Why did my payroll tax increase when I moved abroad?
December 15, 2015 2:08 AM   Subscribe

I moved abroad and continued my employment remotely, with the support of my employer. Now my employer said they're paying more payroll taxes and it's a bit of a problem. But I don't understand why, since my residency status hasn't changed.

I am Canadian and my employer is in Canada. For personal reasons I expressed a desire to spend a year in Europe, specifically Germany, and asked if I could continue working remotely. My boss agreed and we made arrangements - I got a valid working visa, booked a flight, etc. At the last minute someone in corporate HQ almost stopped the whole thing because they anticipated a huge extra tax burden. They decided to let me go ahead, and I'm now in Europe as planned, but my boss has indicated that the company is paying more in payroll taxes so that I could do this, and it's put me in an awkward position.

I'm confused, because I am maintaining ties to Canada and thus maintaining residency, I am still being paid from Canadian payroll (as far as I know), and I'm not even planning on staying in the same place in Europe long enough to establish residency there -- but even if I did, my stronger ties are to Canada. Therefore, I don't see why anything changed and I want to make sure that there hasn't been a mistake.

I'm trying to find out internally, but it's taking a while to get answers. In the mean time, can someone who knows about this sort of thing tell me why the company is now paying more payroll tax in this situation? What conditions trigger an increased tax burden, and is there anything I can do to change this?
posted by PercussivePaul to Work & Money (8 answers total) 2 users marked this as a favorite
 
Some taxes are based upon residency, others upon where the work is performed, and others upon your citizenship. I would not be surprised to find multiple taxes where more than one government wants to collect the same tax.

I'm not familiar with Canadian or German tax codes, but being an employer in Minnesota, and hiring a person who lived in Wisconsin nearly doubled the amount of paperwork I had to file every month, plus required me to have Wisconsin unemployment insurance (because that is based on residency).

I looked briefly at taking on an employee who lived within the EU. The added paperwork alone made it completely uninteresting to me, but there were significant payroll taxes needed (back in the 90s) for an employee performing work there, regardless of residency (i.e. I would have had the same taxes, even if I lived in the US and commuted to Germany).

The only solution I'm aware of (for a US-based company - Canada is almost certainly different) is to set up a subsidiary company in Germany which would pay you. You'd probably have to give up Canadian residency as well, since that's going to complicate the taxes.

What you are trying to do is hard, and your employer did you a HUGE favor by even attempting it. Expect no simple solution.
posted by DaveP at 4:02 AM on December 15, 2015


I'm not an expert in any shape or form, however, with regard to residency rules, if the ones for Canada and Germany are anything like the UK's, these will be complex and I would be surprised if you are still classified as a Canadian resident after a year in Germany. I can also well imagine that the bureaucracy and costs associated with working in an EU country are considerably more labyrinthine that in Canada.

On a more personal level, I would strongly recommend speaking to a tax adviser if you have not yet done so (in at least Canada, but ideally Germany as well). The financial pitfalls associated with living and working abroad are myriad. For example, if, when you say you are "maintaining ties", you have a property in Canada that you can claim is your permanent residence (i.e. it isn't rented out) you might be classified as "non-domiciled" (assuming Germany has a similar concept to the UK), which I believe has implications for how much money you can bring into the country before it needs to be declared.

This is spoken from the perspective of someone who went through a sequence of changes in my country of residence, which made my UK tax return a pain in a** for several years.
posted by oclipa at 5:09 AM on December 15, 2015


You need to be clear on your status.

http://travel.gc.ca/travelling/living-abroad/taxation

You need to know each country that you work in's Tax Treaties with Canada (you can be double taxed if there isn't one!). You also need to know their tax laws. It's a world of awkward and it is pretty close to impossible to find a tax adviser knowledgeable about international taxation issues unless you are willing to drop major corporate coin on them.
posted by srboisvert at 6:52 AM on December 15, 2015 [1 favorite]


Response by poster: Thanks, I appreciate the help so far. Everything I've read so far on these regulations strongly suggests that I am still a resident of Canada for tax purposes.

Suppose I were to come back to Canada before a certain amount of time had passed, leaving no doubt that my absence was temporary. Would that change anything in your answers?
posted by PercussivePaul at 7:06 AM on December 15, 2015


Thanks, I appreciate the help so far. Everything I've read so far on these regulations strongly suggests that I am still a resident of Canada for tax purposes.

Have you read the EU and German Laws? Those take precedence since that is where you will be working. Your residence under Canada law may be irrelevent to them.

You might just be in the situation where your company has to withhold both Canadian and German taxes and you will be reimbursed based on the tax treaty when you file your income tax in both countries.
posted by srboisvert at 7:17 AM on December 15, 2015


Oh hi I work in HR and we seriously just had a discussion about this sort of thing no more than an hour ago in my office. Disclaimer first: I am not a tax attorney, I am not YOUR tax attorney, and I am CERTAINLY not an expert in this kind of thing. In fact, I barely understand what I'm doing myself. But I can make some observations based on what we've been running into lately, is all. And based on that: there could be a few reasons for this.

* I work for a company that has offices all over the world, and most of the payroll is handled out of the New York office. We have two different payroll systems for people who are working in the US and for people not in the US. So even though you are reporting into a Canadian office, the fact that you're living in Europe could have you on the "this is a non-domestic person" payroll. And that could mean a different processing of taxes.

* A quirk of the US system: there's a lot of cases in the US, generally, where you have a person who lives in one state but works in another, for either all or part of the year. With some states, where this kind of thing is especially common, those neighboring states may have a mutual agreement that someone who lives in one state but works in another should only pay taxes to one state (New York and New Jersey have a deal like this). With other states, there is no such agreement, so someone who works in one state but lives in another may have to file a tax return for BOTH states, and may have payroll deductions taken out FOR both states. Again, I'm not an expert, but it wouldn't surprise me to learn that a similar case may be happening with you - even though your legal residence is Canada, you are currently living in Germany, and that's the bit they're looking at.
posted by EmpressCallipygos at 7:35 AM on December 15, 2015


I'm inferring from the information that you've provided that you're either a deemed or factual resident of Canada for tax purposes based on the details of your personal circumstance. In my experience, employers typically determine their payroll withholding taxes based purely on your mailing address (i.e. you either live in a Canadian province, or you live abroad). They're aren't usually particularly interested in wading into the complexities of your actual tax residence.

When a Canadian employer pays an employee abroad, the amount of the income tax withholding usually increases. i.e. the employer should be taking that additional amount of tax out of your paycheque meaning the employer isn't any worse off. If your net pay hasn't changed, they may be paying this additional tax out of their pocket.

The only other theory that comes to mind is that the nature of the work you're doing is covered by Part XIII tax requirements. Again, this is normally deducted from the employee's wages.
posted by bkpiano at 9:52 AM on December 15, 2015


I don't know how things work for you as you say you were the one that wanted to be posted to Europe; with my employer (a rather well-known, centenarian computer company), if we have an international posting then they do our taxes on our behalf through a third party, and then they make us whole for any additional personal taxes incurred due to the posting. In some cases I hear these can be significant (five figures). BTW, also Canadian here.
posted by clicking the 'Post Comment' button at 6:31 PM on December 16, 2015


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