In today’s interconnected world, many individuals and employers operate across international borders and this can lead to complex tax implications, especially in relation to payroll. One significant challenge which consistently arises is the issue of double taxation as well as the financial and compliance burdens this can bring. This blog introduces some key aspects and options to mitigate the impact.
WHAT IS THE MEANING OF ‘DOUBLE TAXATION’?
Double taxation typically refers to a situation where an individual’s earnings are taxed by more than one jurisdiction. This regularly occurs in international scenarios where an individual works and earns income in one country but is resident and subject to taxation on that same income in another country (their ‘home’ country). It can lead to complex tax issues and potentially higher tax liabilities for an individual.
Whilst all countries have their own domestic rules setting out when taxes apply and any potential exemptions, in the vast majority of cases, there will be a compliance requirement when operating internationally. As such, most UK-resident employers who assign employees to work overseas will have a foreign wage tax-withholding obligation and the need to run an international payroll alongside their UK payroll.
DOUBLE TAXATION AGREEMENTS
Many countries have agreements with each other, often known as tax treaties or bilateral tax agreements, which contain various rules and criteria that set out which jurisdiction has the primary right to tax certain categories of income. Such agreements help prevent double taxation through provisions which typically allow for a reduction or elimination of tax.
A major advantage of double taxation agreements is that they help promote international trade and activity by providing certainty and clarity concerning the tax obligations for individuals operating across international borders.
Navigating double tax treaties can be challenging and a thorough understanding of the provisions and how they apply to specific situations is required. It would therefore be recommended that when international opportunities arise, taxpayers should seek advice from tax professionals familiar with international tax regulations to ensure operations are structured in a tax-efficient manner.
