Article Category: Article
Publicado en línea: 08 may 2018
Páginas: 18 - 30
Recibido: 01 sept 2017
Aceptado: 14 dic 2017
DOI: https://doi.org/10.1515/ntaxj-2018-0005
Palabras clave
© 2018 M. Weerepas, published by Sciendo
This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.
A person engaging in cross-border employment activity is confronted with taxation and social security in two or more states. In both areas of law, Also, for the applicable labor law there are conflict rules, see for example, Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), OJ 177, p. 109. The Convention was signed on 23 September 1996 and entered into force on11 May1997. It is based on the OECD Model Convention but has some differences. See Marjaana Helminen, Scope and Interpretation of the Nordic Multilateral Double Taxation Convention, Bulletin for International Taxation 2007, (Volume 61), No. 1, p. 23. Regulation (EC) No. 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems, OJ L 166, p. 1, last amended by Regulation (EC) No. 2017/492, OJ L 76, p. 13. Regulation (EC) No. 987/2009 of the European Parliament and of the Council of 16 September 2009 laying down the procedure for implementing Regulation (EC) No. 883/2004 on the coordination of social security systems, OJ, L 284, p. 1, last amended by Regulation (EC) No. 2017/492, OJ L 76, p. 13. The Convention entered into force on 1 May 2014 (Denmark, Finland, Iceland, Norway, Sweden) and on 1 May 2015 (Faroe Islands and Greenland).
In general, the work state is authorized to levy taxes pursuant to Article 15 of the OECD Model Convention concerning cross-border workers, providing the requirements set out in Article 15, para. 2 have been met. I will not treat these requirements further, but I will point out that pursuant to the Nordic Convention a resident of Finland, Sweden or Norway is subject to a residency state taxation for cross-border activities, on condition that the worker is present in the state of residence on a regular basis. This also applies to public officials. “Regular presence” is understood to mean that the person is present at least one time per week for a period of at least two days. “Day” is understood to mean a part of a day. See Protocol, to the 1996 Treaty (1997), VI. With references to Articles15 and 19, which entered into force on 31 December 1997.
With respect to social security in the European context, the main rule of Article 11, para. 1 of EU Regulation No. 883/2004 applies: exclusive allocation to the work state. This is the “lex loci laboris” principle and applies to both employees and self-employed workers. The rules concerning the posting of workers and deployment of work activity in two or more Member States are not treated in this article. See Articles 12 and 13 of Regulation No. 883/2004 and Article14 of Regulation No. 987/2009.
At first, blush taxation and social security contribution collection would seem to constitute two separate areas of law, each of them having its own rules. But if the manner of financing in these areas is taken into consideration, the areas can be seen to be more connected to each other. This is the case, for example, if social security is financed through tax revenues. In a purely domestic situation, in which a person both resides and works in the same state, this does not lead to significant problems. The Netherlands can be taken as an example. Social security contribution levies in the Netherlands consist of social security premiums, employment insurance premiums and the income-dependent Health Insurance Act (Zwv) contribution. Zvw is the Dutch Health Care Act (Zorgverzekeringswet) and concerns a Regulation for the Provision of Medical Care (Regeling inzake de gevolgen van behoefte aan geneeskundige zorg), Stb. (trans: Law Gazette) 2005, 358, last amended by Stb. 2017, 146. See also Sverre Hveding and Finn Backer-Grøndahl, who describe the international consequences of increased social security contributions payable by employers in Norway in 2002. Sverre Hveding and Finn Backer-Grøndahl, The Concept of Residence for Tax Purposes in Norway, Bulletin for International Taxation 2002, (Volume 56), No. 8, p. 436.
In practice, the cross-border worker can feel subjected to double taxation. In a number of countries, social security is financed to a large extent from tax revenues. See, for example, the differences between Sweden and Denmark. In Sweden, a large part of the social welfare system is funded and provided for at county level; Sweden also levies social security contributions at a high rate, while in Denmark, the system relies much more heavily on financing through taxation. Mattias Dahlberg and Ali Sina Önder, Taxation of Cross-Border Employment Income and Tax Revenue Sharing in the Öresund Region, Bulletin for International Taxation 2015, (Volume 69), No. 1. p. 31.
It is in this way that the cross-border workers can be confronted with divergent social security systems. In this connection, the following figure regarding the allocation of resources across social protection functions is interesting. Social protection arrangements in the EU differ considerably with respect to the allocation of resources within the systems. Figure 1 maps the distribution of benefits across the social protection functions in 2011.
Allocation of social protection benefits across functions (2011)Figure 1
In this article, first a global description will be given of the ways in which social security can be financed; through social security contributions and/or general means. A decision of the Netherlands Supreme Court (Hoge Raad) will be used to illustrate the problem of financing social security through general taxation in respect of an Australian civil service pension. This will be followed by a brief description of the Dutch rules applicable in cases involving cross-border employment, bringing into relief the differences between social security and tax law. The view of the Dutch Supreme Court regarding the concept of tax as compared to Australia as well as the vision of the European Court of Justice will follow. What applies with respect to Australia is also the case in some of the Scandinavian countries that also finance their social security systems via general tax levies. This article will close with a conclusion which includes a recommendation.
As noted above, the way social security is financed plays an important role in the discussion concerning possible double social security contribution. Financing via taxation applies in particular to some Scandinavian countries. This is reflected in figure 2 and 3.
The structure of social protection financing by type of receipt (2011)Figure 2
The changes in the structure of social protection financing (pp differences, 2000-2011)Figure 3
Large portions of the social security systems of Denmark and Sweden are financed by general government contributions. A problem arises in cases where the right to levy taxes is allocated to Denmark or Sweden and the obligation to provide social security to a State other than Denmark or Sweden, creating a sense that (former) cross-border workers pay social security contributions twice. Suppose, for example, that a (former) cross-border worker resides in State A. This worker is required to pay taxes in that state but also pays social security contributions in State B. State A has a high tax rate and a portion of the income tax revenues is used for financing the social security system of that state. The (former)cross-border worker senses that he is paying twice for social security.
Before going into the possible differences between the concepts of tax and social security contribution below, I note that the financing of social security via taxation raises the issue of how to characterize a levy. Recently, the European Commission asked Denmark and Sweden, for example, questions about the nature of certain tax levies. In the case of Denmark, the inquiry concerned a so-called labor market contribution (8%). One of the Commission’s questions was that if the contribution was considered a tax, why not raise the tax on income. Denmark responded that a general increase in the income tax would have negative effects on persons with low incomes as well as on the labor market. Social security benefits are calculated based on sums that are not subjected to the labor market contribution. The levy has to be viewed as a tax and not as a social security premium, argued the Danish government. Memorandum, File No 2012-339-0029, 16 May 2012.
At issue in the Swedish situation was the levy of a particular tax in the event of a non-resident earned income in Sweden through so-called “passive entrepreneurial activity,” such as the receipt of royalties. Whether such a person is covered by and thereby entitled to benefit from the Swedish social security laws or not is irrelevant. The Commission questioned whether this conflicted with EU Regulation No. 883/2004 and the free movement of services (Art. 56 VWEU). Sweden has a special income/wage tax law. In Swedish: Lag om särskild löneskatt på vissa förvärvsinkomster (1990:654). See also Björn Westberg, Sweden, European Taxation 2001, (Volume 41), No. 13, p. 67-S: the Swedish general salary levy was introduced in order to finance EU membership and is considered as tax.
The fact that national law characterizes a levy as a taxi See, Decisions Commission v France, ECJ 15 February 2000, Case C-34/98, ECLI:EU:C:2000:84, ECR 2000, p. I-00995, para. 36 and 37, and Commission v. France, ECJ 15 February 2000, Case C-169/98, ECLI:EU:C:2000:85, See also the opinion of the European Commission concerning a special income tax law, Question from the Commission regarding the Special Wage Tax Act (EU-pilot EMPL/4625/13), 24 April 2013, R2013/1081. Decision Commission v. France, ECJ EC 15 February 2000, Case C-34/98, ECLI:EU:C:2000:84, ECR 2000, p. I-00995. See further para. 7.
The Netherlands Supreme Court handed down an interesting judgment on April 22, 2016, which aptly illustrates the problem of financing. HR 22 April 2016, No. 15/03689, BNB 2016/132, with note by Kavelaars.
A number of regulations can be brought to bear on the situation of a Dutch national insured via a foreign tax levy, in this case Australia, who thereby contributes to a foreign social security scheme. In the first place, the bilateral tax treaty between the Netherlands and Australia and the social security treaty between these countries Trb. 2001, 125 en 95. The treaty came into force and entered into effect in 1976, see Trb. 1976, 41 and was amended in 1987, see Trb. 1986, 89.
The Arnhem-Leeuwarden Court of Appeals Hof Arnhem-Leeuwarden 30 June 2015, nr. 14/00605 and 14/00606, NTFR 2015/2213.
See Article 2 of the Treaty Netherlands-Australia, in which Furthermore, non-residents are not required to pay for the so-called “Medicare” program. “Medicare” allows access to the Australian health care system and is partially financed by taxpayers. The contribution constitutes 2% of taxable income. See
We then turn to the national regulations concerning the avoidance of double taxation, such as KB 746, to see if they offer a different outcome. The Australian civil service pension is subject to the levy of Dutch social security contributions pursuant to Article 8 Wfsv. This provides that only long-term and extraordinary sickness (formerly AWBZ and now WLZ) contributions, and impliedly also Zwv (General Health Care Act) contributions, are owed. The Social Insurance Administration (Sociale Verzekeringsbank) provides an exemption for old-age pensions (AOW), national survivor benefits (Anw) and child allowance (AKW), but not for AWBZ (General Act for Extraordinary Illness benefits). The exemption was not an issue, and therefore, no decision was taken concerning it. Compare Kavelaars in his note on HR 22 April 2016, nr. 15/03689, BNB 2016/132.
See V-N 2016/27.18.
Lastly, the method for calculating deductions that allows the amount of social security income to be deducted from the Dutch social security contribution levy, as provided by Article 2.3, part b of Regulation Wfsv and Article 5.6, part b of Regulation Wwv, could not be applied. The Court of Appeals found that no portion of the social security income was taken to pay social security in the other state on the basis of an international social security regulation between the Netherlands or another state or, an absent international regulation, any other legal basis upon which to base a social security levy in the other state. One cannot say that the tax paid in Australia is part of Australia’s social security income. It is a tax and not a required social security payment. In short, no portion of the Australian tax can be viewed as a social security contribution. In addition, ruled the Court of Appeals, leving a contribution on the pension does not violate the treaty.
The Supreme Court held in its judgment HR 22 April 2016, no. 15/03689, BNB 2016/132, that an Australian government pension enjoyed by a Dutch resident was correctly subjected to the levy of Dutch social security contributions, despite the fact that the pension is taxed in Australia, a country that finances its social security scheme with general tax revenues. The Supreme Court employed a formal definition of social security contribution. It may be wise to continue the discussion about using a more substantive definition, due to severe consequences of the involved cross-border worker.
The Court of Appeals Arnhem-Leeuwarden also employed a formal definition of social security contribution in the above case. The Supreme Court held in cassation that when using the term “levy of social security contributions,” the legislator did not have in mind the levy of taxation in a tax system partially aimed at financing social security. The Supreme Court’s application of the term is formal in this sense. There is no specification of an Australian social security contribution in the amount of Australian tax levied. It is certainly true that a formal definition of social security contribution provides clarity and is a logical consequence of the applicable regulations. Compare Kavelaars in his note to HR 22 April 2016, no. 15/03689, BNB 2016/132. Other authors, however, are of a different mind. Schouten, for example, argues that it is not clear that a formal regulation is
The crux of the matter is that in fact a double payment obligation is imposed. If we assume that this can happen, could we not resolve the problem by recognizing a portion of the tax revenues collected as social security contributions? I agree that it may be difficult to determine which portion of the tax revenues to characterize as social security contributions, and that this will inevitably generate new discussion, but it would help to satisfy parties now having to pay double social security contributions. Before answering this question, a few considerations follow about the differences between social security law and tax law with respect to the characterization of their respective payments.
With no intent to be exhaustive, the following important differences between social security law and tax law in the European Union can be identified. An important initial difference lies in the aim of financing. Taxes can be used for an unlimited number of provisions, including social security. Social security contributions are generally meant to finance social security benefits payments. A second difference has to do with the principles and allocation rules that underpin social security law and tax law. A person engaged in cross-border work activities should be subject to only one social security system See Article 11, para. 1 of Regulation No. 883/2004.
The allocation of the authority to levy taxes has to do with the right to levy taxes, while allocation of the obligation to provide social security has to do with the award and payment of entitlements to individuals. This makes it difficult to ensure that the systems neatly overlap. Making rules simpler is also challenging. In the area of social security, moreover, the primary concern is to be insured upon the basis of which entitlements are awarded to individuals, and in the second place, the payment of social security contributions. The coordination of these entitlements is a necessary condition for promoting the free movement of workers. See Preamble Regulation No. 883/2004. I refer to the social security contribution deduction available in the Netherlands pursuant to Article 2.3 Regeling Wfsv. Under certain conditions, foreign income can be exempted by which the social security contribution income is lowered.
It is sometimes argued that in the future, social security should be financed by taxation so that more people can contribute to the payments. See, See Kavelaars in his note to HR 22 April 2016, no. 15/03689, BNB 2016/132.
I subscribe to this view, especially with respect to long-term payments, the various allocation rules should be maintained. But that does not change the fact that a number of states have systems funded almost entirely by tax revenues. The question arises whether contribution systems should not be introduced, or in some cases, reintroduced?
As has been demonstrated, how a Member State financing its system of social security contributes to the complexity of cross-border work movement. It is sometimes difficult to determine whether one is dealing with a tax or with a social security contribution. In a report by FreSsco a social security contribution is described as follows: “A levy which is meant to finance a social security benefit which forms part of that list. For present purposes, taxes involve any other levies which are not directly and specifically meant to finance one of the listed benefits” (read: as specified in Article3 of Regulation No. 883/2004, MW). B. Spiegel (ed.), Analytical report 2014, The relationship between social security coordination and taxation law, FreSsco January 2015, p. 10. Social protection systems in the EU: financing arrangements and the effectiveness and efficiency of resource allocation, report jointly prepared by the Social Protection Committee and the European Commission Services 2015, p. 83. For an overview of all contributions owed by employers and employees in the Member States, the report refers to
But what falls within the concept of “tax” and what comes under “social security contribution”? Article 2 of the OECD Model Convention describes the taxes to which the convention applies. Social security contributions do not belong to the taxes that fall within the ambit of the Model Convention, according to Paragraph 3 of the Commentary on Article 2 of the Model Convention. “Social security charges, or any other charges paid, where there is a direct connection between the levy and the individual benefits to be received, shall not be regarded as ‘taxes on the total amount of wages”. Deciding whether or not the social security contributions and taxes that finance social security are included in the scope of an income tax treaty is not easy, argued Martin Jiménez. Adolfo J. Martín Jiménez, Defining the Objective Scope of Income Tax Treaties: The Impact of Other Treaties and ECLAW on the Concept of Tax in the OECD Model, Bulletin for International Taxation 2005 (Volume 59), No. 10, p. 436. See Adolfo J. Martín Jiménez, Defining the Objective Scope of Income Tax Treaties: The Impact of Other Treaties and EC LAW on the Concept of Tax in the OECD Model, Bulletin for International Taxation 2005 (Volume 59), No. 10, p. 433. Contribuição social sobre o lucro liquido. João Francisco Blanco and Ramon Tomazela Santos, The Social Contribution on Net Profits and the Substantive Scope of Brazilian Tax Treaties – Treaty Override or Legislative Interpretation?, Bulletin for International Taxation 2016, (Volume 70), No. 9, par. 5.5.
Compare in this regard also Article 2 of the Nordic Convention. Taxation that comes within the scope of the Convention are, for example, state income taxes, corporate taxes, municipal income taxes, church taxes and wealth taxes. Value added taxes, transfer taxes, real estate taxes and inheritance and gift taxes are not covered by the Nordic Convention. Social security contributions also fall outside the scope of the Nordic Convention. See Marjaana Helminen, Scope and Interpretation of the Nordic Multilateral Double Taxation Convention, Bulletin for International Taxation 2007, (Volume 61), No. 1, p. 25.
As indicated above, social security contributions in the Netherlands are in principle divided into national insurance and employee insurance. National insurance contributions are collected along with tax levies by the Tax Service (Belastingdienst). This in itself does not turn the contribution into a tax. See Hof Amsterdam 4 August 1993, no. 92/3667, V-N 1994, p. 695.
Without going into the definition discussion of what a tax is at length, I give only a brief reflection on the concept “tax,” in the Dutch literature, in which it appears that the difference between tax and contribution is not entirely clear. A commission set up in 1990 by the Dutch Association for the Study of Taxation declared that all social security contributions are in a legal sense taxes. This does not deny the special nature of contributions. The Commission made a distinction between contribution and benefit; on the contribution side, the character of a tax is dominant, and on the benefit side, the insurance element prevails. H.J. Hofstra, edited by R.E.C.M. Niessen, Inleiding tot het Nederlands belastingrecht, Fiscale studie- en handboeken, Deventer: Kluwer 2010, p. 41. The earlier-mentioned Commission claims that with respect to national insurance there was never an equal exchange between premiums paid and benefits paid. Rapport van de Commissie ter bestudering van het begrip “belastingen”, Geschriften van de Vereniging voor Belastingwetenschap, nr. 184, Deventer: Kluwer 1990, p. 35. H. Vording and W. Barker, in: B. Peeters, The Concept of Tax, 2005 EATLP Congress, EATLP International Tax Series, Volume 3, 2008, p. 46. 51 M. Bourgeois, in: B. Peeters, The concept of tax, 2005 EATLP Congress, EATLP International Tax Series, Volume 3, 2008, p. 183.
From the foregoing one can conclude, in my view, that an obvious distinction between taxes and contributions is not so easy to make, while the respective allocation rules work very differently. In my opinion, it is justified to ask if we should consider applying a more substantive definition of contribution. Compare also T. El Ouardi in HR 22 April 2016, nr. 15/03689, NTFR 2016/1315.
Just as in the Australian case discussed above, the financing of social security is an element that can cause confusion in characterizing a payment as a contribution or as a tax. As said, according to the ECJ, in the EU context the method of financing is irrelevant for the application of Regulation No. 833/2004. The case Commission v. France ECJ 15 February 2000, Case C-34/98, ECR 2000, p. I-995. ECJ 3 April 2008, Case C-103/06, ECR 2008, p. I-01853. Contribution sociale généralisée. This can be regarded as a socially earmarked tax. There is a borderline between contributions and taxes. B. Spiegel (ed.), Analytical report 2014, The relationship between social security coordination and taxation law, FreSsco April 2015, p. 37. See Commissie v. France, ECJ 15 February 2000, Case C-34/98, ECR 200, p. I-995, para. 35 the decision named there: Rheinhold & Mahla, ECJ 18 May 1995, Case C-327/92, ECR 1995, p. I-1223, para. 15 and 23. One of the benefits of this “hybrid” characterization is that a deduction for tax purposes is possible. See F.P.G. Pötgens, W.W. Geursen, Derouin, Tax Treaties and Regulation No. 1408/71 – Double or Nothing, European Taxation 2009, (Volume 49), No. 3, p. 149.
The difficulty arising from Australia financing its social security system from tax revenues is not unique. In a majority of the Scandinavian countries, social security schemes are also financed by tax resources. In cross-border situations, this often gives workers the sense that they contribute twice to social security; once by paying contributions in one state, and once by paying taxes in the other state. The opposite can also be the case. A worker does not contribute either by paying taxes to finance social security, nor by making social security contributions, but does have a right to receive social security benefits.
Once in while, the governments attempt to address the first situation. For example, with respect to the Dutch citizens living in Denmark, who received a Dutch pension without also receiving a Danish pension, Pursuant to Article 28 Regulation No. 1408/71, a person was insured for health care in the Member State awarding the pension. In this case that was the Netherlands. See the letter of Ministry of Health Prevention, 17 June 2008, No. 2008-11413-169.
In addition to losing the desired clarity created by using a formal definition of contribution, the application of a substantive definition could also lead to – possibly insurmountable – execution problems. A portion of the tax levied will have to be designated as a contribution. This can only be done by the authorized authority of the state in which social security is financed via a tax levy, with or without consultation with the other state in which the interested person is insured. In States where many cross-border work activities occur, it would make sense to make new agreements at a bilateral level. This could lead to a greater administrative burden for the agencies involved, but once a portion of the tax owed has been labeled as “contribution,” similar situations could be treated in the same way. This could take some time, and will require customizing and consultation between both states. See, for example, the consultation between the Netherlands and the Belgium to determine the extent to which Belgian social security contributions match the Dutch national health care contributions in order to apply a compensation regulation indicated in Article 27 of the Treaty Netherlands-Belgium, Kamerstukken I, 2001-2002, 2-1293/2, p. 44.
Characterizing foreign contributions and concomitantly, foreign social insurance, is not entirely new. A decree issued by the Dutch Secretary of Finance about a way to calculate taxable wages for a cross-border worker who comes under a non-Dutch social security system according to the Dutch taxation standards, comes to mind. Decree by State Secretary of Finance of 24 March 2014, No. DGB 2014/144M, Stcrt. (trans: Law Gazette) 2014, 9763.
The different ways of financing lead, according to Verschueren and also in my opinion, to misunderstanding, dissatisfaction and frustration among cross-border workers. A direct relationship between the payment of contributions and the right to receive social security benefits is important to the cross-border worker. In order to strengthen this relationship, a solution needs to be found. He refers to Regulation No. 1408/71, but in my view this also applies with respect to Regulation No. 883/2004. H. Verschueren, Financing Social Security and Regulation (EEC) 1408/71, European Journal of Social Security 2001, p. 7-24. Denmark has given an offset in the past. This is based on a letter from the Ministry of Health Prevention, dated 17 June 2008. Sweden also recently granted an offset from the Swedish income taxation of a resident of Sweden who received a Dutch pension and was charged a Dutch health care contribution. The offset allowed was in the amount of the Dutch health care contribution. Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union, COM(2016)686, CELEX:52016PC0686. Already in 2001, Westberg proposed that the question regarding the distinction between taxes and contributions must be examined further in an international context. Also, the rather strict borderline between tax treaties and social security treaties must be delineated. Björn Westberg, Sweden, European Taxation 2001, (Volume 41), No. 13, p. 67-S.
Regarding the differences between taxation and social security contributions, clear definitions should be used. The Netherlands Supreme Court applies a formal definition of contribution with respect to judging cross-border work situations. This creates clarity for the cross-border worker, but in the case of the recipient of the Australian pension, this gave him the nagging feeling that he was being forced to make contributions to two systems while being allowed to enjoy the benefits of only one. Given the fact that states apply different methods for financing social security, and that the distinction between contribution and tax is apparently less evident than at first glance, any discussion aiming at a more substantive definition would be highly welcome. A more substantive definition of contribution would satisfy the sense of fairness of cross-border workers affected by this issue. I realize that this may take a long time to resolve.
One would hope that the recommendation of the Commission Cross-Border Workers to the European Commission that it effectively address the issue of double economic taxation in its proposed draft directive to avoid double taxation be taken seriously. The advantages and disadvantages of double economic contribution levies certainly need to be resolved. I hope that a discussion about the topic will be started.