Poor marks for Germany in expat tax ranking
18 April 2005, FRANKFURT AM MAIN - Germany has one of the highest tax loads for expatriates in Europe, despite personal income tax reforms earlier this year, according to a new study.
18 April 2005
FRANKFURT AM MAIN - Germany has one of the highest tax loads for expatriates in Europe, despite personal income tax reforms earlier this year, according to a new study.
The 'International Taxation of Expatriates' study was carried out by consultancy firm PricewaterhouseCoopers (PwC) in conjunction with the Mannheim-based Centre for European Economic Research (ZEW), with the aim of finding out how attractive Germany was to companies with expatriate employees in comparison with other European countries, China and the US.
The authors combined PwC data about tax regimes in different countries with a simulation model developed by the ZEW known as the 'Human Resource Tax Analyser' which allowed comparisons between different social security and taxation systems. The 20 countries covered in the study were: Austria, Belgium, China, Czech Republic, Finland, France, Germany, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, Russia, Slovakia, Slovenia, Sweden, Switzerland, the UK and the US.
The study compared the 18 European countries in terms of their attractiveness in terms of tax costs to a hypothetical US company sending employees abroad. For the case of an unmarried employee earning an assumed net salary of EUR 75,000, Germany was ranked a disappointing 14th. The result was slightly better for a married worker, due to German tax breaks for couples, and the country edged up to 9th place in the league table.
However without the lowering of income taxes at the beginning of 2005, Germany would have come in even worse, ending up in 16th place for single workers and 10th for married workers. Unlike countries such as Finland, Sweden and the Netherlands, there are no tax incentives for expatriates living in Germany.
The results show that the Czech Republic, France and the Netherlands were the cheapest countries to send employees, while Belgium and Slovenia were the most expensive.
The study also examined costs to a German company of sending employees abroad and found that Russia (which has a top income tax rate of a paltry 13 percent), Switzerland and Slovakia were the cheapest countries, with costs for an unmarried employee being respectively 6.7 percent, 5 percent and 2.3 percent cheaper than employing the same person in Germany.
When the model's assumed EUR 30,000 foreign posting compensation was taken out of the equation, postings to Russia became 30 percent cheaper than Germany. "Sending an employee abroad can sometimes be cheaper than employing that person in Germany", explains Professor Dieter Endres, head of PwC's tax division.
Belgium and Slovenia on the other hand were the most expensive countries for German companies to send their workers, being 31.8 percent and 46.3 percent more expensive respectively.
The study revealed that, in terms of a country's financial attractiveness to expatriate workers, the most important factor is the rate of personal income tax. Social security contributions were also an important factor, but less important than income tax as they tend to be limited by an upper income ceiling, and many expatriates prefer to remain members of their own country's social security system. An expat's marital status and number of children were additional important factors.
According to the study's authors, companies can reduce their tax burden for international assignments by structuring the timing of payments, dividing taxation between different countries, and granting stock options in a tax-beneficial way.
The authors point out that host countries are in competition for expatriates with their personal income tax systems, and recommend that Germany consider rates of personal income tax (especially on high level salaries) as well as rates of corporate tax when considering how to create an attractive tax climate for multi-national companies.
One possible drawback of expatriate assignments is double-taxation of pension contributions, due to mismatches between national tax systems. The authors say that such double taxation violates EU regulations on free movement of labour and constitutes discrimination against expatriates.
Expatriates affected by double taxation of pension contributions should claim their rights in court, taking their case to the European Court of Justice if need be, say the authors.
The executive summary of the study can be downloaded from http://www.pwc.com/de/ger/about/press-rm/Executive_Summary.pdf
[Copyright Expatica News 2005]
Subject: German news