Tax issues that firms should be aware of before posting staff overseas

Exposure

At KPMG Thailand, as tax advisers, we have a unique perspective in dealing with companies that expanded overseas before considering the tax implications. Unfortunately many companies try to solve these issues after the fact and in many cases, years after expanding, only to find out that their Thai expatriates are not in compliance with either the home or host country’s tax requirements. It can be time-consuming and costly to rectify these problems later. 

Most countries, including Thailand, tax individuals at source, that is, where the employment is exercised. If the employment is engaged outside of Thailand, then the income received by the recipient is considered foreign-sourced and not taxable in Thailand. The mistake that most companies make when sending Thai employees on overseas assignments is maintaining them on their Thai payroll or ultimately incurring the expense of their overseas employment.

For long-term assignments, likely, the overseas employee is subject to taxation in the host country and no tax filing is required for the home country. However, if the employee remains on the Thai payroll, double taxation applies on the same income. It is possible to seek tax relief through an exemption or foreign tax credit under a double-taxation treaty.

A tax exemption is granted under the tax treaty only if certain conditions are satisfied and the conditions are treaty specific. Thailand only provides for a foreign tax credit with respect to the tax paid overseas on foreign-sourced income as long as the credit is permitted under the double-tax treaty. The exemption and foreign tax credit will in a large part depend on the specific treaty between Thailand and the host country. In the absence of such a treaty, double taxation may apply if proper tax planning is not considered before the international assignment. 

Companies should obtain tax advice for the host and home countries before considering sending employees overseas. These include cost projections and structuring the assignment to mitigate tax exposures effectively. The cost of attaining tax advice most often outweighs the costs incurred for non-compliance.

 

Policy

In accepting international assignments, employees may be subject to higher tax liabilities in the host country. For companies to attract talent for international assignments, tax protection of employees is a must. On the other hand, if Thai companies pay the host country tax on behalf of the employee, it can be complicated and costly because of the grossing up of the tax bill.

In most cases, the implementation of a tax-equalisation policy would be beneficial. The way this works is by applying a hypothetical tax, which is calculated at the time of assignment or when the income changes. On certain components of income, applying the home-country taxation or taxation from another country, the hypothetical tax is calculated and deducted from the employees’ salary. Hypothetical tax is not remitted to any tax authorities but is the employees’ share of the host-country tax.

Depending on the company, there may be a reconciliation of the tax settlement. The actual tax is compared to the hypothetical tax and the difference is settled between the employer and employee. In essence, the employee will remain tax-neutral and will not incur higher or lower taxes while on assignment overseas.

Any company seeking expansion overseas would greatly benefit from a well-thought-out, structured strategy that would lay out a plan for smooth future operations. Both employee and employer are faced with complicated non-compliance issues when dealing with different tax regimes. There is no reason, especially in today’s environment, to make these costly mistakes. 

 

This information is intended as a general guide only. Tax law is complex and professional advice should be sought before acting on the information provided.