As Madalina Racovitan, Partner in KPMG in Romania’s Tax Department and head of International Executive Services explains; “This publication gives detailed information on individual income tax and social security in over 80 countries, including Romania. Over 20 new countries have been covered compared with last year’s survey. So this annual publication is becoming an increasingly important and comprehensive work of reference for all companies which send their staff abroad.”
In the year since the last edition, there has been little change to the trend towards companies sending employees on shorter business trips often working across several countries, while the traditional model of a longer term posting to one place continues to decline. In the current economic climate, businesses are often keen to reduce the considerable costs involved in a longer term deployment of a member of staff to another country. So they are also looking for more efficient and flexible models. Employees too frequently favour shorter business trips abroad. Long term relocation with family can present considerable difficulties for the employees as well. So shorter trips often suit both employers and employees alike.
Clearly this new pattern of staff deployment brings many benefits. However, as the KPMG publication explains, it can also generate a number of tax and social security risks, making the tax position of companies and their employees a lot more complicated than with the traditional model. It is particularly important to address these issues bearing in mind that tax authorities worldwide have become increasingly vigilant in recent years, in an effort to protect falling budget revenues.
As Racovitan explains: “Once again, this survey should serve as a reminder that employers who send staff abroad even on short term missions need to monitor this travel closely and take advice on the tax and social security position. One of the major misconceptions which many employers have is that an employee only becomes liable to tax in a foreign country if he or she spends more than 6 months there. While this is generally true for salary income paid by the home employer, shorter stays can still generate a number of other potential liabilities. For example, any local income or commissions earned are likely to be subject to withholding tax, while in some cases, the employee’s activities might generate a Permanent Establishment in the country concerned, with associated corporate tax liabilities for the employer. If the employee travels frequently, he or she will also need to keep a close check on the number of days spent in each foreign country visited. A lot of short trips over a few months might lead to the employee becoming a tax resident without realising it!”
As Racovitan adds: “It is also particularly important to keep in touch with legislative changes in all the countries to which employees are sent, whether on short or long term postings. In Romania this year, we have seen significant amendments to legislation on social security, introduced at quite short notice. These generated new obligations for certain categories of expatriate staff and their employers. Failure to comply with legal requirements can generate significant demands from the authorities for back payments and related penalties, which can seriously disrupt a company’s business planning. So getting up to date information in all the countries concerned is critical.”
Racovitan continues: “Moreover, we have noticed recently that more and more Romania-based companies are expanding their operations outside the country. These firms frequently send their staff on short term foreign business trips to develop expansion projects, or to provide services to clients in other countries. Deploying Romanian personnel to other European jurisdictions has become a relatively easy process (especially to EU countries). However, one should not ignore the immigration formalities which still have to be fulfilled for Romanian nationals in certain European jurisdictions, or the social security compliance requirements before or during such short-term business trips (even where we are talking about trips which do not exceed a few weeks).
Racovitan notes: “There are cases where Romanian employers are not aware of local requirements in the jurisdiction where they deploy staff, and, at some point, they are faced with significant penalties or fines charged by the local authorities. In other cases, the employees themselves are faced with either restrictions on entering or staying in a country or are subject to tax, social security or other liabilities, which may significantly disrupt the business or even worse, can change what looked like a profitable project into a disastrous loss-making business decision.”
As Mark Gibbins, Head of Tax Department at KPMG in Romania adds; “Once again, this year’s Thinking Beyond Borders survey shows how important it is for companies to take tax into account at policy-making level when they make decisions on staff deployment, and to seek expert advice on all the tax and social security implications of both long and short term postings. This is not a matter which should simply be treated as a purely administrative issue- it should be a critical part of a company’s strategic planning.”