When planning their relocation, few people take into consideration the tax system of the host country. Yet it impacts the payment of tax, the tax situation, the management of income in the host country, and, if any, in the home country.
Tax treaties avoid double taxation
Double taxation occurs when the same income is subject to taxation in two different countries for people moving abroad. Therefore, a person working overseas may be subject to double taxation. The same applies to border workers, international assignees and retired expats who receive pensions from their native country. European jobseekers may also be subject to double taxation if they look for work in another European country by transferring their unemployment benefit received in their home country.
Tax treaties make provisions for agreements to avoid double taxation. Many countries have signed tax treaties that specify the rules for tax declarations, tax payments, and tax rates depending on the expat's residence status. They define how tax will be levied on individuals' and companies' income in each country. Tax treaties generally cover income tax, inheritance tax and capital gains tax. Other taxes may also be covered.
For example, the tax paid by a worker in the host country can be deducted from the tax he has to pay in his home country. Another possibility is that tax paid in the country where the expatriate works may be exempt in his home country.
The impact of a tax treaty on expats
Tax treaties offer several advantages, the most important of which is that they avoid double taxation. This is one of the main objectives of a tax treaty. A tax treaty ensures that expats do not pay the same tax twice. Hence, it is essential to find out whether a tax treaty exists between your home country and the host country.
Another important objective of a tax treaty is to combat tax evasion and avoidance. The third objective of a tax treaty is to promote trade between countries and ensure economic development. Most tax treaties follow the OECD model. Tax treaties can be bilateral, multilateral or unilateral.
Permanent resident or non-resident
The taxation rules differ depending on whether the expat is a permanent resident or a non-resident. Permanent residents generally pay tax (depending, of course, on their income level). Non-residents are not considered tax residents of the country where they are staying temporarily. However, they may be required to pay taxes on certain types of income earned in the country in which they reside. For example, a non-resident of Canada may be required to pay tax on income earned in Canada, such as interest, dividends, rent, pensions, etc. But if there is a tax treaty between Canada and the non-resident's home country, the tax treaty rules will apply. In practice, this will imply a reduction in the "rate of non-resident withholding tax on certain types of income" for Canada.
As a result, the tax treaty defines the different profiles of expats in order to make exchanges between countries clearer and more straightforward. However, it is not always easy for foreign workers to find their way around. The best thing to do is to check if a tax treaty exists between your home country and the host country. You can then contact the tax office in the host country to fill in your tax documents; the same procedure applies to your country of origin.
