Paying taxes is easy when you know how much you’re paying and who you’re paying it to; however, what if there is more than just you and your local IRS at play? What if you’ve earned a bit of this income abroad? Where do you pay taxes for it? Do you do it at home or in the place where you’ve earned the actual income?
These, and many other dilemmas, are what troubles millions of mobile workers across the globe. Here’s a brief guide to help you sort it all out.
- Establishing residency
Before you can do anything else, you have to establish your tax residency. This is the location where one’s considered a resident for the purposes of taxes, and in most countries, it’s tied to either the time of duration or the activity in question.
One of the rules that are often applied is the one of physical presence. Namely, in the majority of situations, if you’ve spent more than 183 days within 12 months in one country, you’re considered their tax resident and have to pay taxes for this period.
Physical presence, however, is not the only criterion used. A registered permanent home, personal and economic ties, centers of vital interests, or even the intention of visiting a country could play a role in establishing residency.
- Double taxation agreements
The main reason you even have to establish your tax residency is that there’s a priority in taxation and that you can avoid getting double-taxed. This is usually settled through bilateral agreements between countries. While these often follow some sort of international guideline, sometimes they’re unique, and the only way to know for sure is to read them up.
Now, reading up on these dry legal documents can be incredibly confusing, especially if you’re not a lawyer or an accountant. There are a few points that you have to focus on to understand their most important aspects.
First, you should start by looking up the definitions of residency in both countries. What constitutes a residency according to these laws?
Second, consider if there are mentions of types of income covered. Chances are that pensions, capital gains, dividends, and business profits are going to be treated differently.
Withholding tax rates is also treated differently by different countries.
- Tax equalization
One concept that could make most of these calculations a lot simpler is the one of tax equalization. This is an attempt to standardize taxes on international assignments partially. To make life easier for employers, the tax authority calculates how much taxes a mobile employee would pay if they just stayed in their home country.
This hypothetical tax always takes the home country of the employee as a default state, seeing as how they spend a larger portion of the year there rather than abroad.
In scenarios where the actual taxes in the host country (the country of the employer) are lower, the employee keeps the difference. Keep in mind that this is not always the case, and it’s worth looking into.
Other than just making things simpler, this is an arrangement that usually benefits both parties.
- Consider the source of income
So far, we’ve mostly focused on the location of your residence and the number of days you spent in the country in question, but what about the source of income itself?
You could never leave your home country but own an apartment complex on another continent, an apartment context that generates a pretty hefty rental income. So, can you just collect this money and live in Bermudas (which has no income taxes)? Not really!
Why?
Certain activities are sometimes affected by double taxation agreements, and some income sources (like interest, dividends, and rent money) can be taxed differently. All of this depends on the country in question.
- Tax withholding responsibilities
The concept of tax withholding is nothing new. If an employer is obliged to pay certain benefits or taxes directly on behalf of their employees, they can withhold a portion of their wages to make this payment. These rates are often determined by the employee’s earnings, and they’re collected regularly throughout the year.
This could be a problem with the mobile workforce, seeing as how the location of their employment and, therefore, the location of where they pay taxes may change throughout the year. This is what makes the management of tax withholding for mobile employees the biggest challenge.
If this is the responsibility of an employer, they must do this accurately and provide an employee with an elaborate report. They also have to keep up with all the regulations and laws on the subject, especially to avoid double taxation.
An employee, on the other hand, needs to provide their employer with up-to-date information like their tax residency status and any other relevant personal details.
- Tips for managing tax obligations as a mobile workforce
In the end, there are a few tips you should resort to to understand these residency rules a lot better and manage your business finances more effectively.
First, you need to be very disciplined and accurate when tracking your time and location. We’ve mentioned 183 days (which is a common marker), but if you’re going in and out of the country on many occasions, it’s easy to lose track of time.
Second, you definitely want to talk to a tax professional. Seek advice and even help. This is worth a fee, even a bit heftier one, seeing as how a mistake here can affect both your fines and your visa conditions.
Also, remember that deadlines for filing your taxes may differ in different countries.
Wrap up
Handling your tax obligation as a mobile worker or employer of mobile workers is a challenge; however, you can’t afford to miss out on some of the best working arrangements available just because you’re afraid of a challenge. When you actually start researching this and getting some professional help, you’ll quickly learn that it’s nowhere near as complex as you originally thought it would be. It’s only difficult in the beginning.