Globalisation has dramatically changed the way in which companies conduct their business across the world, increasing the demand for internationally mobile executives (IMEs). Forecasts suggest that the number of IMEs will continue to increase significantly in the coming years.
However, the tax and social security systems in individual countries are the product of long history, adaptation to worldwide developments and political, cultural and social considerations. The detail varies significantly from country to country and this complicates the position when it comes to the treatment of pensions. As the number of countries to which assignees are sent expands, so do the complexities associated with the interaction of complex pension rules.
A study entitled Taxation of Internationally Mobile Executives (TIME), which included a survey of international tax practitioners around the world, found that there are significant risks and uncertainties attached to the complex interaction of national tax rules on pensions and that the network international tax treaties do not always provide relief or eliminate additional taxes and charges.
The following can act as barriers to the movement of international directors, executives and employees: International agreements – not many tax treaties contain provisions on the tax treatment of pension contributions. Provisions on pension income is not always consistent between countries; EU harmonisation – these rules are not particularly effective at either harmonising the EU rules on pensions or ensuring tax efficient pensions contributions for IMEs; international definition – there is no universal definition of what a pension is e.g. pension vs. social security tax vs. provident funds; transferring funds internationally – it is usually complicated, not possible or expensive to transfer pension funds between countries when an individual relocates; lump sum treatment – there is inconsistency between countries on the treatment of lump sum payments.
Mandatory pension systems vary from country to country. Many countries provide tax incentives to encourage contributions to local pension or retirement funds. This may take the form of a deferral mechanism such that both the contributions to the fund and the income earned in the fund are exempt from tax, but pension benefits are taxed upon receipt. Other countries, however, consider pension contributions to be akin to other forms of savings mechanisms and do not provide special tax treatments by way of exemption, but on the other hand do not tax the benefits once they are paid.
There are many other possibilities and complications such as eligibility requirements for relief and different tax treatments depending on the type of pension fund therefore commonly arise – for example, whether they are mandatory or voluntary schemes, state or private, occupational or individual retirement schemes, and lump sums or recurring payments.
Additionally, IMEs will often wish to continue their contributions to a pension scheme while overseas, particularly to avoid a loss of rights and benefits and because having pension arrangements in a number of countries can further complicate their position.
In addition to the tax consequences for the individual, there are also corporation tax consequences for the employing company for its contributions. The net cost to the employer must also be assessed and if contributions to an IME’s pension arrangement are not tax deductible, this needs to be taken into account when making decisions about the overall costs associated with sending individuals on international assignments.
We recommend that pensions are made more mobile for IMEs by developing a truly international pension regime and pension vehicle, and that the number of tax treaties providing reciprocal pension relief is increased. It is also necessary to provide a universally accepted definition of a pension and it core attributes.