Placing talent overseas – are you aware of the risks?

Michelle Reilly

More and more recruitment businesses are now operating internationally and are partnering with overseas companies in order to supply contractors all around the world. But with these opportunities also come the challenges of compliance with local tax and regulatory systems.

And while this may not have been a major headache in the past, times have been changing. The number of dedicated tax officers in the UK has multiplied tenfold in the past few years, and we’re not alone. So with this in mind, what do agencies need to be aware of when placing talent overseas?

Even the term compliance can send a shiver up the collective spine of some organisations, however there seems to be some confusion over what it actually means. Quite simply, being compliant – in this case at least – means that all income generated by the contractor is declared in their country of work. While this may seem like a straightforward concept to grasp, in reality, too many firms seem to think they can get away with playing the system and utilising schemes to avoid paying the appropriate levels of tax.

One of these methods is the ‘183 day rule’ which leads many agencies and contractors to, wrongly, think that because an overseas contract is shorter than six months that they do not have to pay tax in the host country. However, this isn’t the case. The rule is an internationally recognised tax concept that aims to protect professionals and corporations from becoming resident in a foreign country if they work there for less than this period of time. And how this is calculated depends on the terms of the particular double tax treaty.

However, there’s considerably more to this rule than just counting down the days. The 183-day rule will only apply if the individual’s employer can prove a genuine employment relationship with the worker in the country where they pay tax and have a history of working with that employee. In addition, the ruling doesn’t apply to self-employed and independent workers, who are being treated as being tax resident in the host country from the start of the assignment.

Historically, many agencies and individuals have also attempted to work on a non-compliant basis by registering A1 forms in locations with more favourable social security rates, such as the Cayman Islands. However, the rules on this particular issue are clear. The worker must carry out substantial work in the country where their A1 was issued and must also have pursued activity in that country for at least two months before working elsewhere. In addition, they also need to have the means to carry on work in the country where the form was issued.

Even for those operating on a completely compliant basis, the international employment markets are full of quirks that both agencies and contractors should look out for and be aware of. One such example is Switzerland, a popular contracting location, which is made up of 26 separate cantons, or regions. What’s so challenging about this you may ask? Well, each canton is subject to an individual set of laws meaning that professionals who work in more than one may be subject to a range of varying employment regulations – and taxes – which can be extremely difficult to manage. In some cases, simply crossing the road can put you under an entirely different tax regime.

Some agencies may feel as if they’re one step ahead of the authorities or that their solution will allow them to continue to ‘get away it’, but the risks just aren’t worth taking anymore. The threat is made all the more significant by the fact that employing someone on a non-complaint basis could potentially impact your end client, not just your agency or an individual. Ryanair, McDonald’s and Mercedes are just some of the major firms to have operated non-compliantly and have faced massive fines as a result. And if they can’t get away with it, which firms can? Even Lionel Messi’s almost superhuman ability on the football pitch hasn’t prevented him from falling foul of the authorities.

Quite simply, the risk of operating on a non-compliant basis is far too severe and the knock on effects so damaging that it’s just not worth the risk. If you’re placing talent internationally on a contract basis, make sure your firm is aware of each relevant country’s legislation, otherwise you, or your end client, could face a severe punishment or even worse.

Michelle Reilly is managing director of CXC Global.