How to Deal With Employee’s Questions on Personal Income Tax

For the human resource practitioner, we are interested about personal income taxes of employees and sometimes, independent contractors because sometimes our jobs may require us to prepare and submit data on employment income to the local tax authority as well as to act as the income tax collecting agent for the local government.

Despite of this compliance role, we are not in a position to advise the employee on his or her personal income tax matters. The difficult cases are the ones involving employees who are non-resident foreigners and employees that have been provided with benefits in kind.

Introduction

Governments impose different types of taxes. It is 1 of the different ways that governments obtain the resources for funding the running of Government agencies and programs. The types of taxes include income tax, tariffs, sales tax, property tax, excise tax and estate tax.

With regards to income tax, governments vary the tax rates for 2 main reasons: (a) To distribute the tax burden among individuals or classes of the population involved in taxable activities, such as business (b) to redistribute resources between individuals or classes in the population.

Terminology Used in International Assignment

The following definitions are provided by the Society for Human Resource Management (www.shrm.org):

(a)   Local or host-country nationals – These are employees are hired for jobs in their own country. They are the domestic employees of the subsidiary of a multinational company. For example, a Singapore citizen who is employed at Procter & Gamble’s Singapore subsidiary is a local national.

(b)  Expatriates – These are employees who are asked by their employers to work outside their home countries for a period of time with the intent of eventually returning to their home countries. They are the domestic employees of a multinational company. Expatriates who are from the country where the company is headquartered are referred to as headquarters expatriates. An expatriate may also be referred to as a parent-country national.

(c)  Third-country nationals (TCNs) – These employees who are not citizens of the home or host countries, that is they do not have the citizenship of the parent company’s home country or the country of employment. TCNs includes international freelance employees, that is technical or professional employees hired for short-term employment for example a British citizen employed by Procter & Gamble on a 6 months contract to work in Procter & Gamble’s Singapore subsidiary.

(d)  Inpatriates – These foreign national employees have been transferred to work in the home country of an international organization on a temporary or permanent basis.

International Taxation, Taxation Systems and Source of Personal Income

International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country’s tax laws.

Personal income can come from domestic and foreign sources (foreign earned income). The term “worldwide income” refers to aggregation of a taxpayer’s domestic and foreign income. Worldwide income is income earned anywhere in the world and is used to determine taxable income.

In general, there are two systems of income tax – territorial or residential. In the territorial system, only local income (income from a source inside the country) is taxed. In the residential system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. In addition, a very small number of countries, notably the United States, also tax their nonresident citizens on worldwide income.

Identifying Individual that is Liable for Income Tax

For the purpose of determining tax liability, it is important to establish the residency of the person, that is identifying the location of the person’s tax home. The tax home is defined as the general area employment, where the individual is permanently or indefinitely engaged to work as an employee or self-employed individual regardless of where he or she maintains his or her family home. The residents of a country include (a) individuals who have their domicile in the country (b) individuals who do not have their domicile in the country but resides in the host country for a specific period of time in the country long enough to be considered as a resident by the local tax authority.

The term “normal resident” refers to a person who ordinarily resides in the country in where his or her center of economic interests lies. Normal residents can be of 3 types:

(a)   Citizens residing in the country of which they are the nationals, such as Singaporeans living in Singapore.

(b)   (Resident) foreigners (also called resident aliens) living in a country for a specific period of time in the country long enough to be considered as a resident by the local tax authority.

(c)    Citizens living abroad temporarily but their economic interest lies in the country of which they are the nationals.

Double Tax Agreement

Countries with a residential system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income.

Tax treaties exist between many countries on a bilateral basis to prevent double taxation (taxes levied twice on the same incomeprofit, capital gaininheritance or other item). In some countries they are also known as double taxation agreements, double tax treaties, or tax information exchange agreements (TIEA).

Tax on Benefits in Kind

Benefits in kind are benefits which employees or directors receive from their employment but which are not included in their salary cheque or wages. They are sometimes called ‘perks’ or ‘fringe benefits’. They include things like company cars, private medical insurance paid for by the employer, private use of a company car, free or subsidized accommodation and preferential loans. Some benefits in kind will not be taxed. Some benefits in kind will be taxed only for people who are not in lower paid employment. Some benefits in kind will be taxed for everyone, whatever their income.

Dual Contracts

If the employee is working for a group of companies it may be possible to have a separate contract of employment for duties to be performed wholly outside the host country, for a non-resident employer) with a view to exclude the earnings from that offshore  employment from host country tax.

Collection of Personal Income Tax

Personal income tax is either collected on a pay-as-you-earn basis or after the end of the tax year (year of tax assessment), with small corrections in the following year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid.

Tax Rates and Personal Income Tax Reliefs

Tax rates are normally progressive. The rates are different for resident employees and non-resident employees. The tax rates that apply to non-resident employees are known as withholding tax rates.

Income tax systems will often have deductions available that lessen the total tax liability of resident employees by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages.

Many jurisdictions require businesses paying amounts to non-resident employees to collect tax due from a nonresident with respect to certain income by withholding such tax from such payments and remitting the tax to the government. These requirements are induced because of potential difficulties in collection of the tax from non-residents.  Generally, withholding taxes are imposed on the gross amount of income, unreduced by expenses. Such taxation provides for great simplicity of administration but can also reduce the taxpayer’s awareness of the amount of tax being collected.

Joint Personal Income Tax Assessment

Spouses are taxed separately although it is possible to include a spouse’s income in the tax return of the resident spouse with the greater amount of income.

What Should I Tell My Employees?

It is an emotionally charged situation especially when non-resident employees, especially those at the lower level of the company finds out that their income needs to be withhold from them for tax reasons while they need the money for day to day sustenance and the government takes a big bite out of it for all the hard work they put into their jobs and the abuses they faced on the job. Employees in such situation may become nasty and not be their generally good selves.

As you can see from my brief explanations above, tax is really a specialist’s area. As a HR practitioner, you should not be providing consultations in an area which you are not a regarded expert, not matter how well trained or knowledgeable you are. If you does so, you open yourselves liable to be sue by the employee for providing the wrong information or advise and/or liable to lose your job for doing so and putting the company in a position of liability.

To understand how deep an area tax is, you will be able to find Universities offering degrees in taxation for example SIM University in Singapore offers a Master of Taxation degree course in Singapore. This course was established by the Inland Revenue Authority of Singapore (IRAS), the Law Society of Singapore, and the Big-4 international accounting firms.

SITUATION

SUGGESTED COMMUNICATION STRATEGY

SUGGESTED COMMUNICATION

The non-resident employee was not told that he or she will be subject to withholding tax and the tax rates will be different from a resident employee at the point when the job offer was made. You want to be helpful but you cannot answer for the previous person. Since I am not present when you sign your employment contract, I can only attempt to answer you to the best of my ability.
The non-resident employee ask questions about his or her income tax. Clarify that you are not able to provide any advise. As a broad statement, the local Government impose personal income tax on people who works in this country. Paying income tax is a personal liability. For a through understanding of your tax liabilities, you may want to seek the services of a tax consultant.
The income information was submitted by the outsourced payroll vendor to the tax authority for tax assessment. Highlight that the incomeStatement is not in your hands and you will need time to obtain it. The processing of the payroll was outsourced. I am following up on my request to the vendor for a copy of the tax submission to be provided to you.
The non-resident employee argue about the high tax amount. Clarify that the tax authority is the correct party to approach. The payment of taxes is not for negotiation between yourself and the company. The company is subjected to the law to perform the tax clearance and you are subjected to the law to pay your taxes. If you have objections, you should raise it personally to the tax authority.

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