Can culture affect taxation behaviours? In Part 1, I explored how cultural issues regarding compliance and morale affect taxation behaviour. In this article I look closer at how taxation attitudes and rules can affect migration decisions. This is particularly an issue in the European Union, where the single economic area should theoretically encourage cross-border migration.
Global research on tax and migration
Global research indicates that tax considerations have a small effect on people’s decisions to migrate or not. The knife cuts two ways: people may migrate to pay less tax, or they may decide not to migrate if they are worried about incurring higher taxes, such as if they are afraid of double taxation.
For example, Claus et al., in an analysis of data from APEC and OECD economies, found a positive correlation between migration rates and favourable rates of taxation in host countries. They note that migrants with secondary education, tend to place the most importance on average tax rates, whereas migrants with tertiary education are more likely to place importance on marginal rates, since they take into account possibilities for career and income progression in their country of relocation.
Double taxation in the European Union
In Europe, tax rates vary widely from country to country, so there is ample scope for potential migrants to take taxation rates into account in their decision-making. The main issue addressed by policy-makers has been the problem of double tax relief for cross-border workers, most of whom are employees.
Europeans who maintain residence in more than one country, or who are “frontier workers” commuting daily across a national border, are particularly at risk of incurring tax obligations in more than one country. Usually they are subject to taxation in their country of residence, not in their country of work.
On paper, most workers should theoretically be protected. Although the European Union lacks a single system for adressing double taxation, there are bilateral tax relief agreements between the vast majority of European countries. In total, there are 378 double tax relief agreements between European countries, with only 11 pairs of countries lacking such an agreement.
In practice, however, mobile workers face multiple problems in claiming relief, mostly due to bureaucratic differences. The European Commission notes that they are “concerned that differences between the 28 national tax systems combined with different interpretation of laws are resulting in tax obstacles to worker mobility” as “practical differences in interpretations which render the treaties less useful than they could be.”
When claiming double taxation many bureaucratic issues arise, including tax returns being due at different times of year, language translation issues, failure of employers to issue statement of tax paid, different definitions of “employer” and how days are counted for income taxation and exemption:
“Based on the information obtained for the purposes of the study the application of the appropriate bilateral tax treaty should avoid incidences of double taxation. However, for the unrepresented individual the time and effort involved in navigating the rules and dealing with tax authorities can represent an insurmountable challenge. The individual will either decide not to work outside their country of residence, suffer double taxation or, adopt a practice which is incorrect such that Member States do not receive a proper share of tax revenue. The alternative is for the individual to obtain professional advice at a cost which may discourage labour mobility. As such, a simplification of the procedures for Double Tax Relief claims should help taxpayers to take advantage of their legal rights to avoid double taxation and encourage labour mobility.”
European cross-border workers therefore face a great deal of uncertainty when it comes to taxation. While there is a lack of evidence as to the extent to which taxation issues affect decisions, it is likely that it has some effects on both their initial decision of whether to be mobile across borders, and present ongoing problems for managing life across borders.
Resolving EU issues
To resolve this, the European Commission recommendations simplifying the system of claiming tax relief and making information more available. They also state that bilateral tax relief agreements need to include specific clauses for frontier workers, defined as:
“a rule for taxation of frontier workers require the worker to commute from his state of residence to his place of work in the other state on a daily basis”
However, they note that due to tax pressures few governments are willing to provide such agreements and renege on their rights to tax income. It is therefore likely that cross-border workers will continue to face uncertainty when it comes to taxation.
Since regulatory change seems highly unlikely, it may help to look further into migrants’ decision-making processes. Their decisions are theoretically quantitative, since they involve comparing net income in the home country with potential net income in the receiving country.
However, they may well also be sociocultural, with attitudes to tax differing from country from country, as well as from one demographic group to another. Level of education, expectations of earnings, and social attitudes can all impact upon an individual’s assessment of taxation. It is possible that the issues people face dealing with tax may have little to do with their attitudes towards tax itself, but rather their experiences of dealing with institutions, bureaucracy, getting information, and so on.
There is also little data available on how people who have already migrated deal with ongoing taxation issues. One problem with looking at how culture affects cross-border movement is that cultural effects on attitudes towards tax can vary widely within countries (e.g., Torgler and Schneider on Belgium / Spain), and so a broader, country-level study of attitudes towards taxation will not be useful for understanding the experiences of immigrants.
Qualitative studies may provide us with a better insight into a range of cultural influences as people cope with being frontier workers. Such studies could be designed and implemented in areas of policy concern, such as whether wanting to increase mobility from one particular location to another, then look at how people who have already made the move are coping. They could also be models for further research elsewhere in the European Union.
Claus, Edda, and Iris Claus. "Effects of Taxation on Migration: Some Evidence for the ASEAN and APEC Economies." Asian Development Review 28.1 (2011): 22-50.
European Union. 2014. Triangular Cases – Tax obstacles to labour mobility in the European Union and tax avoidance, p. 7.
Eurostat–European Commission. "Taxation trends in the European Union." Data for the EU member states, Iceland and Norway (2012).
Organisation for Economic Co-operation and Development. Taxation and employment. OECD, 2011.