on a daily basis
as determined by day-to-day trading in foreign exchange markets. Since the
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collapse of the Bretton Woods fixed exchange rate system countries are
maintaining their own exchange rate policy and so there is much more flexibility
in movement.
Some countries elect to adopt a pegged exchange rate, which means they work
their money value based in close relation to another. Since 1979 those
countries in the European Community created an exchange rate mechanism
(ERM) but the European Monetary Union (EMU) superseded this in 1999.
This is a fixed exchange system that uses a common currency called the Euro.
Countries who registered to join this have a controlled exchange rate within a
target zone. Members of the European Community do not have to adopt the
EMU but still find their currency greatly influenced by its behaviour.
Another issue is that the value of one currency compared to another can
fluctuate on a daily basis. It can cause an issue when setting a payment
agreement with an employee as to what they are to be receiving. An example
of this would be where an employee working for an US company is employed
and paid in the UK. If the employee was offered a contract advising the
payment value they are to be paid is a set amount of dollars per pay period but
the payment is made in sterling currency there is going to be a different value
awarded to them each pay period.
The US Company would be able to reconcile its payment in dollar terms inside
its accountancy system but the employee would be unsure what their pay would
be each period. Alternatively if the US Company had promised remuneration in
sterling when reconciling to their dollar finance system it would look like the
salary was different each pay period. Some organisations decide to use a set
exchange rate to handle this and put the actual difference into an exchange rate
account to absorb the floating difference from
It is sometimes beneficial for an employee to have their contract in another
currency, such as US$ or GB£ instead of the currency where they are working.
This may be where there is a lack of stability in the currency of the country they
are working. It may be that an employer considers placing employees on these
type of arrangements to help protect their income when financial stability is
uncertain.
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Official documentation
Besides the need for a Visa to allow the employee to work in a particular
country, the payroll department must also identify if there is a need for any other
official documentation: examples include immigration, tax and social security.
Not all countries will require forms to register an employee seconded to work in
their country, but it is necessary to check the country’s individual taxation and
immigration web sites to find out.
How information should be submitted to the authorities needs to be checked:
Some countries may not accept the information in written format but might be
required as an electronic report. This varies according to the country and its
level of computer sophistication.
Some examples of where there is a need are detailed below:
Immigration – The documentation varies but an example is the requirement in
the US: there is a legal obligation for an employer in the US to have a copy of
the form I9 on file within three days of an employee starting work for them. This
form confirms an employee has the right to work in the US.
Tax – A requirement in the UK and the US. Notification for an employee starting
on the payroll; in the UK the registration is electronic reporting using the payroll
but in the US a form submission is the W4. The data gathered from the form
helps assess how much tax should be withheld from the employee’s earnings.
When someone comes into the UK to work for the first time on an assignment
they are required to complete the form P46 (EXPAT). The equivalent in the US
are forms 673 and 8833. These forms give the various tax authorities data that
helps determine the area of legislation their earnings would be taxed under, i.e.
Detached Duty, Foreign Earnings Exclusion, etc.
Social Security – affecting many countries around the world. This is an area
where there is greater consistency in the approach of the various countries tax
authorities, but there remain differences depending on the home and host
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country regulations. There are a number of different circumstances and
processes to be applied to Social Security of a seconded individual.
There are three key processes that could be applied:
● Certificates of coverage: example issued by the US authorities,
these certificates allow US Citizens/Nationals to be maintained in
their home country social security schemes
● Certificate of continuing liability: example issued by the UK, these
certificates allow certain international employees to be maintained
in their home country social security schemes
● A1 or pre May 2010 E101: example issued between countries in
the EU/EEA, this certificate allow a European citizen/national to
be maintained in their home country Social Security scheme while
seconded to work in another EU/EAA country.
It should also be remembered that the UK have the fourth option known as the
’52 week rule’. This is where an employee works in a country that is not covered
by the certificate of continuing liability or A1. It maintains them in their home
country social security scheme for a period of 52 weeks from the start of their
secondment to another country.
Pension – Approval of a pension scheme by a host country tax authority can
help reduce the tax liability for both the employee and employer. This facility is
available between many countries tax authorities.
Payment – it is common sense to have some sort of protocol for proving pay
over of collected funds. Electronic processes may have some security but in
some locations there is a requirement to use official ‘bank payment’ material
that will act both as to support the process of payment for official recognition but
also support the locate pay office to evidence and move funds in a documented
way.
Module7 Unit 3 Legislation and payroll Page 47
Control of data
The payroll and HR are understandably very concerned with data – the
collection, use and distribution of information. One concern for compliance is
on any issues related to the control of information. As with all other topics the
nature of legal treatment on information varies by locality.
The focus of concern can influence the nature of duty for information and the
global organisation has to make sure there is not preconception over their
responsibility
Review Module 4 section 2 and consider the complexities of controlling data.
Data
Right of access
Movement cross
borders
Focus on confidentiality
Module7 Unit 3 Legislation and payroll Page 48
On review it should be remembered that there is a clear difference between the
principles of data protection and freedom of access. The protection requires
careful control not only of how material is used but who it is discusses with. It
places a specific burden on ensuring ‘old’ data is adequately disposed of and
that the principle of privacy for personal information should be maintained.
Consider issue of control over movement of money – looking for breach in use
of money from criminal activity.
It should be apparent that individual countries have differing approaches to the
classification of pay and the way the moneys should be treated for taxation
purposes. Modules 2 and 4 have given indication of a number of different
bodies responsible for the control and communication of data required in these
areas.
It will be recognised that some countries do not actually have rigorous payment
regulations whilst in others the requirements are very complex and concern
employment law, payment minimum standards and data control, reporting and
both taxation and social security requirements.
This will be made more complicated where regional differences can make
requirement for calculation and control problematical. And of course the issue
of cross border and multi-state work placement will be a concern particularly
where the duties are conflicting or duplicating in requirement.
Module7 Unit 3 Legislation and payroll Page 49
Module7 Unit 3 Legislation and payroll Page 50
Summary of payroll practical issues
The legislative duty for creation and management of contract content will need
to be controlled by each location. The intention may be to treat staff the same
but there may be special areas of process that are specific to a country.
Processes may exist about both the nature of pay but the timing and minimal
earnings rate that must be met.
The payroll process has to have capability of flexibility in order to calculate,
report and make payment following legislation requirements. This means
selected software either has to be sufficiently flexible to cater for the specific
requirements of the location or it may be more suitable to use outsource or
country specific systems.
The payroll duty includes understanding the nature of payment requirement.
In some locations there is a legal right to expect payment to be processed in a
specific way or treatment of right of condition for pay reward or receipt of benefit
such as holiday payment.
There is also clearly the need to make the appropriate types of deduction from
pay. There can be a statutory duty to take taxation, social security allowance,
pension or health insurance, attachment of earnings (garnishments) and in all
those situations the responsibility will include reporting and payment over of
funds collected to the relevant statutory body.
The payroll process must encompass the ability to make payment on the
designated agreed day but there may be specific legal rights for treatment
concerning whether this should be made available as a cash payment rather
than having the employer choice of process. In addition the need to provide a
personalised payment statement (payslip or pay advice) will vary according to
location. Legislation may regulate the format this must be offered as – paper or
electronic.
Report production and presentation will be another consideration as some
countries require the employer to contact statutory bodies electronically, others
do not have that capability and material must be submitted as hard copy.
Module7 Unit 3 Legislation and payroll Page 51
The information may need to be processed at pay date, or there can be
different requirements, such as quarterly returns or annual statements.
In some situations there will be no statutory reporting required by the employer
as it is the employees’ personal duty to lease and complete tax statements.
The nature of reporting can relate to purely payments or to include expenses
and benefits provided.
When all that aspect has been completed there will then be a need to consider
control of information held about employee. The definition of what this data will
cover will be specific to the relevant country. The nature of information may
mean there is a requirement to ensure personal information is securely stored
and released to only authorised personal or in the opposing focus that
information being held must be made available under specific terms for public
investigation.
In most countries there is a requirement for an organisation to be able to show
financial reports in order to show both prudent and careful reconciliation of
financial activity and to establish profit levels in order to meet statutory
commitment on profit related tax. Payroll normally has an important role in this
area to support the organisation to meet this obligation.
As such part of the supporting work will be to help internal investigation on the
level of capability of the department – how much its behaviour could expose the
organisation to risk of breach of statutory and legal obligation.
The challenge is to approach all these aspects of duty in a flexible manner to
meet the legal duty for each locality. This will therefore influence the system
chosen to support the payment process.
For an international or global organisation the impact will depend on which
countries and how many are involved – the larger the number the greater the
complexity. It should be noted that size involvement may have an impact but
many of the requirement exist whether there is one or one thousand
employees.
Module7 Unit 3 Legislation and payroll Page 52
Gov.uk - Statutory Instruments for tax treaties
Published 4 September 2013
Country Year Statutory Instrument number
Antigua and Barbuda 1947
1968
2865
1096 (Protocol)
Argentina 1997 1777
Armenia 2011 2722
Australia 1968
1980
2003
305
707 (Protocol)
3199
Austria 1970
1979
1994
2010
1947
117 (Protocol)
768 (Protocol)
2688 (Protocol)
Azerbaijan 1995 762
Bangladesh 1980 708
Barbados 1970
1973
952
2096
Belarus 1986 224 (1995 No. 2706)
Note: the UK’s 1986 agreement with the
Soviet Union is currently to be regarded as
Statutory Instrument numbers between the
UK and Belarus. The position with regard
to former Soviet republics not listed is less
Module7 Unit 3 Legislation and payroll Page 53
clear, but the UK will in all cases apply the
provisions of the agreement on the basis
that it is still Statutory Instrument numbers
(until such time as new agreements take
effect with particular countries). The 1995
agreement with Belarus has not yet
entered into force.
Belgium 1987
2010
2053
2979
Belize 1947
1968
1973
2866
573 (Protocol)
2097 (Protocol)
Bolivia 1995 2707
Bosnia-Herzegovina 1981 1815
Note: the provisions of the 1981 agreement
with the former Socialist Federal Republic
of Yugoslavia will be treated as remaining
Statutory Instrument numbers.
Botswana 1978
2006
183
1925
Brazil 2011 2723 (aircraft crew)
Brunei 1950
1968
1973
1977
306 (Protocol)
2098 (Protocol)
Bulgaria 1987 2054
Module7 Unit 3 Legislation and payroll Page 54
Canada 1980
1980
1980
1985
2003
709
1528 (Protocol)
1996 (Protocol)
1996 (Protocol)
2619 (Protocol)
Cayman Islands 2010 2973
Chile 2003 3200
China 1984
1996
2011
1826
3164 (Protocol)
2724
Croatia 1981 1815
Note: the provisions of the 1981 agreement
with the former Socialist Federal Republic
of Yugoslavia will be treated as remaining
Statutory Instrument numbers.
Cyprus 1975
1980
425
1529 (Protocol)
Czech Republic 1991 2876
Note: the provisions of the 1991 agreement
with Czecho-Slovakia will be treated as
remaining Statutory Instrument numbers.
Denmark 1980
1991
1996
1960
2877 (Protocol)
3165 (Protocol)
Module7 Unit 3 Legislation and payroll Page 55
Egypt 1980 1091
Estonia 1994 3207
Ethiopia 2011 2725
Falkland Islands 1997 2985
Faroes 2007 3469
Fiji 1976 1342
Finland 1970
1973
1980
1985
1991
1996
153
1327 (Protocol)
710 (Protocol)
1997 (Protocol)
2878 (Protocol)
3166 (Protocol)
France 2009 226
Gambia 1980 1963
Georgia 2004
2010
3325
2972
Germany 1967
1971
2010
25
874 (Protocol)
2975
Ghana 1993 1800
Greece 1954 142
Grenada 1949 361
Module7 Unit 3 Legislation and payroll Page 56
1968 1867 (Protocol)
Guernsey 1952
1994
2009
1215
3209 (Protocol)
3011
Guyana 1992 3207
Hungary 1978
2011
1056
2726
Hong Kong 2010 2974
Iceland 1991 2879
India 1993 1801
Indonesia 1994 769
Ireland (Republic of) 1976
1976
1995
1998
2151
2152 (Protocol)
764 (Protocol)
3151 (Protocol)
Isle of Man 1955
1991
1994
2009
1205
2880 (Protocol)
3208 (Protocol)
228
Israel 1963
1971
616
391 (Protocol)
Italy 1990 2590
Module7 Unit 3 Legislation and payroll Page 57
Ivory Coast (Côte
d’Ivoire)
1987 169
Jamaica 1973 1329
Japan 1970
1980
2006
1948
1530 (Protocol)
1924
Jersey 1952
1994
2009
1216
3210 (Protocol)
3012
Jordan 2001 3924
Kazakhstan 1994
1998
3211
2567 (Protocol)
Kenya 1977 1299
Kiribati 1950
1968
1974
750
309
1271
Korea (Republic of) 1996 3168
Kuwait 1999 2036
Latvia 1996 3167
Lesotho 1997 2986
Libya 2010 243
Lithuania 2001 3925
Module7 Unit 3 Legislation and payroll Page 58
2002 2847 (Protocol)
Luxembourg 1968
1980
1984
2010
1100
567 (Protocol)
364 (Protocol)
237 (Protocol)
Macedonia 1981
2007
1815
2127
Malawi 1956
1964
1968
1979
619
1401 (Protocol)
1101 (Protocol)
302 (Protocol)
Malaysia 1997
2010
2987
2971
Malta 1995 763
Mauritius 1981
1987
2003
2011
1121
467
2620
2442
Mexico 1994
2010
3212
2686 (Protocol)
Moldova 2008 1795
Mongolia 1996 2598
Module7 Unit 3 Legislation and payroll Page 59
Montenegro 1981 1815
Note: the provisions of the 1981 agreement
with the former Socialist Federal Republic
of Yugoslavia will be treated as remaining
Statutory Instrument numbers.
Montserrat 1947
1968
2011
2869
576 (Protocol)
1083
Morocco 1991 2881
Myanmar (Burma) 1952 751
Namibia 1962
1962
1967
1967
2352
2788 (Protocol)
1489 (Protocol)
1490 (Protocol)
Netherlands 1980
1983
1990
2009
1961
1902 (Protocol)
2152 (Protocol)
227
New Zealand 1984
2004
2008
365
1274 (Protocol)
1793
Nigeria 1987 2057
Norway 1985 1998
Module7 Unit 3 Legislation and payroll Page 60
2000 3247
Oman 1998
2010
2568
2687 (Protocol)
Pakistan 1987 2058
Papua New Guinea 1991 2882
Philippines 1978 184
Poland 1978
2006
282
3323
Portugal 1969 599
Qatar 2010
2011
241
1684
Romania 1977 57
Russian Federation 1994 3213
St Kitts and Nevis 1947 2872
Saudi Arabia 2008 1770
Serbia 1981 1815
Note: the provisions of the 1981 agreement
with the former Socialist Federal Republic
of Yugoslavia will be treated as remaining
Statutory Instrument numbers.
Sierra Leone 1947
1968
2873
1104 (Protocol)
Singapore 1997 2988
Module7 Unit 3 Legislation and payroll Page 61
2010 2685 (Protocol)
Slovak Republic
(Slovakia)
1991 2876
Slovenia 1981
2008
1815
1796
Solomon Islands 1950
1968
748
574 (Protocol)
South Africa 1969
2002
2011
864
3138
2441
Spain 1976
1995
1919
765 (Protocol)
Sri Lanka 1980 713
Sudan 1977 1719
Swaziland 1969 380
Sweden 1984 366
Switzerland 1978
1982
1994
2007
2010
1408
714 (Protocol)
3215 (Protocol)
3465
2689 (Protocol)
Taiwan 2002 3137
Module7 Unit 3 Legislation and payroll Page 62
Tajikistan 1986 224
Note: the UK’s 1986 agreement with the
Soviet Union is currently to be regarded as
Statutory Instrument numbers.
Thailand 1981 1546
Trinidad and Tobago 1983 1903
Tunisia 1984 133
Turkey 1988 932
Turkmenistan 1986 224
Note: the UK’s 1986 agreement with the
Soviet Union is currently to be regarded as
Statutory Instrument numbers.
Tuvalu 1950
1968
1974
750
309 (Protocol)
1271 (Protocol)
Uganda 1993 1802
Ukraine 1993 1803
USA 1980
2002
568
2848
Uzbekistan 1994 770
Venezuela 1996 2599
Vietnam 1994 3216
Yugoslavia (Federal 1981 1815
Module7 Unit 3 Legislation and payroll Page 63
Republic) Note: the UK’s agreement with Yugoslavia
is currently to be regarded as Statutory
Instrument numbers between the UK and
former Yugoslav states listed. The position
with regard to the remainder of what was
Yugoslavia is undetermined.
Zambia 1972
1981
1721
1816 (Protocol)
Zimbabwe 1982 1842
Guidance
Social Security Agreements with contribution p
Module7 Unit 3 Legislation and payroll Page 64
Appendix: Statutory Instrument numbers
Published 4 September 2013
•
Country Year Statutory
Instrument number
Australia (terminated 28 February
2001)
1992 1312
Austria 1981
1987
1992
605
1830 (Protocol)
3209 (Protocol)
Barbados 1992 812
Belgium 1951
1958
1801
771 (Protocol)
Bermuda 1969 1686
Canada
Canada (Double Contributions
Convention)
1995
1998
2699
263
Cyprus 1983
1994
1698
1646 (Protocol)
Denmark 1960 211
Finland 1984 125
Module7 Unit 3 Legislation and payroll Page 65
1992 3210 (Protocol)
France 1951
1958
972
597 (Protocol)
Germany 1961
1961
1202
1513 (Protocol)
Gibraltar 1974 555
Iceland 1985
1992
1202
3211 (Protocol)
Irish Republic 1960
1966
1968
1971
707
270 (Protocol)
1655 (Protocol)
1742 (Protocol)
Isle of Man 1977
1977
1989
1989
593
2150 (Protocol)
483 (Protocol)
2001 (Protocol)
Israel 1957
1984
1879
354 (Protocol)
Italy 1953 884
Jamaica 1997 871
Japan 2000 3603
Jersey/Guernsey 1994 2802
Module7 Unit 3 Legislation and payroll Page 66
Korea 2000 1823
Luxembourg 1955 420
Malta 1956
1958
1996
1897
772 (Protocol)
1927 (Protocol)
Mauritius 1981 1542
Netherlands 1951
1955
972
874 (Protocol)
New Zealand 1964
1983
495
1894 (Protocol)
Northern Ireland 1976
1977
1977
1003
7 (Protocol)
645 (Protocol)
Norway 1991
1992
767
3212 (Protocol)
Philippines 1989 2002
Portugal 1979
1987
921
1831 (Protocol)
Spain 1975
1976
415
1916 (Protocol)
Sweden 1988
1992
590
3213 (Protocol)
Module7 Unit 3 Legislation and payroll Page 67
Switzerland 1969 384
Turkey 1961 584
USA 1984
1997
1817
1778 (Protocol)
Yugoslavia 1958 1263
