Personal Income Tax and Social Security Coordination in Cross-Border Employment – a Case Study of the Czech Republic and Denmark
| DOI | 10.1177/1388262719833766 |
| Date | 01 March 2019 |
| Published date | 01 March 2019 |
| Subject Matter | Articles |
Article
Personal Income Tax and Social
Security Coordination in Cross-
Border Employment – a Case
Study of the Czech Republic
and Denmark
Jana Tepperov´
a
University of Economics, Prague, Czech Republic
Abstract
Neither personal income tax nor social security is harmonised within the EU. Social security
systems are coordinated at EU level whereas personal income tax in cross-border situations
is governed by respective double tax treaties. In most EU countries, personal income tax and
social security contributions are relatively distinct payments. This article examines problems
surrounding the interaction between personal income tax and social security contributions on
a national and international level based on a case study of cross-border employment between
the Czech Republic and Denmark. As the Czech and the Danish systems are designed very
differently, the case study allows for clear illustration of the issue at-hand. The aim is to
identify the elements influencing the impact of different coordination rules in personal income
tax and social security contributions, illustrate and discuss the potential problems of such
mismatches between the two payments. The impact on final payments differs, not only due to
the different levels of coordination of the payments, but also due to the different designs of
the two national systems. Thus, it would be very difficult to address all the scenarios with a
one size fits all measure for all the EU Member States that would overcome the differences in
this coordination.
Keywords
Personal income tax, social security contributions, cross-border employment, European Union,
coordination
Corresponding author:
Jana Tepperov´
a, Assistant Professor, Department of Public Finance, W. Churchill Sq. 4, Prague 3 13067, Czech Republic.
E-mail: jana.tepperova@vse.cz
European Journal of Social Security
2019, Vol. 21(1) 23–41
ªThe Author(s) 2019
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DOI: 10.1177/1388262719833766
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Introduction
Personal income tax and social security contributions are integral parts of the system of overall
taxation in modern economies. Taken together they represent a significant part of tax revenues and
are key to financing the welfare systems of the countries. Some countries finance their welfare
systems mainly on a contributory basis, and impose higher social security contributions. Others
finance their mostly residual welfare systems from taxation and keep their social security contri-
butions relatively low (Peeters and Verschueren, 2015). Low social security contributions are often
reflected in higher personal income tax payments and may also be counter-balanced by higher
levels of other taxes. At the same time, this rather technical interplay between personal income tax
and social security contributions can have a significant impact on cross-border situations, and thus
deserves close attention.
Taxation of cross-border activities within a common market area, such as the EU’s internal
market, requires special consideration. Mismatches between national jurisdictions can create
obstacles and additional costs, thus disrupting the free movement of goods, services and labour,
including the right to choose a place of stay or residence. Since indirect taxation plays a key role in
cross-border shopping and corporate taxation in cross-border movements of enterprises, it is
mainly personal income tax and social security contributions that are at stake in cross-border
labour migration (Bode et al., 1994).
The fact that tax and social security coordination within the EU varies, and that mismatches can
occur, is well known. Nevertheless, the potential impact and scope of such mismatches, when it
comes to the particular amounts of tax payments and social security contributions, has not been
analysed. As national systems of tax and social security differ, the impact of mismatches between
coordination rules can be magnified by other elements within the systems, such as tax and con-
tribution bases, tax reliefs, etc. These are not directly obvious from the tax and contribution rates,
and their identification requires detailed knowledge of the systems involved.
Based on a case study of cross-border employment between the Czech Republic and Denmark,
this article examines the problems and consequences arising from the interaction between personal
income tax and social security contributions from the EU perspective and aims to identify elements
within the national systems that increase or decrease the impact of such differences on individuals’
tax payments and social security contributions. Our case study is based on a more general legal
analysis and more detailed economic calculations of tax and social security payments in the Czech
Republic and Denmark in various situations.
The selection of the Czech Republic and Denmark as the focus of this study is not random.
These countries were chosen intentionally, since their welfare systems are very different – for
historical and economic reasons – and they have quite opposite approaches to financing their
respective systems, thus clearly highlighting the impact of such differences. The general conclu-
sions will also apply to other countries, even though, for some countries, the impact might not be as
clear as in the case study used in this article, and thus might not seem significant. We are aware that
migration flows between the two countries are not high, but we are of the opinion that the case
study serves well as an illustration of the problem at hand.
According to available statistics, approximately 18 million EU citizens live in another EU
country than their country of birth. The long-term mobility within the EU in 2014 was estimated
to be 12.5 million people (Equinet, 2015), with cross-border mobility, meaning regular cross-
border for work, to be 1.6 million people (Eurostat, 2016). Another view on the size of the problem
is based on A1 statistics. A1 is a document issued to confirm the curr ently applicable social
24 European Journal of Social Security 21(1)
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