Tax treatment of income earned abroad
List of abbreviations:
PIT: Personal Income Tax
CC: Criminal Code
LTPTA: Law on Tax Procedure and Tax Administration
On 13 October 2020, the Serbian Tax Administration (STA) issued an announcement inviting Serbians who earn income abroad to comply with their statutory requirement of paying taxes and social contributions. The STA reported it had cross-referenced data on foreign payments received by natural persons with their withholding tax returns and found widespread non-compliance. The STA therefore resolved to give taxpayers the opportunity to comply voluntarily on pain of facing misdemeanour charges.
The STA’s announcement caused widespread discontent in the freelancer community, leading to a petition under the slogan Ne uništavajte frilensere (‘Don’t Destroy Freelancers’) that aims to bring about a reduction in rates of tax on foreign income. If the petition receives 10,000 signatures, the legal team of the Serbian Legal Review Association will undertake a comparative analysis of freelancer taxation. If 20,000 signatures are received, a negotiating team is to be established to seek tax cuts. At the time of writing, the 20,000 figure has already been exceeded[i].
To better understand the current situation facing freelancers, we will first explain the notion of the term ‘freelancer’ and then look at the tax treatment of foreign income and propose solutions.
- Meaning of ‘freelancer’
A Freelancer is a free agent, a natural person who sells goods or provides services for consideration but is neither employed nor registered as a sole trader[ii]. In its announcement, the STA uses the term to refer to individuals who earn income from operating in foreign markets.
Specifically, the STA found that individuals providing software development, translation, language instruction, advertising, graphic design, and other services were the least compliant. High rates of non-compliance were also found for income earned on social media (‘YouTubers’) and from online betting and the like, as well amongst individuals renting real estate for under 30 days (such as in vacation rentals schemes).
- Brief overview of tax treatment of foreign income
The PIT Law treats as taxable all personal income from all sources listed in the Law[iii]. Relevant to this discussion is the fact that the PIT Law uses the worldwide income taxation concept, which makes the totality of a person’s income taxable, regardless of whether it was earned in Serbia or abroad[iv]. This concept is nothing new and was adopted as early as the first iteration of the PIT Law dating from 2001. As such, paying tax on foreign income is a statutory requirement that all Serbian nationals – including freelancers – would actually have needed to comply with even in the absence of prompting from the STA. In all likelihood, the present issue was caused because of ignorance of the law or lack of consultation with tax experts. Whatever the reason, anyone who failed to declare their foreign income or pay their taxes is still able to do so, and failure risks misdemeanour[v] or criminal penalties[vi]. Any late payment incurs interest, but, due to the operation of the statute of limitations, only income earned in the last five years is taxable,[vii]which means that taxpayers are not required to pay either taxes on earnings older than five years or any penalty interest.
It is worth mentioning that Serbia uses the so-called mixed income taxation model[viii] that entails taxing some income during the course of a calendar year (such as wage taxes and taxes on other revenue) and additionally levying an annual personal income tax for earnings above a particular threshold[ix]The tax base (taxable income), tax rate (percentage applied to the tax base to assess the tax), and tax relief (adjustments that reduce the tax liability) all vary depending on the source of income (e.g. salary, self-employment income, royalties, etc.)[x]and will not be covered in detail here due to their complexity.
In addition, methods of tax assessment and collection also merit a closer examination. The PIT Law envisages three options: collection of withholding tax, payment of tax as assessed by the tax administration, and self-assessment.[xi]Some individuals have been confused by the STA’s announcement and remain unsure of how to go about paying their taxes. This is all entirely to be expected because tax law is amongst some of the most difficult fields of jurisprudence, and the STA is yet to reach a level of development that would allow it to help taxpayers comply with their legal requirements without undue difficulty. The European Union has supported reforms to Serbia’s public administration, including the transformation of the STA into an efficient, open, and transparent provider of services to members of the public. Much progress has already been made, but there still remains a great deal of room for improvement.
Any taxpayer not wishing to seek professional advice must pay attention to any statutory provisions that can be used to reduce their tax liabilities perfectly legally. This is especially important for self-assessing taxpayers, who run the greatest risk of erroneously assessing more tax than they are due. To avoid unnecessarily paying extra, these individuals should specifically keep in mind the following considerations:
– is the income taxable;
– has the statute of limitations run out for the tax authority to assess and collect the tax;
– are there statutory standard deductions that apply;
– would the taxpayer be better off claiming itemised actual deductions, if these are higher than the standard ones;
– has income tax already been paid abroad; and
– what social contributions rate applies.
Finally, until the Don’t Destroy Freelancers petition manages to achieve its stated aims, the only option open to freelance workers is to comply with the law. The STA’s announcement has not imposed any new levies, nor could it have done so, in view of the principles of ‘no taxation without representation’[xii] and nullum tributum sine lege,[xiii]but has rather only warned taxpayers they must comply with their existing obligations. And, whilst awaiting any tax relief for foreign income, all freelancers must pay their taxes and the appropriate social contributions, as well as the annual PIT if they exceed the statutory threshold, on all income earned over the past five years, plus any interest. That being said, in the words of a judge of the US Court of Appeals, ‘anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.’ So, take action to minimise your tax liabilities, but be careful not to stray into tax fraud or tax evasion territory.
[i] See https://peticije.kreni-promeni.org/petitions/ne-unistavajte-it;
[ii] Author’s definition.
[iii] See Art. 3 PIT Law.
[iv] See Art. 7 PIT Law.
[v] See Art. 11 LTPTA.
[vi] See Art. 225 CC.
[vii] See Art. 114 LTPTA;
[viii] Dejan Popović, Poresko pravo, p. 303.
[ix] See Arts. 87 to 89 PIT Law.
[x] See Art. 3 PIT Law.
[xi] See Arts. 99 to 156 PIT Law.
[xii] In other words, a population cannot be taxed if it is not represented in parliament.
[xiii] No taxation without law.