Due to globalization and the increasingly integrated nature of regional economies, workers largely operate cross-border on a highly mobile basis. Truck and train drivers employed in the road and railway transportation, for example, often commute cross-border on a daily basis.
Because of this highly mobile character of activities, difficulties arise regarding the place of exercise of employment for tax purposes, and affiliated (dis)coordination difficulties between tax and social security rules.
Case study: A Belgian resident works as a traveling truck driver (employment relationship) cross-border assume the following two situations: i) the truck driver works 50% in Belgium and 50% in Germany for an employer established in Cologne (Germany), and ii) the truck driver resides in Belgium and usually drives through Belgium, Germany, Luxembourg, and the Netherlands for an employer established in Hasselt (Belgium). Which state may tax the income of the truck driver? In which state does the truck driver need to pay the social contributions? Is the tax and social security position coordinated?
While for social security the EU has taken the lead in laying down which Member State is competent to levy contributions (Title II of Regulation (EC) No. 883/2004), taxes are still outside such EU instruments and are governed by double tax treaties. Departing from a case study, this article highlights the questions, problems and challenges for highly mobile workers resulting from the different competences.
The OECD Model does not provide special provisions for the specific category of international transportation workers. Therefore, the general taxing rule for employment income in Article 15 OECD Model applies. The “place of exercise of the employment” determines whether or not a state other than the residence state of the employee may tax the employment income (‘place of work’-principle).
The employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. The highly mobile worker would have to show for how long he or she was present in any of the states he or she drove through. If he or she was in one state for more than 183 days, this state bears the primary taxing right for the income earned by the highly mobile worker during this period. In most cases, the highly mobile worker is present in all of the states concerned for less than 183 days.
In this case, the taxing rights will remain with the residence state (on the condition that the individual is only working in the interest of his/her employer not a resident of any of the other states). The difficult application of taxing rights traces back to the determination in which state and under precisely which conditions the employment is being exercised in the other contracting state. Due to the division/fragmentation of taxing rights, complex and difficult verifiable situations and a heavy administrative burden exist for the tax authorities and international employees as well as for transportation companies.
Thus, a truck driver residing in Belgium, but working for an employer established in Germany consecutively in both Member States (50% in Belgium and 50% in Germany) is subject to the legislation of both Belgium and Germany. A truck driver who resides in Belgium and usually drives through Belgium, Germany, Luxembourg, and the Netherlands for an employer established in Belgium, is subject to the legislation of Belgium on the condition that he is present in all of the states concerned for less than 183 days.
Social security status
For highly mobile workers, the single rule that only Member State for social security is competent, applies (Article 13 of Regulation (EC) No 883/2004). Due to the lack of specific guidelines in Regulation (EC) No 883/2004, general guidelines for employees who normally work in two or more EU Member States apply.
The residence state is competent in cases the highly mobile worker exercises a substantial part of all activities (25% of income and/or working time in the next twelve months) in this state. If not, the Regulation provides for a rather complex system under which the competence is allocated to either the Member State where the employer, or one of the employers, is established (i.e. employment by undertakings with registered office in the same Member State or residence state) or, again, the residence state (i.e. of employment by various undertakings or various employers with registered offices/places of business in different Member States outside the residence state).
The competent Member State has to cover the whole activity or activities exercised in the EU as if they were exercised in the competent Member State (Article 13(5) Regulation (EC) No 883/2004). Consequently, also income received in another Member State for the same employer or for any different employer becomes subject to the legislation of the competent Member State as if it were gained there.
The situation of highly mobile workers under Article 13 Regulation (EC) No 883/2004 is always delicate and not easy to decide. A look into the future is necessary: what will be the assumed situation in the next 12 calendar months?
In the expectation of repetitive activities in more than one Member State, the conditions for activities normally exercised in more than one Member State are fulfilled. For the determination whether or not substantial work has been carried out in the residence state, a closer examination of the working arrangements (i.e. timetables, travel schedules or other data) or a method other than working hours (i.e. the number of times of loading and unloading of cargo and the different states in which this takes place) may be needed.
Thus, a person residing in Belgium, but working for an employer established in Germany consecutively in both Member States (50% in Belgium and 50% in Germany) is subject to the legislation of Belgium, as a substantial part of the activities is exercised there. A truck driver who resides in Belgium and usually drives through Belgium, Germany, Luxembourg, and the Netherlands for an employer established in Belgium is subject to the legislation of Belgium. Note that even in cases in which the 25% rule is not fulfilled (e.g. residence in Belgium but engagement always in Germany, Luxembourg and the Netherlands), Belgium is the competent one (although no activity is exercised there) in case the truck driver is employed by various undertakings or various employers with registered office in different Member States (Article 13(1)(a) Regulation (EC) No 883/2004).
Note that the competent state for taxation is not always aligned with the competent state for social security contributions. Social security contributions have to be paid in one Member State only, which has to be identified on the basis of the residence of the worker concerned and the place of the establishment of the employer(s). Taxation can differ depending on the type of activity exercised in more States; in the case of highly mobile workers the income is taxed wherever the concrete activity is exercised (taxation in different States).
Possible solution – future actions to be taken
Note that a special taxing rule for income of employees working aboard a ship or an aircraft operated in international traffic is laid down in Article 15(3) OESO Model Treaty.
Since the 2017 OECD Model-Update, the exclusive taxing rights are allocated to the residence state of the employee and no longer to the contracting state where the effective management of the company is situated. The taxing rights to the residence state can help to avoid tax base fragmentation issues.
As the situation of the international road and railway transportation workers physically present in multiple jurisdictions arises the same difficulties as for workers employed aboard ships or aircraft, Article 15(3) could be extended to the international road and railway employees. A residence state-based tax system is (partly) affiliated with the social security levies.
In addition, highly mobile workers primarily use the public facilities of the residence state and limit their presence in the source state to the extent required for the exercise of their employment. From an efficiency point of view, a multilateral or EURO Model Treaty can also be pursued, in which the tax allocation rules are aligned on the rules of Regulation (EC) No 883/2004. The more than 3.000 double tax treaties would no longer need to be adjusted before the beneficial effects of the changes could have an effect.
The social security levies and the taxing rights would then pass through the same level. The tax authorities of the Member States concerned could agree on the distribution of the tax revenues obtained from cross-border employment (so-called revenue-sharing at the macroeconomic level). Moreover, the budgetary consequences would no longer be resolved at the level of the individual stakeholder, but at the level of the authorities themselves.
By Hannelore Niesten, ITEM