Preferential tax regimes are often used to attract high-income and wealthy foreigners by offering them a lower tax burden on their income and wealth. Such developments have indirectly created an environment in the EU where member states compete for labor and capital. Ultimately, this is likely to have a detrimental effect on the EU single market unless member states reconsider their tax policies.
The EU Tax Observatory has recently published an empirical study on tax competition between Member States, with particular attention to personal taxation. The study found that some preferential tax regimes implemented by member states could be detrimental to the EU single market if they continue.
This follows a recent EU crackdown on member states selling “golden visas” and EU citizenship-by-investment schemes. Reported abuses of such schemes by Russian oligarchs have shone a spotlight on the practice in some member states, especially since the invasion of Ukraine.
As a general rule, when an EU Member State offers lower tax rates on wealth and, in particular, on (high) personal income, it must find a way to cover the “lost” revenue which naturally result from preferential tax regimes, since expenses and liabilities do not decrease.
To achieve this, some Member States have chosen to increase social security rates which are paid by the whole population and only certain foreign workers. (Foreign workers who are temporarily assigned to work in another Member State will in most cases be exempt from social security contributions in the host Member State as they continue to be covered by social security in their country of origin.) The EU Tax Observatory report shows that this option is generally preferred by countries in the eastern part of Europe.
Other Member States have chosen to compensate for “lost” revenue by increasing taxation of the general population or by introducing other forms of taxation.
This contrasts with some non-member states, such as Switzerland, which actively pursue a policy of attracting talent and capital by offering low tax rates at both personal and corporate level, with no intention or need to generate revenue elsewhere to compensate – on the basis that attracting business increases overall tax revenue and GDP.
Over the past 15 years since the global financial crisis, the Organization for Economic Co-operation and Development, the G20 and the EU have focused on combating the harmful effects of global tax policies and practices that offer perceived unfair advantages to certain businesses and corporations. This has resulted in a number of initiatives, such as strengthened transfer pricing rules, anti-tax avoidance provisions, new nexus and apportionment rules for the digital economy, reporting of tax schemes potentially aggressive measures, the abolition of harmful tax practices and, more recently, a global minimum corporate tax rate. The taxation of personal income and wealth, however, was not part of this base erosion and profit shifting (BEPS) program.
It is only more recently that the EU took up this subject following the study published by the EU Tax Observatory. In January 2022, the University of Munich produced a report, at the request of the European Parliament’s Economic and Monetary Affairs Subcommittee on Tax Issues, which examined tax competition for mobile taxpayers. The report looked at preferential personal tax regimes and tax rates within the EU, as well as evidence of tax-induced mobility. The study examined preferential tax rules in Greece, Cyprus, Italy, Portugal, Austria, Belgium, France, Malta, Finland, the Netherlands, Sweden, Ireland and Luxembourg.
Therefore, we can expect the attention of policy makers to begin to turn to harmful tax practices with regard to the taxation of mobile taxpayers, particularly as the long-running G20/OECD project touches coming to an end with the agreement on BEPS 2.0 Pillar 1 (Corporate Profit Allocation) and Pillar 2 (Minimum Corporate Tax Rates). The time is certainly near when similar attention will be given to personal tax competition between states.
Post-COVID Remote Work
Now that the pandemic has accelerated hybrid working from home, more and more people are looking to work remotely across borders. The consideration of tax rates in such arrangements often has a significant influence on the choice of destination for remote work. If this trend of cross-border remote work continues to increase, as many predict, it will potentially shift tax revenues from high-tax countries to low-tax countries, thereby draining government revenue in high-tax countries. . Several countries are already promoting themselves as “digital nomads” and remote work destinations by offering work visas that don’t require a local sponsor, often in conjunction with tax breaks (and better weather).
It is often claimed that sovereign states are free to compete for talent, tax revenue, and capital, just as they are free to compete for trade and technology. As we have seen with BEPS, however, the global community frowns on harmful competition resulting from excessive tax exemptions and negligible tax rates, and is prepared to act multilaterally to discourage such practices.
EU labor regulations
Although EU initiatives on personal income and wealth taxes still have a long way to go before agreement is reached and changes are implemented, the EU continues to introduce a range of other reforms that will have a lasting effect on the EU labor market. In 1996, the EU adopted a directive which defines a set of “basic” employment conditions that a company must respect when posting employees from one EU country to another (the country of ‘welcome). This guideline has recently been revised and one of the most significant revisions relates to salary. According to the revised directive, posted workers must be paid at least as much as local workers in the same position (the so-called “equal pay” condition) and the payment must include all the mandatory elements of a salary and not just a salary basic .
In addition, the EU has introduced compulsory registration of posted workers in the host country. Several Member States have extended the registration requirement beyond the scope of the EU Directive, for example by requiring the registration of workers posted from a non-EU country and the registration independent workers. Failure to comply with the general conditions of employment and registration of posted workers is generally heavily sanctioned and often treated as a criminal offence. Recently, the authorities have focused on labor inspections and more audits are expected.
Other EU directives coming into force impose additional requirements on employers, such as written contracts with clearly defined terms and conditions when the job is to last at least four weeks. The EU also puts pressure on Member States to define and update minimum wages and encourage social partners to organize and collectively negotiate wages and other working conditions.
What the future holds
Countries will be forced to conform to EU-set standards and parameters on what constitutes fair tax competition, and they will have to seek international solutions when considering new tax policies and other initiatives to attract foreigners and capital. Otherwise, the current imbalances in the EU single market regarding the movement of people and their capital will create losers and winners in Member States which ultimately could erode the foundations of the free movement of people, services and goods. EU capital.
The more holistic approach of policies and initiatives is already relevant for the growing number of cross-border remote workers. The EU’s Economic and Social Committee has just published an opinion urging member states to provide flexibility in taxing remote workers, such as setting thresholds that would delay the triggering of taxation in the state. host member. The same flexibility is offered in the area of social security contributions.
While there is a generally positive view of reducing burdens on remote workers and their employers, these discussions are facing new challenges. One such concern is the definition of “remote workers”. If certain flexibilities are put in place for remote workers, should they apply only to people working from home or should they also encompass those working from a hotel or short-term rental duration ? Should the relaxations applicable to remote workers apply regardless of the type of work performed by an individual, or should there be other requirements? For example, no interaction with local markets etc.
These discussions will determine whether the future holds an aligned approach to remote working or a situation where each Member State acts unilaterally. The outcome of these discussions and solutions could possibly influence general attitudes towards the EU and national governments, especially if some states are left behind, unable to access skilled labor and sources of capital. . It should be remembered, of course, that tax positions between EU Member States are largely governed by bilateral tax treaties rather than EU regulations, so this is an area where the OECD plays a important role.
The Netherlands provides an interesting example of an existing preferential tax regime for incoming workers. The Dutch scheme offers an exemption for foreign workers in which 30% of their income is exempt from Dutch taxes. This is generally considered to be a very advantageous tax regime which has attracted a lot of skilled workers to the Netherlands. However, the Dutch government is currently considering abolishing the scheme altogether.
Similar to the crackdown on “golden visas” and corporate profit shifting, we can expect multilateral action by powerful high-tax countries in the OECD and G20 to force the abolition of harmful individual tax practices in small states looking to attract expats, digital businesses. nomads and inward investment.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Daida Hadzic is Head of Quality at KPMG for Global Mobility Services (EMA) and Daniel Foster is Director of KPMG, Tax & Legal, Global Mobility Services, Switzerland.