As Irish construction companies increasing seek opportunities overseas, tax expert Mary Nyhan of RSM Farrell Grant Sparks advises on how to maximise their tax position in relation to international employees.

More than ever, Irish construction companies are looking for opportunities abroad. As a result, many companies are faced with international tax issues pertaining to the staff that they have seconded to their operations in foreign countries. For some this can be a potential tax mine field especially when dealing with operations simultaneously in several countries.

It is essential to have a transparent Human Resources Policy for employees involved in international secondments. This is vital in ensuring that a company’s talent is incentivised to move abroad to conduct the international business for the company. A taxation policy needs to be an integral part of this Human Resource Policy, given that any long-term stay in an overseas country is likely to attract foreign taxation.

There are two main taxation policy alternatives:

• The employees obtain the tax benefit of travelling abroad but are compensated if there is a tax cost to travelling abroad. This approach is more suitable if the employee is required to travel long haul to an area such as the Middle-East, as the tax-free status of income earned in that region is usually the main incentive for the employee to relocate abroad.
  
• The company adopts a tax equalisation approach where the employee earns the same amount of after-tax income as if they remained in Ireland. Such equalisation policies are common to multi-national and Irish companies (particularly where the employee remains within Europe). Due to current pressure on salary levels and the high Irish income tax rates, our experience is that employers favour tax equalisation policies because they as employers can share in the benefit of relocating an employee to a lower income tax location.

As part of the discussion with the employee prior to departure, it is vital that taxation matters relevant to the employee’s secondment are discussed so as to avoid any misunderstandings in the future. The employee will also have a requirement to retain a detailed schedule of their location during each year so as to determine tax residence.

Partial or short-term overseas secondments

Where an individual leaves Ireland and will become non-Irish tax resident in the following year (i.e. less than 183 days in Ireland or 280 days between the following and current year), the Revenue allow for a PAYE exclusion order to be issued with the result that no PAYE will apply for the duration of the overseas assignment.

The most common tax difficulty associated with relocating employees to overseas locations relates to cases where the employee continues working in Ireland for part of the year or alternatively is away for short stays (i.e. less than 2 years).This results in the individual not being eligible as a non-Irish tax resident and PAYE continues to be deducted. Due to their location abroad, there may be a foreign tax charge resulting in the employee suffering two layers of taxation which is not reduced until the end of the relevant tax year by obtaining a refund from the Irish Revenue on submission of an Income Tax Return. The employer then tends to be left with no alternative but to temporarily bear the cost of the additional layer of taxation until the refund is obtained. This can prove to be a significant cash-flow burden for employers.

We believe that Revenue should alleviate this cash-flow burden by making it the norm that credit is obtained on a monthly basis for the foreign tax. This would remove any penalty being imposed on either the employee or the employer because of the overseas secondment. This is a critical area that must be addressed by Revenue in the form of legislative changes so as to ensure that the income tax treatment for foreign short-term or part-term assignments carries the same exemptions as long-term secondments abroad. In our view, this change would encourage Irish businesses to expand abroad using its Irish workforce, particularly given that secondments abroad tend to be part-time or short-term for fledging international businesses.

Flexible benefits

A flexible benefits package is likely to yield taxation benefits for employees when they are abroad. There are merits of reflecting such a package in the international Human Resources Policy for the business. A number of countries allow for subsistence allowances to reimburse food and hotel costs to be paid on a tax-free basis to employees in relation to short-term secondments in that country. If an employee is seconded to the UK, it is possible for subsistence allowances to be paid without UK tax to the employee where that particular secondment is for less than 2 years.

However, it is necessary to review the rules for each country relating to subsistence allowances as the rules can vary. Even if there are no tax benefits associated with a particular benefit, its provision can often be expected by the employees. For example, personal flights back to Ireland tend to be subject to tax in the foreign country (with a possible exemption for 1-2 flights per year, depending on the country) but often the tax on such flights is borne by the company given the perceived importance of providing this benefit.

Social Security

Retention of Irish social security is not automatic in relation to foreign secondments. Generally, an application must be made to the Department of Social Protection to remain on Irish social security. Such approval is only granted where the employee remains working for the Irish employer for the duration of the overseas secondment and the secondment is not long-term, for example, assignments to other EU countries cannot be in excess of 5 years. The benefits of remaining on Irish social security are two-fold:

• In order to qualify for job-seekers allowance from the Department of Social Protection in the event of unemployment after return to Ireland, only Irish and EU social insurance contributions are taken into account. By opting to be subject to foreign social insurance a real ultimate cost for the employee could result in the event of unemployment on return to Ireland.
  
• While Irish income tax rates are among the highest in Europe, Irish social security rates are lower than a number of other countries. For example, the total rate of social security in Poland varies from 28% to 37%. Therefore, retention on Irish social security can provide a cash-flow benefit for both the employer and employee.

Again, the social security position should be discussed with the employee prior to the secondment beginning with a view to remaining on the Irish social security system.

The Human Resources, taxation and social security issues in relation to overseas secondments are complex and vary from country to country. It is our view that such issues be handled through clear, consistent and transparent policies which can be expanded on depending on the country involved. Such policies should be discussed with the employee prior to the overseas secondment commencing to ensure transparency and to avoid any potential misunderstandings in the future.

Mary Nyhan is a Tax Partner with RSM Farrell Grant Sparks
E: mary.nyhan@rsmfgs.ie
T: +353 (0)1 418 2025

This article appeared in the Construction magazine
http://www.rsmfarrellgrantsparks.ie/sending-employees-abroad-unravelling-the-tax-maze/