The most popular way for British contractors to operate their overseas contracts is through their own UK limited company, known as a PSC (Personal Service Company).   This is understandable as UK recruitment agencies are practically forced by UK legislation to pay incorporated entities. So the starting point for many contractors is to use their existing PSC, if their agency allows this, particularly where a short term contract is initially on offer.

Risk
Either immediately or after 183 days (where there is a Double Tax Treaty), the PSC can be deemed to have a permanent establishment in the host country because that is where its centre of economic interest lays and where its management is based.

Outcome
The PSC becomes liable for host country corporation tax – often far greater than in the UK!  Additionally, if your contractor chooses not to meet his or her personal obligations in the country of work, this situation could be uncovered during a standard external (statutory) or internal audit at your client. This will expose your contractor to back tax payments and heavy penalties.  Your client is likely to presume you, its agency, have failed to meet your contractual obligations to maintain control over your contractor regarding tax.

The second most popular way for contractors to operate their overseas contracts is to use the infamous “split solution”.  This is where the gross contract income is split, every month, with part paid into the host country and the remainder into another of the contractor’s individual, personal bank accounts. 

Risk
Whether the monthly remainder is paid out disguised as a “non-declarable” ‘dividend’ or ‘profit share’ or ‘expenses’, the contractor has “economic ownership” of all monies paid to him or to her.  Unless all monies are properly declared, he or she is entangled in tax evasion which, as everyone knows, is illegal.  

Outcome
These accounts become known to inquisitive tax authorities who force banks to provide details under international anti-money laundering regulations. This information is then shared with other tax authorities.  In the country of work, this situation could unravel during a standard tax office audit when there is too great a gap established between the amount paid by the client at the top of the contract chain and the amount declared on a tax return by the contractor.  This exposes the contractor (and, where chain law exists, the agency and/or client) to back tax payments and very heavy penalties.

In countries where ‘chain law’ exists:

Risk
The tax authorities can and do extract missing contractor’s tax and impose heavy penalties on anyone in the contract chain – the easiest being your client. 

Outcome
Your client will blame you for such an embarrassing intrusion into its business. 

In countries where there is no ‘chain law’:

Risk
Although the contractor is exclusively responsible in law to deal correctly with his or her own tax affairs, in practice many contractors who find themselves under threat of investigation leave the country.  Your client then finds itself without a resource – often at a crucial time in the project. But more embarrassing for your client is the tax authorities have an excuse to carry out a tax audit on the client to see if they can uncover “other instances of tax evasion”. 

Outcome
Again, your client will blame you for this unwelcomed disruption of its business.

It is not for us to preach contractor compliance to any agency……..but: 

Risk
Having completed all due research, you may still decide to contract with a company that pays your contractor a monthly split income (normally under great pressure from your contractor) with only one part of the split being declared in the host country. You do this because you are prepared to accept the consequences from any subsequent discovery of tax evasion by the contractor. 

Outcome
In accepting your decision is a commercial risk, you are facing two potential outcomes.  If there is no discovery, you receive what you had planned.  But if tax evasion is uncovered, you will have to face the consequences.