Tax cross-border problems

Tax cross-border problems

There is no EU law that states how people moving from one country to another within the EU should be taxed.

For example, the rules about taxation on pensions differ between Member States. These differences can create problems for people who have worked in one Member State but retired in another, in some cases leading to pensioners being taxed twice on their income.

Individuals exercising cross-border activities within the EU are often confronted with different/ additional tax issues compared to individuals who are active only within a single EU country.

The issues that can arise may include complex administrative procedures in one or both countries involved that make tax compliance difficult; language barriers; different interpretations of tax treaties by the EU countries involved; difficulties in accessing relevant tax information; and difficulties in identifying officials responsible in national tax administrations.

The problems often stem from the fact that two or more EU countries may have the right to tax the income in a cross-border case. Even if procedures exist in theory to prevent double or multiple taxation, the application of those procedures may be very complicated in practice.

Cross-border taxation for individuals with assets/transactions spanning more than one country is usually always complex and often subject to conflicting legislation in different jurisdictions.

The interaction of one country’s domestic legislation with that of another can be a difficult process to unravel, particularly where there is no Double Tax Agreement (DTA) in place and/or there is conflict in the way two countries treat any one asset, entity or transaction, and in the way reliefs and credits are applied.

Where there is a DTA between countries, this can help with some of the uncertainty and prevent double taxation by overriding domestic laws, fixing an individual’s residence in any one country and determining the taxing rights of each party to the agreement on various sources of income or gains.

On death, the position can be complicated even further, especially where there are probate issues and where access to the deceased’s funds/assets is thwarted by jurisdictional conflicts of laws.

However, DTAs do not cover all countries, and there are even fewer Capital/Estate Tax Treaties.  Double taxation may therefore be unavoidable in some cases.  Similarly, should a DTA not allocate rights to tax a particular type of income, gain or asset then each country will be entitled to apply domestic law, and there is again a risk of double taxation.

The interaction between the different domestic tax codes, even with reference to an appropriate DTA, is often far from straightforward.  Each domestic tax code recognises different vehicles for instance, trusts are frequently used as a tax planning vehicle in the UK and the US, but are not recognised in France or Spain; Sometimes there is inconsistency in the taxable person e.g. gift and estate taxes are levied on the donor/deceased in some countries but on the donee/beneficiary in others. There are also endless interpretational differences of key terms (e.g. domicile) and inconsistency in the application of reliefs/exemptions (e.g. the treatment of gifts/bequests between spouses).

While it is encouraging to see that the European Commission is looking at eradicating some of the challenges involved in cross-border taxation, this may well prove to be a tough task, given that domestic tax laws are constantly changing, and therefore so too are the cross-border interactions.  The reality is, and may always be, that high net worth individuals with multi-jurisdictional interests are governed by several different tax codes, and the interaction between those codes, on a technical,  legal and practical level, will always prove challenging.

Nevertheless, there may be scope to ease the burden on the individuals concerned. For instance, more cohesive administrative procedures (e.g. on death), a central EU code/categorisation of different entities, and clearer systems for awarding foreign tax credit reliefs and allowances would be welcomed, as would the introduction of more Capital Taxes Treaties.

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