24th February 2021
With more contractors looking to work internationally, there’s a lot of potential for recruitment agencies to tap into the highly lucrative work of placing contractors in overseas positions. However, while there is plenty of potential to develop revenue through international placements, it’s not without its compliance challenges.
Cross-border tax issues have increasingly come under scrutiny in recent years, driven in large by the revelations of the Panama Papers, which exposed significant illegal tax operations across the globe. With Government agencies scrutinising employment tax payments, it’s more important than ever that the contractors your agency places are fully compliant with local and global laws.
In this blog, we take a look at two recent tax developments that could have implications for your agency.
Corporate Tax Avoidance
Portugal sitting in the seat of the EU presidency looks set to bring about big changes regarding how the European Union investigates tax avoidance. Over the past five years, member states have fought over one important tax measure: changing a law that would require transnational companies (such as Google) to disclose their income tax information.
The issue of corporate tax has historically been a thorny one. Some large companies have been able to move a large chunk of their profits to what’s referred to as ‘letterbox companies’; these are essentially shell companies set up in countries with low tax rates, such as Ireland or the Netherlands. It is estimated that Google alone has managed to avoid paying taxes to the tune of €20 billion each year within the European Union by using this approach. With Portugal now taking over the Council Presidency at the EU, there has been further movement to close this loophole.
The obligation to report taxes has previously been proposed by Portugal, but rejected by Germany. The hope is that by making reporting taxable income in a transparent way a requirement, public pressure to change the system will grow. Currently, citizens don’t know how much tax is being lost in their country through the use of these shell companies.
These reforms are not new, though; they’ve been discussed for some time now. However, the talks have never developed, due to pressure from Germany lobbying groups, who argued that it would put German companies at a disadvantage in the international market. The German Government even went as far as creating an alliance with other European Member states that meant that the 55% agreement of states to pursue the matter could never be reached.
However, circumstances have changed and more of the member states that joined the alliance have changed track, with support for a law to make tax reporting transparent now growing.
The move to pass the law will begin on 25th February at the next Council of Ministers meeting. This will take place online and can be streamed live by the public. If it passes, then companies that pay taxes through shell companies within Europe will no longer be able to keep their operations a secret.
Tax Scandal in Luxembourg
Another big tax news story comes from Luxembourg, where it has emerged that criminal organisations and the wealthy have been concealing their money in a bid to avoid scrutiny.
A recent investigation found that there were around 55,000 off-shore ‘companies’ operating within Luxembourg, with assets with a combined value of around €6 trillion. The report was carried out by French newspaper Le Monde, which discovered that among the companies that have a presence in Luxembourg were some with global criminal ties. Not only that, but a political party in Italy – the League Party, a far-right party – were also allegedly hiding money in the small landlocked country, in a bid to conceal their finances from the authorities in their home country.
The revelations have put even more pressure on the European Union to do more to tackle tax fraud. Tax Justice Network, an NGO, found that Luxembourg is one of the world’s leading tax-avoidance enablers and it is estimated that around €23 billion is lost in revenue each year as a result of fraud in the location. To combat this reputation, Luxembourg made its tax information available online. However, the system implemented has been criticised as overly complicated to use.
Tackling EU tax issues
The European Union Commission has committed to using its resources to not only shine a light on tax avoidance but to also pursue legal battles and amend regulations to make it more difficult for organisations and individuals to take advantage of existing loopholes.
However, with so many high-profile tax avoidance cases coming to light in recent years and global authorities facing increasing pressure to recover much-needed funds, things will likely change sooner rather than later.
For staffing companies tapping into the global recruitment market, this increasingly complex tax landscape presents a compliance headache and has the potential to expose your business to new risks.
To ensure that your recruitment agency and the contractors it places internationally are operating on the right side of the law, it’s recommended that they seek expert advice from an international contractor management firm. In doing so, you’ll be helping your firm avoid potential fines or even criminal charges that can be pursued as a result of non-compliant behaviour.
Contact the 6CATS International team today to find out how we can help you.