As Matt Parling, ECA Tax Services Analyst, highlights some of the more notable reforms to tax legislation this year he also reminds us why it is important to look behind the headlines.
In recent years there has been a focus on austerity, often manifesting itself through tax rises, new surcharges and other measures designed to increase tax and social security revenues, and this has continued to an extent in 2015. Japan has increased the top rate of marginal income tax from 40% to 45%, applicable to taxable income in excess of JPY 40 million while in Singapore, although not applicable until 2016, additional income bands and higher rates will increase the tax liability for individuals with taxable income over SGD 160 000.
However, a number of measures have been introduced which could reduce tax liability, many of which are aimed at families. In Portugal, income tax reform which took effect from 1 January 2015 includes the adoption of a family coefficient tax system. The incomes of both spouses and certain dependants are aggregated and the total taxable income is then divided by a coefficient which reflects the size of the family. The tax rates are then applied to the result, and the tax due is multiplied by the same coefficient to give the total tax due. However, the reduction of tax liability arising from the new system is subject to variable limits; for example, the maximum reduction is EUR 2 000 for a married couple filing jointly with three or more dependants.
In Canada, the Family Tax Cut Credit has been introduced. This is a federal credit available to couples with at least one child under 18 years old, up to a maximum amount of CAD 2 000. The calculation method is rather complex. The credit is equal to the difference between the combined federal tax due by both spouses before and after a notional transfer of income between themselves. The transfer is equal to one half of the difference between the respective incomes and may not exceed CAD 50 000. It is also theoretical so the actual incomes used to calculate tax liabilities are not affected. For example, if one spouse has an income of CAD 80 000 and the other has none, the transferable amount is CAD 40 000. Firstly, the tax liability on CAD 80 000 (total income) is deduced. Secondly, the tax levied on each spouse after the notional transfer (i.e. on an income of CAD 40 000 per person) is calculated and combined. After accounting for any other relevant tax credits, the difference between the two calculations is the value of the credit. Clearly, the amount of the tax credit will vary between families but those who stand to benefit the most from this new credit are middle and high income families where one spouse earns significantly more than the other.
The 2015/2016 budget in the United Kingdom introduced a transferable personal allowance. This allows one spouse to transfer up to 10% of their unused personal allowance to the other if neither individual is liable for tax above the basic 20% rate of tax.
However, it is wise to look beyond the headlines of a tax reform as the overall picture can look different. For instance, the reform introduced in Portugal also abolished a number of tax credits, while the Canadian authorities have discontinued the federal Child Tax Credit which had provided families with CAD 338 per child per annum.
Expatriate concessions: legislative changes in 2015 have made it easier for assignees to take advantage of tax concessions in a number of countries.
In Spain, the EUR 600 000 income limit for participation in the non-resident tax regime has been abolished, as has the requirement that the work be carried out in Spain for the benefit of a Spanish employer. Furthermore, the regime now applies a flat rate of 24% on income up to EUR 600 000 (20% for nationals of other EU member states, Iceland or Norway), with the excess taxed at 47%.Transitional arrangements are available for those workers who opted for the regime before 1 January 2015.
The applicability of the Special Assignee Relief Programme, which offers tax reductions to certain employees assigned to work in the Irish Republic, has been extended until 2017. The scope of the programme has also been broadened for individuals arriving in Ireland from 2015 and the upper income threshold of EUR 500 000 has been abolished. Income ceilings seem to be a common target; the government in Denmark has reduced the minimum salary required to qualify for the 26% flat tax rate from DKK 70 600 to DKK 61 500 per month.
Amendments in Belgium are not so generous; assignees who exclude more than 25% of their income as work performed abroad may be made worse off as a result of changes to the tax residency rules. Non-residents must now derive at least 75% of their income from Belgium in order to claim personal allowances and transfer part of their income to a dependent spouse.
In July 2014, the Sixth State Reform came into force allowing the federal government to transfer an increased level of power over taxation to the Flemish, Walloon and Brussels regional authorities. While no significant regional changes have yet occurred, the reform has introduced the concept of a ‘basic’ employer social security contribution. From 1 January 2015, employers are no longer required to contribute to various individual schemes including unemployment, medical care and retirement and survivors. Instead, a composite employer rate of 24.92% is levied which is meant to cover a range of schemes (such as family allowances) but has no direct connection with the previous system. Contributions to a number of additional existing schemes are still required, but the total employer rate drops from 34.79% in 2014 to 34.65% in 2015, representing a modest saving for the employer.
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