Belgium, (Brussels Morning Newspaper) In recent years, EU countries have started a race to the bottom called ex-pat tax breaks. Simply put, these are carrots member nations dangle in front of bright foreign workers, to lure them to come work from their country. Although these tax breaks can be attractive, we need to be honest about the downsides of this system.
First, well-earning ex-pats pay relatively fewer taxes, which means the strongest shoulders aren’t carrying the most burden. Second, it distorts the internal market by creating unfair competition between member states. Simply put: A country that invests less in its educational system, can still ‘steal away’ another country’s talent by offering these digressive tax rates.
We’ve seen a similar problem before, with corporation tax-dodging firms. The rock-bottom corporation tax offered by some EU countries (as low as 10%) is destructive. In sectors where markets are disconnected from headquarters (E.g. Tech or Medicine), it’s easy to pick your location based on the lowest tax rates.
This practice clearly comes at the expense of their neighbors, as it leads to ever-lower tax rates across European states. It’s a race to the bottom where ultimately all lose out and host countries will have a drought of funds to invest locally. Nations have taken notice and are slowly taking action. The recent G20 agreement to set a bottom of 15% is bare-bones but clearly laudable. The EU is also discussing digital taxation, not just based on the headquarters (Say, Google HQ in Ireland), but based on revenue (Say, Google turnover in France).
Just like less developed regions may offer low corporation taxes to attract foreign firms, they may employ income tax breaks to attract foreign workers. These workers usually have a high purchasing power and can be an asset to the local economy in terms of their high consumption (housing, hospitality, local services). This can be seen as an add-on to the local community.
The above argument is valid. However, most EU countries rightly have progressive income taxes. Those who earn the most should pay a higher rate of income tax. But because of these misguided incentives, already high-earning expatriate workers now benefit from below-average or digressive tax rates. Those who earn the most, pay the least.
An absence of EU rules, it’s another example of what myopic national policymaking leads to. Once one country offers tax breaks, it leads to brain-draining and forfeited income taxes in their EU partners, who in turn introduce their own ex-pat tax breaks. Lately, the race to the bottom has accelerated in earnest. The construction of tax breaks varies, but the overall effect is the same: A heavy discount on taxes paid by well-earning ex-pats. We’ll give five egregious European countries below.
#5: Spain
National top rate: 47%
Expat rate: 19%
Spain’s leftist government is not so social when it comes to taxing well-earning ex-pats.
Where the top bracket for Spaniards is at 47%, ex-pat colleagues from any EU country pay a flat income rate of just 19%. A rough estimate for a gross salary of €100,000: A local would net €65,000, but an ex-pat €75,000.
#4: Portugal
National top rate: 48%
Expat rate: 20%
Expats moving to Portugal can register as Non-Habitual Residents, and get a flat income tax fee of just 20%, well under half of the local top rate. A rough estimate for a gross salary of €100,000: A local would take home €55,000, but an ex-pat colleague €70,000.
#3: Netherlands
National top rate: 49.5%
Expat rate: Top 30% income tax-free
When an ex-pat comes to live in the Netherlands, they are offered a tax break on the top 30% of their income. Due to the country’s progressive tax rates, this means already highly paid ex-pats owe about half as much tax as their Dutch colleagues, who are working the same job. The tax break counts for any ex-pat earning over €40,000 a year. A rough estimate for a gross salary of €100,000: A local would net €55,000, but an ex-pat €70,000.
#2: Belgium
National top rate: 50%
Expat rate: Top 30% income tax-free
In a seeming carbon copy of the Netherlands, Belgium also started offering a top 30% tax break for high-earning ex-pats, defined as those earning over €75,000 a year. Usually, the top 30% of an expat’s income will fall at the top rate of 50%, providing a hefty sweetener for ex-pats. A rough estimate for a gross salary of €100,000: A local should net €50,000, but an ex-pat €65,000.
#1: Italy
National top rate: 43%
Expat rate: 70-90% income tax-free
Italy has for years struggled with a brain drain of its best and brightest. With an eye to counteract this, they introduced a digressive tax regime for ex-pats. They can dodge the top rate of 43% in a number of ways. For example, newcomers get a 70-90% tax break (!) for 5 years. High-net individuals can simply buy off all income taxes at a €100,000 a year flat rate. A rough estimate for a gross salary of €100,000: A local might net just under €60,000, but an ex-pat €85,000.
What we need: EU ex-pat tax break alignment
We seem to have entered a race for the bottom between EU member states. But besides the clear domino effect, offering digressive taxes to high earners is inherently unfair. It puts pressure on overheated housing markets, widens gaps between haves and have-nots, and leads to an increase in populist votes from those picking up the taxation tab.
Removing barriers for international labor forces to move about is essentially a good thing. A Europe that allows workers to work where they want creates balanced labor markets. But it shouldn’t come at the expense of a fair tax burden. Countries should instead compete on value-adding factors like education, healthcare, utilities, roads, and public transport.
If the EU wishes to acknowledge the short-term extra cost experienced by expatriates (say, increased housing or travel cost), then policy should be aligned across EU countries. This can take the form of a maximum discrepancy with local taxpayers. The EU has the lever of market access to align this policy to nearby third countries. If this issue is not solved, it will entice evermore EU members to join the rat race, at the expense of state revenues and social fairness for all Europeans.
Currently, the EU has a limited mandate over fiscal matters, which still falls under member states which are loath to relinquish power. As a case in point, the G20 agreement on a minimum fifteen percent corporate tax was blocked for a while by Hungary. However, as a response to COVID-19, we have seen the first EU-led fiscal policy with the €750 Billion EU recovery fund. Likewise, the EU should start pushing for joint regulation of tax policy undermining the common EU market, such as ex-pat tax breaks.
In short, the EU should introduce a policy to align tax breaks for ex-pats, for example by introducing a maximum discount to rates paid by regular citizens. In order to avoid peripheral states taking over the position of ex-pat paradises, the EU should enforce policy to nearby countries. Only with fair income tax policies across borders, can we guarantee an equitable job market for all our member states and citizens.
