Income Tax Treaties - The "183 Day Rule"
GTN Newsletter - February 2014
Brett Sipes, Branch Director
Phone: +1.949.231.5864 | Email: firstname.lastname@example.org
As a follow-up to our January 2014 newsletter regarding short-term assignments, in this month’s newsletter, Brett Sipes, a Director in GTN’s Pacific region, highlights the impact of income tax treaties on the tax cost of short-term assignments.
I've heard that an individual on a short-term international assignment of no more than 183 days will be exempt from tax in the Host location. How does this work?
There is vast network of income tax treaties globally. For example, the U.K. has income tax treaties currently in force with over 100 countries. The U.S. has income tax treaties currently in force with over 50 countries. An income tax treaty typically includes an article, often referred to as the "183 day rule", which addresses the taxation of employees working temporarily in a country. If an employee and employer meet the requirements of this article, the employee will not be subject to income tax in the Host location.
Under the OECD Model Income Tax Treaty (model treaty), an employee will not be subject to income tax in the Host location if:
- The employee is present in the Host location for no more than 183 days in a twelve month period commencing or ending in the taxable year concerned; and
- The compensation is not paid by, or on behalf of, an employer resident in the Host location; and
- The compensation is not borne by a permanent establishment or fixed base which the employer has in the Host location.
Note that certain countries are now considering the “economic employer” of the employee. The treaty would not apply if the Host location is deemed the economic employer. As a result, the employee would be taxable in the Host location. These rules should be reviewed on a country by country basis.
Given that each treaty is unique, we recommend you review the specific treaty to avoid potential traps, which include, but are not limited to:
- You should verify that there is an income tax treaty between the Home and Host locations. Without a treaty, local tax laws will apply. For example, the U.S. does not have a treaty with Singapore. Thus, under Singapore tax law, a U.S. employee will be taxable in Singapore if present more than 60 days in a calendar tax year.
- The number of days allowed in the Host location can be based upon either a "rolling" twelve month period or on a tax year basis. In addition, the number of days allowed per the treaty may be less than the 183 days noted in the model treaty.
- Countries may differ on how the days present are counted. For example, Sweden includes both the day of arrival and the day of departure as a day present in Sweden for determining the 183 days for income tax treaty purposes.
- The treaty may not apply to local income taxes. For example, a number of U.S. states, including California and New Jersey, do not follow the federal treaties. Thus, even though the employee is exempt from U.S. federal tax, they still may be required to pay state income tax and file a state income tax return.
If our employee is exempt from tax in the Host location under the treaty, are any tax filings required?
Even though the employee may be exempt from income tax under the "183 day rule", the Host location may still require the filing of an income tax return or other form to document the treaty exemption. For example:
- The U.S. requires a non-resident to file an income tax return if the U.S. source income is greater than one personal exemption (currently $3,300) even if they are exempt under the treaty.
- A German national working in Singapore, but exempt from tax under the German/Singapore income tax treaty, must obtain a signed statement from the German tax authorities and submit this with a letter to the Singapore tax authorities to support the treaty exemption.
- The U.K. has various reporting requirements for payroll and tax purposes depending upon the number of days the individual spends in the U.K. in a tax year.
There are many other examples where a Host location requires reporting of a treaty exemption even though no income tax is due. Many countries are actively conducting audits of companies' compliance with the reporting requirements.
As you can see, the treaty exemptions and tax reporting requirements vary widely and are dependent on the Home and Host location. We recommend each assignment be reviewed to maximize the treaty benefits available on a worldwide basis and to ensure proper income tax reporting in both the Home and Host locations.
If you have any questions regarding short-term assignments, please feel free to contact Brett at email@example.com or +1.949.231.5864.
The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.