Overseas compliance for contractors is a game of carrot or stick

Compliance in the overseas contracting world has long been regarded as expensive to implement, and many contractors have regarded local legislation as something of an option rather than an obligation, writes Paul Matthews of international tax planning specialist Capital Consulting.

With various countries’ systems for monitoring contractors’ compliance becoming more complex and efficient, there are two distinct schools of thought emerging that could be termed the ‘carrot’ and the ‘stick’ approach.

The former, evident in countries such as the Netherlands (with the 30% ruling for certain qualified specialists) and Norway (with a 10% deduction for individuals staying temporarily there with a maximum of NOK 40’000 [£4.2M] for the first two assessment years), coaxes contractors towards local compliance by means of attractive tax breaks and dispensations.

Other examples of this ‘carrot’ approach include the optional flat taxes for inbound expatriates under certain circumstances in Spain (24.75% in the tax year of arrival and the following five tax years), Sweden (25% SINK tax), Finland (35% for qualifying foreign specialists and executives) and Denmark (under certain circumstances expatriates may elect to be subject to a final tax at a rate of 26% for 5 years, levied on gross salary as reduced by the 8% social security contribution and the ATP pension contribution).

These tax breaks and dispensations serve to reduce both the administrative hassle of working abroad and the sometimes heavy local tax burden, making working within the rules considerably more attractive. These positive measures coupled with stringent control procedures (for example, the Netherlands’ ‘chain law,’ which requires full governmental visibility over the entire contract chain) encourage contractors, agencies and clients to remain compliant, while ensuring that it is also financially attractive to do so.

The opposite approach, which could be termed the ‘stick’, makes use of the previously mentioned control procedures without the positive measures demonstrated in other countries. This is typified in locations such as Germany and Belgium, where inward expatriates are treated in much the same manner as locals. The control procedures in these cases have been operating for a few years now and have developed into formidable tools for local authorities. Foremost among these is Belgium’s Limosa programme, under the auspices of which every foreigner coming to work in the country must be logged in one central register. Although this mandatory Limosa registration was introduced to monitor social security compliance, the Belgian Tax Office now has access to Limosa data and can compare it with completed tax returns. An absence of a tax return could therefore trigger an investigation.

These two approaches being taken worldwide illustrate a fundamental difference in philosophy between countries who actively encourage contractors to come and remain compliant, exchanging immediate revenue for potential volume, and those who run the risk of becoming unpopular contracting destinations by the very fact of their costly reputation. Can it be said that the latter approach encourages non-compliance? Certainly yes, for the moment, but with programs like Limosa operating, it will become increasingly risky.

Only time will tell whether contractors are willing to submit to higher taxation in order to work in large contract centres such as Brussels, or whether stricter and more expensive contract markets will suffer from the immovable stance of their tax authorities.