Over the last few years and continuing into 2021, Independent and Self-Employed contractor classification and tax avoidance globally has become a focal point of local governments. Workers now offer their expertise and services on a global basis. Recruitment companies and talent platforms are adopting strategies to identify and engage these individuals. In terms of cost and speed pf engagement, the most efficient way to engage these workers is as independent or self-employed contractors. The economic benefits for the contractor are evident. However, government tax offices now realize that contractors being paid non-compliantly from a global payment platform, results in missing tax revenue.
The IRS and State Revenue offices in the USA began their campaign to seek out the misclassification of workers in the mid 2000’s, with rulings like IRS 87-41 establishing the Federal “twenty-point test” and more recently Massachusetts MGL 149 & 148B, and California’s AB5 Classification standards for independent contractors. Other countries will likely follow the USA’s lead, as they tend to with human capital trends and seek to ensure correct classification of their workforce and proper taxation is recordation and payment.
Around the World
Below are some examples of the current and forth-coming legislation enacted by global governments, to ensure Independent and self-employed contractors are properly classified, with taxes properly recorded and paid.
United Kingdom – IR35
Beginning April 2021, self-employed workers and the companies who engage them will experience one of the most important changes to worker tax legislation in the United Kingdom “UK”. The IR35 reform will have a serious impact on large and medium-size organizations, operating in the private sector. Compliance and adherence will become paramount.
This new legislation by the UK HMRC’ is an attempt to plug loopholes that have been exploited by services providers, to reduce tax for contract workers. To be fully compliant any self-employed worker must be assessed to determine if they are “inside” or “outside” of UK IR35.
Contractors deemed inside IR35, will be engaged as a “PAYE” employed worker, similar to W2 in the USA or T4 in Canada. If a self-employed solution is being utilized, all employee statutory costs must be withheld prior to paying the Contractor’s Limited Company.
For Contractors deemed outside of IR35, a defined contract for services with a detailed scope of services and statement of work will need to be signed off by the Client.
Mexico – Subcontracting Law November 2020
The newly enacted legislations by the Mexican Government prohibits subcontracting, which in the law is defined as “the practice of providing or making available workers for the benefit of another person or legal entity.”
Contractor workers looking to perform services or work for a company will be allowed, only if the service or work is not part of the core business. Additionally, specialized services by the Ministry of Labor and Social Welfare (STPS) may be approved as compliant, with a detailed contract for services.
The Dutch Tax and Customs Administration must determine whether or not there is a true employer-employee relationship built into contractor engagements.
A formatted agreement (prepared in Dutch) should be utilized by companies and contractors, to prove the correct classification of their contractor and ensure the worker does not have to be classified as employed.
There are 2 types of agreements Independent and self-employed contractors and the end clients have the option to choose from.
- General agreements defining no direct employment.
- Sector and Professional agreements, for contracting to or in certain professional sectors.
If your company is seeking to engage an independent or Corp. to Corp. contractor abroad, understanding compliance, possible employment and tax laws in the country where the contractor will perform the services or work is essential.
Partnering with a global compliance and contractor management company like CXC Global will help you ensure compliance and reduce risk.
Speak with one or our global compliance and workforce experts today to find out more.