Expatriate taxation - CIOT - The Chartered Institute of Taxation

CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION
9.17 Rule 2 is: “The time when a person becomes entitled to payment of or on
account of the earnings”. The question is whether an expatriate who has
signed up for an assignment and has agreed to the tax equalisation policy
has agreed to become not entitled to payment of the earnings to the extent
that they represent hypothetical deductions. Whilst there is room for doubt as
to whether he has ceased to be entitled to the earnings, it seems entirely
tenable to argue that, when you have agreed to have your net earnings
reduced to take account of hypothetical tax, you have agreed that you will not
be entitled “to receive” those earnings so long as the rules relating to tax
equalisation as set out in the employment contract or the company policy are
concerned.
9.18 I contend that Rule 2 is also capable of being complied with.
9.19 Rule 3 relates to directors. Virtually all tax-equalised expatriates are not
directors of companies. They cannot be a director of a UK company and be
paid net of tax, as that is contrary to section 310 of the Companies Act. They
would be unlikely to be a director of another company if they are expatriated
to the UK. However, if they were, then Rule 3 could bite, as Rule 3 provides
for the earnings to be treated as received on the earliest of the three events
listed there. Directors are worthy of further examination, but are beyond the
scope of this paper.
9.20 So far, we have looked at the adjustment of the earnings by hypothetical tax
and concluded that it appears to be a valid reduction of the net earnings to be
grossed up. We now have to look at what actual taxes are being paid in
consequence of the hypothetical deduction from the earnings.
9.21 For normal compensation, it is self-evident. However, in the example above,
there is also the taxation of a stock option exercise. A stock option exercise
of itself is not necessarily subject to UK tax, especially if it were granted prior
to arrival. Likewise, an LTIP award that relates solely to service prior to
arrival in the UK may also have no UK tax attaching to it. However, if the
income has been brought into the hypothetical tax calculation, then it will have
been done so on the basis that the home taxation will be borne by the
employer in exchange for the employee’s paying only the hypothetical taxes.
As such, the reason the employer pays the home tax on the LTIP is because
the employee is on assignment in the UK. It means the home country
taxation should be earnings from the UK employment, and therefore taxed as
such, “when paid”.
9.22 There is an argument that, if the underlying stock option is free of tax in the
UK, then any taxation in the home country can be ignored. This misses the
point as to why the tax is being paid by the employer. The non-UK taxable
stock option exercise is a smokescreen. It does not matter what the taxes
are. If the reason the taxes are being paid is by virtue of the employment
agreement between the employer and employee, any payment made by the
employer will be sourced to that employment and will be earnings from that
employment.
9.23 It is therefore correct to deduct hypothetical taxes and social security from the
net earnings subject to gross up where the facts support this. However, it is
also true that, where there are home country taxes due on items paid by the
employer and the payment is made by virtue of the UK employment, that
Peter Ashby 40 6.2.07