Table of contents
- International Tax Management as a Contractor Working Abroad
International Tax Management as a Contractor Working Abroad
As an international contractor you face one unavoidable pain point when working abroad: International tax.
The fact is that you are a citizen of one country working in a foreign jurisdiction, and both countries have a tax interest in your earnings.
How can you possibly know how to calculate and apply the tax rates for a new country, as well as manage any home tax liability?
New contractors may be especially challenged by international tax management, if they were previously working as employees.
When you are an employee, your employer takes care of all tax calculation and withholding for you. But as a contractor, you are self-employed and have to handle this on your own, or with the help of advisors.
This was the dilemma facing Marie, a German contractor working long term for a client in Brazil. The role was perfect for Marie’s skill set, and gave her the chance to live and work in an exciting new country.
The work was going well, but she had reached the end of the tax year after a nine month stay that she began in April, and was trying to understand her tax obligations.
The first thing that Marie had to learn was whether she was a tax resident of Brazil and how that would affect her tax liability.
Tax Residency and Tax Treaties
Tax residency is different from legal residency, and in Brazil any foreign national staying longer than 183 days in a 12 month period is considered a tax resident.
Marie did meet this criteria with a 9 month stay, so she was deemed to be a Brazilian tax resident. What this meant, is that Brazil would tax both her Brazilian sourced income, as well as worldwide income.
So, any income she had earned in the first three months of the tax year in Germany would also be subject to Brazilian tax.
This example illustrates the need for expert tax consultation and advice for international contractors, to avoid non-compliance or the possibility of double taxation.
Fortunately for Marie, Brazil has a unique tax treaty with Germany that allows for a credit on her Brazilian tax return for any German taxes paid.
Without an advisor, it is unlikely that Marie would have even known about tax residency and tax treaties affecting her international contracting. This is where international tax services can be invaluable when working in a new country.
International Taxation Services
International tax services come in a variety of forms, depending on the type of client and complexity of the situation. For contractors, international taxation services can come from accountants, attorneys and contractor management/umbrella companies. When Marie contracted with her Brazilian client, she decided to use an umbrella company to facilitate the relationship and handle all of her compliance needs. The umbrella company as a local provider had tax experts on staff who made sure that her tax withholding and calculation took into consideration her tax residency and related tax treaties.
Notably, the umbrella company also took care of her work permit, client payments and issuance of a monthly payslip that reflected tax withholding. In the end, it didn’t matter if Marie understood tax residency or how it impacted her tax liability. The umbrella company had an international tax expert that made all the correct calculations based on the current rules.
What is an International Tax Rule?
There is no global, international tax statute that applies in all countries, and most international tax rules stem from tax treaties between two or more countries. These tax treaties are often reciprocal, where two countries extend the same tax rule or exception to one another. In Marie’s case, Germany was one of only three countries that already had an automatic reciprocity agreement with Brazil allowing tax credits to be deducted on the Brazilian return. This reciprocal tax rule was designed to make it easier for expat workers in both countries to pay fair taxes.
Of course, Marie had no idea about any of this when she accepted the client’s offer. But her use of the international tax advisory services of the umbrella company proved to be pivotal for accurate tax withholding, filing and compliance.
The Pitfalls of Non-compliance: Case Study
What happens if a contractor doesn’t pay taxes either in the host country or at home?
Steven was a contractor from the UK working in Spain, and was not aware of international tax rules. His client was paying him to his UK bank account, and as a contractor there was no local Spanish withholding tax on his earnings. Steven was paying his UK taxes as usual, with all business expenses deducted and he didn’t think that he needed to pay Spanish taxes as well.
The problem was that his Spanish client was including his contractor payments in their own tax returns as an expense, and Steven had a work permit naming the client as a sponsor. It was going to be only a matter of time before Spanish authorities would learn that Steven was not filing a tax return on his earnings. Penalties can range from 50-150% of taxes owed, so there were real consequences for non-compliance. Fortunately, Steven decided to consult with an umbrella company who could help him get his taxes in order and avoid any penalties.
International Tax Solutions
Expatriate tax can be a real burden, especially in locations with a language barrier. We’ve taken the headache out of your foreign contracts by sourcing the very best international accounting services to advise and assist you. Through our network, we have found and assessed specialist providers of efficient tax and payment solutions for all the countries we cover. They will save you time and money. We offer completely free, no-obligation quotes on advice on how to reduce your international tax bill.
We work hard to make the solutions clear and understandable for you, so you can better enjoy your time living and working overseas. To find more specific information about a destination please select the country where you wish to work from the drop-down menu on our website.
How Does Contractor Taxation Help You with International Taxation?
Our partner companies offer a variety of solutions to suit your situation from: Umbrella Companies, Financial Management Structures, PEO / ASO / CMC, Tax Efficient Salary Packaging, Trusts, Pension Schemes and location-specific tax structures. You could spend hours researching the myriad of options without getting a personalised assessment, or you can give us some information on your circumstances and we can provide you with a variety of options and quotes from our partners.
You make your choice, but our service will save you time and money whilst not costing you anything. That’s right – our service is completely free! We only get a referral fee from a provider if you are completely happy and choose to use their service.
Read on for more information on each of the structures offered. Hopefully, you’ll find the solution you’re looking for in these pages – but if not then please let us know.
Does your current provider look after:
- Double taxation
- Local tax requirements including statutory reporting
- International tax advice for individuals and limited companies
- Expense allowances and tax incentives for expats
- Wealth planning
- Retirement planning
- Remittances
- Do they reduce your costs and administration
If you need assistance with planning and global tax services, please contact Contractor Taxation to learn more about our international tax solutions.
More about International Tax
All taxes are levied by each country’s government, according to their own tax code. International tax only arises when there is some cross border transaction, trade or service that a country deems taxable. There is no literal ‘international tax’ as there is no global taxing authority to impose it.
When a contractor works in a foreign country they have to pay tax on locally sourced earnings, and if they become a tax resident they also pay tax on non-local, global earnings. But the non-local earnings may also be taxed in the country where it was earned. This brings up the possibility of double taxation, where the same income in the tax year is being taxed by two different countries. Tax treaties eliminate this possibility in most cases, but it still can happen which is why expert international tax management is crucial.
The types of income included in international taxation depend on each country’s tax laws. Typically, tax will only apply to locally sourced revenue or income, except for tax residents where it becomes a global application. Many countries exclude items like foreign investments, capital gains and retirement accounts, as exempt from global tax liability.
Deductibility of charitable donations depends on the tax code of the country where you are resident. Most countries will allow deductions to NGOs, either international or domestic, if they are valid registered organisations.