Double taxation is a common problem due to worldwide work mobility and skills shortages. Basically, it means that we pay twice for a single source of income. The lack of a competent workforce impacts companies across industries. While less developed countries have skilled workforce to spare, others require talent.
In recent years, flexible work arrangements and remote work are reshaping working relationships globally. The adoption of new technologies like artificial intelligence is bringing changes and possibilities to work both asynchronous and synchronous. Tech is changing the skill sets and working relationships. It seems that around 2028 about 44% of our set of skills will be disrupted. T
Employers from European economies like Germany, France, Belgium, the UK and the Netherlands have difficulties filling in-demand jobs. Some countries are trying to fill their skills gap by using workforce from eastern and southern parts of Europe. Also, the remote work trend is helping them to attract highly skilled employees with lower costs.
Employers are trying to find talent for tech, health, and climate innovation-focused initiatives. Ironically, the latest technological advancements like AI generate at the same time unemployment and skill shortages. This is why continuous learning, upskilling and reskilling are essential even if is a complex endeavour.
Employment and contract working arrangements
There are several solutions for hiring employees from another UE country. Global employers can opt for temporary deployment from other EU states. Also, another solution mostly used for STEM jobs is to hire contractors or freelancers. Hybrid or remote employment and contract working arrangements offer more flexibility and higher revenues for both sides. However, legal requirements and remote working conditions are different in every EU country.
In some cases, European work regulations are overlapping with national laws. This overlapping is making contracting people complicated, especially from a taxation point of view. EU states have different regulations on foreign employees and contractors. It’s a legal entanglement that ends with the employees paying taxes in two countries. Unless you become a resident of the country where you work, you will pay taxes in both countries.
Skills shortage and double taxation
Foreign workers’ employment is used to overcome skills shortages in countries that have a higher number of jobs available. Hiring needs are partially filled with a working force from Eastern and Southern Europe. The remote working trend is also encouraging cross-border employment or contracting favouring employees ‘mobility for global companies. However, EU employees and contractors are dealing with a double taxation problem.
So, if you have a different tax residency than the country you are working in, most likely you will face the double taxation problem. This means that taxes are paid twice on the same income, regardless of it’s corporate or individual income. As an employee or contractor, you should know that tax rates in European countries are quite complex. You will need tax advice or constant self-documentation to be clear about where and when you should pay it.
Different countries, different rules
Each country has its own tax regulations, but in the EU, you will be considered a tax resident in the country where you spend more than 6 months a year. If the tax rate in the country where you are working is higher, that is the rate you will pay. So, a higher tax rate rule will apply, even if you are exempted in your resident country from any taxes or your residence country tax is offset against the tax due.
Countries’ tax codes with different regulations and tax provisions overlap. On top of this EU payment transparency rules to solve the gender pay gap are coming into place as mandatory. Double tax treaty provisions implementation with other countries needs clear explanations. Problems like residency of tax-exempted companies, permanent establishment, taxation of profits, and deductible expenses need to be simplified so that taxpayers should not be charged twice for the same pay.
Double taxation avoidance agreements
To avoid double taxation you need to understand jurisdictions between countries deploying employees and European legislation. According to the OECD, there are more than 3,000 existing bilateral tax treaties signed to solve taxation problems and ease the burden of taxes.
Overlapping countries’ jurisdictions regarding tax exceptions or facilitations granted by national authorities create overcomplicated requirements. Fortunately, most European states have in place treaties for the avoidance of double taxation and special cross-border or frontier workers rules.
However, as an EU citizen living and working in a country other than your country of residence, you can avoid double taxation. The provisions of double tax agreements mainly state two possible situations. To begin with, the tax you pay in the country where you work may be offset against the tax you owe in your country of residence. In addition, the income earned in the country where you work might be taxable only in that country and exempt from tax in your country of residence.
That is why when working abroad we should consider:
- To understand the tax rules from both your country of residence and the country where you work because each country has its own tax laws.
- Regularly verify if there are changes to the double tax agreements signed by your residence country and the country where you work. Most countries have double tax agreements with each other to prevent double taxation.
- Claim relief from double taxation if this is the case, you won’t be taxed twice due to the existence of double tax agreements.
Salary payment transparency implications in recruitment
Besides complicated income taxation and possibly better payment, we face other challenges like integration into a foreign culture with different work habits or gender pay discrimination. In an effort to solve the gender pay gap, the European Directive 2006/54/EC is setting a pay range transparency rule for employers. It prevents employers from asking candidates about their past salaries.
This rule might have positive implications for the recruitment process. It increases the fairness of the hiring process through salary transparency for job seekers. Candidates will know salary ranges before applying or before the job interview.
Mandatory requirements for salary transparency beginning with the recruitment process, can set premises of equal treatment for the same skills. It can also encourage a true meritocratic working environment. However, it will take time and effort to implement pay transparency rules and convert them into a fair and honest practice in all EU countries.
