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Outbound Assignments: Tax Considerations for Irish Employers

Colin Forbes Senior Manager, Deloitte
Introduction
In recent years, Ireland and other Old World countries have seen their competitiveness eroded by low labour cost economies such as those in Central and Eastern European countries (e.g., Poland, Slovakia, and the Czech Republic) and the emerging Asian superpowers of China and India. It is the Old World multinational companies that are in the vanguard seeking to significantly reduce their operating costs by investing in these countries. However, these companies know that setting up shop and training local staff requires relocating significant staff numbers to these countries. Irish companies need to assign their highly-skilled and educated Irish talent to these locations either on a short or long-term basis, in order to make sure that their investment in these countries starts well and that the local workforce is adequately trained a reverse of the trend in the latter part of the last century. Budgetary planning is critical to the success term of any international assignment, long or short. There is some evidence to suggest that the costs of more traditional long-term assignments (e.g., 3-5 years duration) can be multiples of an employees base salary. This is due to the fact that employers must pay for assignment related benefits, such as cost of living allowances, housing allowances, dependent tuition and cross-cultural training, not to mention the potentially increased employment tax costs which they may be asked to bear. This article sets out the tax and social security issues of which Irish employers must be aware when planning the assignment of their Irish staff to these overseas locations. The article deals with: How an employees tax residence position is the key driver in ascertaining the tax position in Ireland and abroad. What Irish PAYE and foreign wage withholding tax obligations may fall on Irish employers. Reliefs available with regard to subsistence expenses. How the taxation of share options and pension contributions in a cross-border context can add complexity for Irish employees and employers. How tax equalisation policies aim to solve some of the above issues. The social security position for the assignees.

Trends in International Assignments

Over the course of this article, I will deal with the international assignment method of moving Irish talent abroad within a multinational organisation. This generally involves the employee continuing to be employed and paid by the Irish employer while physically working abroad for the foreign sister company for a period of time (irrespective of its length). This is the most common method. Many surveys on international assignments have shown that the number of international assignments continues to increase. This is mainly due to the growing use of short-term assignments over the past few years. Short-term

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assignments are becoming popular because they are generally more cost-effective than longterm assignments and they allow companies to transfer skill sets quickly and more easily. There is also evidence to suggest that Irish employees, many of whom are concerned about the impact that a long-term assignment abroad would have on their partners careers, and on their families, are now less willing to accept such assignments abroad. Indeed, due to the availability of cheap flights to most of the Central and Eastern European business hubs, Irish employees can now work Monday to Friday in these locations and travel home to visit their families at weekends. The alternative localised method, where the employee becomes an employee of the host entity, has historically been the favoured approach. However, employers do not wish to lose the talent that they have nurtured and are keen to repatriate their international assignees at the end of assignments in order to keep growing their domestic businesses.

280 days or more in the current and preceding tax years.

the double-taxed income (see below for comments in relation to potential double withholding tax issues). Employers need to be aware that if the employee finds him/herself in the situation at 1) above, wage withholding tax may still be required to be operated in the host country, even though an exemption from income tax is available under the relevant DTA. A refund of the withholding tax would need to be claimed in this instance. Alternatively, other countries may require an application to be made to the authorities before allowing an exemption from wage withholding tax. If the employee finds him/herself in the situation at 2) above, but happens to be working in a country with which Ireland does not have a DTA, the Irish Revenue will concessionally allow a deduction of the income tax paid in the other country against the foreign income (Revenue Guide Res.1 Going to Work Abroad), which clearly is more costly than the foreign tax credit method.

An assignment abroad which, for example, lasts for between a year and 18 months may mean that Irish tax residence is not broken, depending on the date the assignment is expected to start. If Irish tax residence is not broken, the employee must continue to pay Irish income tax on his/her employment income.

Irish PAYE requirements

If the employee remains an Irish employee and will not break Irish tax residency, then the Irish employer is obliged to continue deducting Irish PAYE on his/her employment income. For international assignments, care must be taken by the Irish employer with regard to the taxation of cash/benefits which may be delivered in the host country by the foreign sister company. The Irish employer must subject all assignment-related cash/ benefits (except qualifying travel and subsistence expenses see below), no matter which company delivers them, to Irish PAYE. Therefore, it is crucial that Irish employers have adequate internal systems in place to ensure that host country delivered items do not fall outside the Irish PAYE net.

Budgetary planning is critical to the success of any international assignment, long or short-term. There is some evidence to suggest that the costs of more traditional long-term assignments can be multiples of an employees base salary.

Double withholding tax

As mentioned above, in certain circumstances, an Irish employee on a short-term assignment may remain Irish tax resident but may also trigger tax residence in the other country (under its domestic tax rules) e.g.: John is an employee of ABC Ltd., an Irish resident employer. He is assigned to ABCs subsidiary in Poland for a nine-month period from 1 January 2008 to 30 September 2008. John is resident in Ireland and Poland in 2008. Irish PAYE must continue to be paid. Polish withholding tax must also be paid by the employee (not employer) under Polish domestic provisions. As mentioned above, a double taxation event is avoided through the application of the Elimination of Double Taxation article of the Ireland/Poland Double Taxation Agreement (Article 24). John would be regarded as a resident of Ireland under Article 4 of the DTA and, according to Article 24, could claim a foreign tax credit on his Irish tax return for the Polish income tax suffered on the same income.

Irish Tax Residence Considerations

Before planning any type of international assignment,

the first step is to ascertain how the employees tax residence position, both in Ireland and the host country, will be impacted. The Irish tax treatment of an employees income earned while working abroad will differ, depending on whether the employee continues Irish tax residence or breaks it.

Foreign tax considerations

If the employee is assigned to a country with which Ireland has agreed a Double Taxation Agreement (DTA), either of the following will happen: 1) Exemption from host country income tax: If the conditions of the Employments article of the relevant DTA are met, the employee may be exempt from income tax in the host country (see below for comments in relation to withholding tax); or 2) The employee is liable to income tax in the host country, but a foreign tax credit can be claimed against the Irish tax on

Continuing Irish tax residence

Short-term assignments where the employee is not abroad long enough to break Irish tax residence are becoming more common. This category of assignee continues to meet the Irish tax residence rules under section 819 of the Taxes Consolidation Act (TCA) 1997 i.e. they are present in Ireland for: 183 days or more in the current tax year; or

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However, under Irish and Polish domestic withholding tax rules, withholding tax must be operated simultaneously in both jurisdictions. Clearly, this is an inequitable situation for the employee, who would then be left to wait several months until the tax year finished in order to claim the foreign tax credit on his/her Irish tax return. There is no current Irish tax legislation/practice in place to counteract this cash-flow nightmare. However, an Irish employer could consider making an application to Revenue to offset the host country withholding tax against the Irish PAYE each pay period. The above raises difficult questions for the Irish employer, such as: 1) Who will pay the income tax liability in the foreign country (if there is any)? 2) If tax is paid on behalf of the employee in the foreign location by his/her employer, and a foreign tax credit is claimed in Ireland by the employee, will the employer be refunded the credit for the foreign tax? 3) If an exemption from income tax in the foreign jurisdiction is available, does this need to be applied for? The use of internal relocation policies such as a tax equalisation policy (see below) can assist companies in dealing with these difficult questions.

1997. This treatment has the effect that his/her employment income will not be taxable in Ireland from his/her date of departure from Ireland.

provision of such subsistence payments to their assignees while working abroad on a temporary basis. Where an employee performs the duties of his/her Irish employment while working abroad on an international assignment, allowable subsistence expenses can be reimbursed tax-free on the basis of either: Acceptable flat-rate allowances; or Actual expenses which have been vouched with receipts. The amount of flat-rate subsistence allowance varies, depending on the length of the absence outside the State and the Civil Service subsistence rates for the various foreign locations. Revenues guide IT54 (Employers Subsistence Expenses) provides further details regarding the amount of flat-rate subsistence which is allowable for: 1) 2) Assignments of up to six months; and Long-term assignments of over six months.

Irish PAYE

Under Irish and Polish domestic withholding tax rules, withholding tax must be operated simultaneously in both jurisdictions. This is an inequitable situation for the employee, who would then be left to wait several months until the tax year finished in order to claim the foreign tax credit on his/her Irish tax return.

requirements
If an employee remains on the Irish payroll and is able to avail of this split-year residence treatment, then the Irish employer can apply for a PAYE Exclusion Order (under s984 TCA 1997) to Revenue. This will allow the Irish payroll to discontinue PAYE withholding.

Foreign considerations
In this scenario, even though the employee will not be liable to Irish income tax, he/she is very likely to be tax resident and liable to income tax in the foreign country. The liability to foreign country income tax and the non-

Although, Irish employers welcome such tax relief, careful consideration must be given as to whether the host country will allow similar relief on subsistence expense payments. If not, the costs of the assignment can increase significantly, particularly where the host country tax on such subsistence expenses will be paid by the employer and a tax on tax scenario may arise.

applicability of Irish income tax poses several challenging questions for Irish employers wishing to encourage Irish staff to relocate abroad, such as: Is the incidence of income tax higher/lower in the foreign country? Will the employee accept paying higher taxation in the foreign country? If not, will the employer cover the higher tax costs in the foreign country and leave the employee in the same tax situation as if he/ she never left Ireland? If so, how will the employer achieve this goal?

Share Option Scheme Considerations

While the focus of the above has been on the Irish and foreign income/wage withholding tax obligations for employers on compensation items such as salary, benefits-in-kind and subsistence payments, a far more complex area is the taxation of share options in a cross-border context. A significant number of the Irish employees being assigned abroad are key executives with high skill levels and management expertise. These key executives are likely to have been rewarded by their Irish employers with share incentives such as share options (which are unapproved by Irish Revenue) in their company during their careers, and they are likely to continue to receive these incentives while working abroad. The Irish and international tax rules regarding the taxation of share options in cross-border

Breaking Irish tax residence

Although long-term assignments (i.e., when an employee breaks Irish tax residence) are becoming less common, they are still used by Irish employers for assignments to countries such as China or the US. If an employee moves abroad to work on an international assignment and he/she breaks the Irish tax residence rules mentioned above during his/her time abroad, then the employee will be able to avail of split year residence treatment under s822(1)(a)(ii) and (2)(b) TCA

The use of a tax equalisation policy (see below) can assist companies in dealing with these difficult questions.

Irish Tax Treatment of Subsistence Expenses for Absences Outside the State
It is common for Irish employers to provide employees with accommodation and per diem payments while working abroad. Irish employers can achieve tax savings in relation to the

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situations are highly complex and can prove challenging for both the employer and the employee. Prior to the release of the Revenue Statement of Practice (IT/1/07), the rules with regard to the taxation of Irish employees who left Ireland, and who were granted share options while resident here, were clear. The gain on the exercise of the share option was subject to income tax in full in Ireland under s128 TCA 1997, even if the employee was no longer resident in Ireland at the date of exercise (Tax Briefing 31). However, this practice was at variance with the principles enunciated by the OECD Committee on Fiscal Affairs in their June 2004 report on crossborder issues related to employee share options. The Revenue SOP (Statement of Practice) follows the recommendations set out by the OECD and will apply these recommendations to cases where Irish employees who hold share options are assigned abroad to countries with which Ireland has agreed a DTA. The change in rules in relation to outbound assignees is best illustrated by the following example:

1 Jan 2008

Gerry exercised his share option at which time the shares were worth 7 each.

How can the individuals presence in each country be tracked in order to calculate correctly the amount of income tax which is due in Ireland and the other country?

Note: Gerry was a resident of Ireland from 1 Jan 2004 to 31 Dec 2005 and was a resident of the DTA country from 1 Jan 2006.

Employers need to carefully consider these questions when designing their internal tax policy (e.g., tax equalisation policy) for international assignments.

Overview
The share option was granted for a period of employment covering three years (780 working days) of which: Two years (520 working days) were spent in Ireland; One year (260 working days) was spent outside of Ireland, but in a DTA country. The charge to Irish income tax under Irish domestic tax legislation (s128 TCA 1997) is as follows: Market value of share at date of exercise Option Price Taxable Gain 1 x 10,000 = 10,000 60,000 7 x 10,000 = 70,000
1

Pension Considerations
In recent years, pension planning has jumped to the forefront of many Irish employees minds as they look forward to living long and active lives during their retirement. Key to their planning is the tax relief afforded to employee and employer pension contributions in their Irish employers pension scheme. Employees that are being assigned abroad need to be aware of the Irish and foreign tax implications on their pension contributions.

Continuing Irish tax residence

If an Irish employee leaves Ireland on a short-term basis and does not break Irish tax residence, his/her pension contributions to the company Revenue-approved pension scheme will be unaffected from an Irish tax viewpoint, i.e. the employer pension contributions will continue to be non-taxable and the employee contributions will continue to be tax deductible (subject to Revenue limits). However, the Irish employer must consider the = 40,000 treatment of these pension contributions in the host location. Clearly, if the assignment is of a short enough duration, an exemption from income tax under the Employments article of the DTA (if one is in place) may render the tax treatment of the pension contributions a moot point. However, if income tax is due in the host country, two issues may arise. These are: 1) The employee contributions may not be tax deductible according to local rules. 2) The employer contribution may be taxed as a benefit. Most of Irelands Double Taxation Agreements do not deal with this issue (see Article 17A of the Ireland/UK Double Taxation Agreement, which sets out the conditions for relief in the UK in such

Example
Income tax treatment where an employee is granted an unapproved share option while a resident of Ireland, and exercises it while a resident of a DTA country.

However, where the terms of a DTA confine the charge to income tax to the period(s) of employment exercised in Ireland, the taxable gain of 60,000 is apportioned as follows:

Facts
1 Jan 2004 Gerry, a resident of Ireland and employee of an Irish subsidiary of a multinational company, was granted a share option to acquire 10,000 shares in the parent company at a price of 1 per share. Under the terms of the share option plan, the right to exercise the share option was conditional upon Gerry remaining in the employment of the group until 31 Dec 2006. At that date, Gerry acquired a vested entitlement to exercise the share option. 1 Jan 2006 Gerry agreed to an international assignment from Ireland to an affiliate company in a DTA country. Gerry continued to be an Irish employee.

Taxable amount

60,000 x

520 days 780 days

Under Article 15 of the OECD Model DTA, Ireland may tax remuneration derived by Gerry from the exercise of his employment in Ireland. Such remuneration includes benefits received by employees under share option plans. Although the introduction of this double taxation relief is a welcome development, the above example poses a number of challenging questions for Irish employers assigning key employees abroad, such as: What obligations does the employer have in the host location, e.g., is withholding tax due? Who will pay the foreign country tax? Who pays the Irish income tax due?

1.

Assume there are 260 working days in a year.

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a case), and often issues arise as to who will bear the increased tax cost in the host country. Clearly, Irish employees will not want to suffer an extra tax burden, and employers will cover the costs under the company tax equalisation policy (see below). What is often forgotten by employers is the additional tax-on-tax scenario which can arise in the host country, and which may not have been budgeted for.

tax return, claiming a credit for the foreign tax paid. As a result, he/she would be obliged by the employer, under the terms of the equalisation agreement, to return the resulting refund of Irish PAYE to his/her employer.

in computing the employees hypothetical Irish income tax liability. The employee would therefore receive the normal Irish tax relief during the tax year as if he/she had never left Ireland and will be protected from any additional tax costs associated with the pension contributions in the host country, as mentioned above. Employers also need to be clear in their tax equalisation policies on how non-employment income and capital gains are to be dealt with, i.e., will employers protect their employees from any increased foreign tax costs in regard to these sources of income/gains? Lack of clear agreement on these issues can lead to bad feeling between employees and employers, should unexpected tax liabilities arise during such assignments.

Breaking Irish tax residence

The mechanism to ensure that the employee who breaks Irish tax residence continues to bear the same level of tax involves the deduction of so called hypothetical home country tax. Applying this methodology to Ireland, this hypothetical Irish tax (which is retained by the company and not required to be paid to Revenue) is used by the Irish employer to settle the applicable host country taxes. If the host country taxes are less than the hypothetical Irish tax, then the employer retains the benefit. If greater, the employer will pay any taxes due over and above the hypothetical Irish tax. In this case, the excess is funded by the employer, which in turn creates further taxable income, i.e., the tax-on-tax scenario. In general, some of the advantages of tax equalisation for Irish employers include the following: Tax savings may be enjoyed by the Irish employer, thus reducing overall assignment costs; The employee is not disadvantaged from a tax viewpoint by accepting the assignment; Corporate image is protected as tax equalisation facilitates and ensures assignee tax compliance; Employee mobility is enhanced.

Breaking Irish tax residence

The employee/employer contributions made during more long-term assignments when employees break Irish tax residence (but continue to be Irish company employees) must also be considered. As already mentioned, as the employee will not be paying actual Irish income tax in these circumstances (as split year residence treatment applies and a PAYE Exclusion Order will be in place), he/she will not be able to claim tax relief in Ireland on his /her own pension contributions. The question then arises as to whether the employee contributions will be tax deductible in the foreign jurisdiction and whether the employer contributions will be treated as taxable income. Again, the use of a tax equalisation policy (see below for further comments in relation to pension contributions) can assist companies in dealing with this issue.

Social Security Considerations

Another area that is always important in planning assignments is the social security impact both on the employee and the company. When an employee continues to be an employee of the Irish company and is assigned abroad, the social security rules applying to the assignment will fall into three different brackets: EU regulations; Bilateral agreements; or Non-EU regulations/bilateral agreements.

Tax Equalisation Policies

The solution to some of the difficult questions posed above can generally be found in the implementation of tax equalisation policies, which are used by many Irish and multinational employers. The concept of tax equalisation is that an individual accepting an international assignment should be neither better nor worse off from a tax point of view by accepting the assignment. He/ she will continue to be subject to the same tax cost as if he/she had remained at home. The tax impact of the assignment is therefore neutralised for the employee.

EU regulations
EU Council Regulation 1408/71 governs intraEU (including EEA countries) assignments. In general, an employee being assigned to another EU (EEA) Member State will continue contributing to the Irish PRSI system and will be exempt from paying the host country equivalent of PRSI. An E101 application is required to be made by the employer in advance of the assignment, and certificates are generally granted for assignments up to a maximum of five years. As Irelands employee PRSI contribution rate is low and the employee earnings ceiling is still in place, this can result in savings for Irish assignees, particularly compared with countries such as Belgium (13.7% uncapped), France (23%8.61% uncapped rate decreases as earnings increase), or the UK (11% up to cap, 1% above cap) where social security rates are higher. Also, the Irish employer may benefit from not

A major disadvantage is that the administration of operating a system of tax equalisation tends to be time-consuming and, consequently, expensive. Furthermore, additional tax costs can arise for the employer, as is illustrated above in the area of pension contributions. With regard to the question of how an employee in this situation could receive income tax relief for his/her employee pension contributions during the tax year generally speaking, if the employer operates a policy of tax equalisation, employee pension contributions (including Additional Voluntary Contributions or AVCs) are allowed as deductions (subject to the Irish Revenue limits which would apply normally)

Continuing Irish tax residence

If an Irish employee continues his/her Irish tax residence, pays PAYE as normal, and is also liable to foreign country tax (in a DTA country for example) under a tax equalisation policy, the employer would normally agree to pay the foreign tax. The employee would then file an Irish

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having to pay the higher employer social security contributions such as in Belgium (3435%), France (50%26.5% uncapped rate decreases as earnings increase), or the UK (12.8 % uncapped). Even some of the low cost economies of Eastern Europe can have a high incidence of social security for employees when compared to Irish contribution levels. In Poland, for example, the main employee contribution rate (ZUS) is currently 13.71% up to an earnings cap of PLN 85,290 (approximately 25,000 at the time of writing). There is then a

can be applied for. For example, an employee can be assigned from Ireland to the US for up to a maximum of five years.

What benefits will the employee receive from the contributions?

In some countries, such as China, social security may not be payable by expatriates and may only be levied on local employees.

The Irish employees tax residence position in Ireland and the foreign country is the key driver behind the treatment of withholding tax, subsistence expenses, share options and pension contributions.

Non-EU (EEA) regulations/ bilateral agreements

Assignments from Ireland to countries such as China and South Korea are becoming increasingly common as Irish companies seek to expand into these emerging markets. Unfortunately, due to the absence of bilateral agreements for many of these countries with Ireland, the social security situation can be more complex. Persons employed in Ireland

Special collections system for PRSI

When an Irish employee with an E101/Certificate of Coverage/Certificate of Retention is assigned abroad and his/her employment income falls outside the Irish PAYE net (through a PAYE exclusion order being in place), the Special Collections System must be used to pay PRSI to the Irish authorities. The assignees will generally not be liable to the health contribution if their employment income falls outside the Irish PAYE net. An annual return must be filed with the Special Collections Section of the Department of Social and Family Affairs by 15 February in the year following the relevant income tax year. Monthly payments for employee and employer PRSI contributions must also be made to the Special Collections Section. The Irish employer should be aware of these special requirements and should ensure that PRSI is not paid through the monthly payroll/P30 filing method as this can cause difficulties once the time for filing the annual Special Collections returns comes around.

2.45% charge above this cap. There is also a health insurance charge of 9% on an employees earnings (but a deduction for the employees social security contributions can be taken in computing this contribution). However, the availability of an earnings cap in Poland on the main employer social security contribution (16.81% up to the earning cap of PLN 85,290 (approximately 25,000 at the time of writing) and then 2.55% above this cap) and a low accident insurance contribution rate (0.67% 3.6% uncapped) means that Poland has a lower incidence of employer social security than in Ireland at certain income levels. Apart from the cost, the employees are also more comfortable paying into the Irish PRSI system as they know that their stamps are not being affected by being assigned abroad i.e., the social security impact of the assignment has been neutralised.

who are assigned outside the EU (EEA)/bilateral agreement countries are normally compulsorily subject to Irish PRSI for at least the first 52 weeks of their assignment, and a Certificate of Retention can be sought under SI 312/1996. A further 52 weeks extension can be granted with the consent of the Minister, if the assignment is to be extended. Thereafter, the employee in general will not be able to continue to contribute to the Irish PRSI system in the normal way. However, the employee may be able to contribute to the Voluntary PRSI system, which is a method whereby previously insured employees can continue to contribute to the PRSI system even when they are not obliged to do so. Benefits covered under the Voluntary PRSI system are: State Pension (Transition and Contributory), Widows/Widowers Contributory Pension, Guardians Payment (Contributory), Bereavement Grant.

Summary
Irish employers have to contend with a number of complex employment tax issues apart from the actual relocation logistics associated with assigning Irish employees abroad within an organisation. The Irish employees tax residence position in Ireland and the foreign country is the key driver behind the treatment of withholding tax, subsistence expenses, share options and pension contributions. In relation to international assignments in particular, Irish employers need to consider whether they have adequate internal policies in place to deal with the foreign tax and social security issues which the employee may trigger in the foreign country. Tax equalisation policies are often used by companies to overcome these issues. However, the costs of operating such policies can be high, and careful planning is required, from a tax viewpoint, prior to an assignment being initiated to keep these costs to a minimum.

Bilateral agreements
Ireland currently has bilateral agreements with the following countries: USA, Australia, New Zealand, Canada (including Quebec) and Switzerland. In general, these bilateral agreements aim to achieve the same result as the EU regulation, i.e., assignees from Ireland will continue to contribute to the Irish PRSI system. Certificates of Coverage are granted under the bilateral agreements and must be applied for by the employer. The conditions of each bilateral agreement must be considered in order to see how long certificates

It should be noted, however, that the voluntary contributions do not cover short-term benefits such as those for illness, unemployment, maternity, occupational injuries, and dental/ optical treatment. Consideration must also be given to the social security system in the host country, for instance: Will social security also be due in the host country from day one of the assignment? What is the cost to the employee/employer?