No matter where your business establishes itself or operates, paying taxes remains an unavoidable part of employing staff and ongoing operations. However, tax laws vary by country (or smaller jurisdictions) and sometimes by business structures, which complicates compliance for global employers.
Among the tax burdens businesses must meet, the most common is income tax. Employers must ensure they withhold the required income tax from employees’ wages to comply with local regulations. Failure to do so can result in fines and other penalties for your business. Additionally, most countries impose a corporate income tax on the profits of certain businesses.
This guide will cover everything employers need to know about global income taxes, including the different types, how they vary around the world, and how to calculate them, to help avoid income tax noncompliance and its consequences.
What is Income Tax?
Income tax is a type of tax imposed by governments on both individuals and businesses based on their earned incomes. Individuals and businesses may be subject to income taxes at both national and subnational (e.g., state, province, county, local) levels, with the income tax rate set by the corresponding tax authorities.
What are the Different Types of Income Tax?
Income taxes come in two types:
- Personal Income Taxes – Also known as “individual income tax," they are levied on an individual’s earned income. The total amount of taxed income is typically a person’s annual earnings minus any tax credits or exemptions. Taxable income usually includes earnings from employment (i.e., employment taxes), pensions, property sales, and any other sources of income.
- Corporate Income Taxes – Governments collect taxes from businesses located within their jurisdiction. The amount owed will depend on what type of business it is, how much revenue it brings in, and how many employees it has working for them at any given time, among other factors.
Tax Systems and the Differences Between Individual and Corporate Income Taxes
Tax systems—or how a government levies different taxes and on who—can vary significantly by location. Two of these tax systems commonly found worldwide are:
- Progressive income taxes – This system’s rates increase as individuals’ or entities’ income increases. Generally, progressive tax systems rely on “brackets” or annual income thresholds to determine what amount is owed. Many countries use progressive tax rates for individual income taxes.
- Flat income taxes – Sometimes called “regressive taxes,” this system applies the exact same obligation to all individuals and entities subject to it (e.g., a “flat” 7% tax). Sales taxes provide a common example of how this structure functions.
The tax system utilised often proves a major difference between income taxes assessed on individuals and businesses—income tax on individuals tends to be progressive, while corporate income tax tends to be flat to better prevent unequitable impacts, such as on businesses operating on vastly different margins.
However, some countries and jurisdictions, such as Bulgaria, have flat tax rates on personal income. Conversely, the Tax Cuts and Jobs Act of 2017 established a 21% flat rate for US businesses, replacing an Alternative Minimum Tax (AMT) system and its two-calculation determination that adjusted tax rates somewhat progressively.1
When it comes to tax payment and tax filing, the processes can differ greatly between individuals and corporations. Individual tax filing typically involves reporting personal income and deductions, while corporate tax filing often requires more complex documentation related to business expenses, revenue, and various deductions allowed for businesses.
What is Income Tax Used for?
Generally speaking, income taxes are used to fund governments. Governments invest the funds toward maintaining public organisations and providing services for everyone’s benefit. What receives funding will vary by location (and the governing or majority group’s politics) but commonly includes infrastructure, education, military, healthcare, and other forms of public assistance.
Businesses also benefit from the taxes they contribute—such as:
- Public health insurance coverage decreases expenditures on employees.
- Lower sales taxes (offset by corporate income tax) can stimulate consumer spending.
- Public infrastructure and road construction—along with public mail services—facilitate sending and receiving supply chain shipments or purchased orders.
How are Income Taxes Levied Around the World?
Given tax systems’ variety, complexity, and vulnerability to legal overhauls, managing a global business’ burden becomes incredibly challenging without employing or partnering with tax professionals dedicated to the task.
For example, the United States imposes income tax at the national level under the authority of the Internal Revenue Service. Most state governments within the country also collect their own income taxes. Some city-level jurisdictions, like New York City, may impose additional income taxes as well, per the laws in 17 states.2 Canada enforces a similar tax system to the US.
National Income Taxes
National income taxes are collected by a country’s central government, while local income taxes are collected by state or provincial governments. Most countries and territories levy income taxes at the national level, with a dedicated agency or department usually established to oversee the process.
For example, some of the most notable worldwide tax authorities collectively form the Joint Chiefs of Global Task Enforcement, or the “J5”3:
- HM Revenue and Customs (HMRC) of the United Kingdom
- Internal Revenue Service (IRS) of the United States
- Canada Revenue Agency (CRA)
- Australian Taxation Office (ATO)
- Fiscale Inlichtingen- en Opsporingsdienst (FIOD) of the Netherlands
Together, these agencies collaborate to stop entities and individuals from committing transnational tax crimes.
However, several countries don’t have income taxes altogether. Some countries with no income taxes include The Bahamas, St. Kitts & Nevis, and the United Arab Emirates.
Local Income Taxes
Local income taxes are imposed by municipalities and are varied based on location. These taxes are generally used to fund things that benefit the community as a whole — parks, public education, infrastructure improvement, and more.
Local taxes are largely dependent on a number of factors and are usually state, county, province, or city-specific. Not every state or country has local income taxes, so be sure to check local regulations to find out how your business and employees are impacted.
For example, the UK and Germany don’t impose or allow any local income taxes,4,5 whereas Sweden,6 Switzerland,7 and Japan impose them on every municipality.8
Income Tax and Residency
Looking again at some of the previous examples, you can also see tax systems become further complicated depending on whether employed individuals hold citizen, resident, non-resident, or other statuses in a given country. Income tax on an individual’s earnings according to where they live differs by:
Canada
Canada typically levies a 15% to 33% progressive income tax for residents, non-residents and citizens with partial residency.9
Germany
A 14% to 42% progressive income tax with residents levied on all income, regardless of international source and non-residents only taxed on earnings from employment within Germany.
Japan
Japanese workers can expect to pay a 5% to 45% progressive income tax10: Permanent residents will pay tax on all their income, regardless of source. Non-residents are only taxed on employment within Japan. Finally, non-permanent residents will pay some income tax based on non-Japanese income that was paid or remitted while in Japan.
Sweden
Sweden is an example of a country that levies a flat national income tax of 20% for those above 614,000 SEK and 32% (on average for other taxpayers. In Sweden, a 25% income tax is levied on earnings from employment within the country for non-residents. However, it’s worth noting that this applies if the business is a foreign entity with a permanent establishment (PE) in Sweden or if a Swedish entity benefits from the employee’s work, acting as the management and control.
For non-residents without a permanent establishment, the tax is applicable only when the employee spends fewer than 15 days consecutively or 45 days annually within Sweden. Residents, on the other hand, are subject to income tax on all income regardless of its international source.11
Switzerland
As with some of the other countrieswe’ve covered in this article, income tax is levied on those with tax residencyregardless of source. For non-tax residents, income is levied on employmentwithin Switzerland. Switzerland is unique in that it levies a mix ofprogressive and flat taxes at the national, canton, and municipal levels.
- Tax-residency – Income tax levied on all income regardless of international source
- Non-tax-residency – Income tax levied on earnings from employment within Switzerland
UK
In the UK, a progressive income tax is applied to all forms of taxable income, ranging from 20% to 45% on income excluding dividends and 8.75% to 39.35% on dividends.12
Residents and UK-domiciled individuals are subject to income tax on all income, regardless of its international source. Residents who are non-UK-domiciled are taxed on earnings from employment within the UK. Non-resident and non-UK-domiciled individuals can choose to be taxed under the UK’s remittance system for income used in or remitted to the UK.
Scottish residents face income tax rates ranging from 19% to 47%, with consistent dividend rates.
USA
The USA levies progressive income tax on residents’ worldwide income at the federal level. Non-residents are taxed on their US-source income and any income effectively connected with a US trade or business (with certain exceptions). Federal income taxes range from 10% to 37%, according to an individual’s citizenship, residency, and legal status (e.g., head of household, married, single).
Various states across the USA also levy state income taxes, which vary between progressive and flat taxes. Currently, 12 states use the flat tax method. The different states also have varying levels of tax bracket; for instance Hawaii has 12 while Kansas and a handful of other states only have three.
Some states also levy taxes at the local and municipal levels. Several cities across numerous states levy local taxes, including Philadelphia in Pennsylvania and Detroit in Michigan. For example, Philadelphia has a city wage tax, and many other municipalities in the state have local income taxes.
Finally, it’s important for businesses trading in the USA to be aware of sales taxes. 45 states collect sales taxes, with only Alaska, Delaware, Montana, New Hampshire and Oregon being the exception. Many states also have localised sales taxes. Businesses operating outside the USA should also be familiar with the concept of NEXUS. In US tax law the term NEXUS describes a situation in which a business has a sufficient tie to a state, either “physical” or “economic that would compel the business to comply with the state’s tax laws.
Prior to 2018, many states were only using the physical criteria, meaning that a business had to have a physical presence in a state to comply with relevant taxes. However, a Supreme Court in 2018 has since meant that many states now also require companies with an economic presence to comply with relevant taxes (for example, online businesses
Many states now mandate that digital platforms or online marketplaces (like Amazon or eBay) are responsible for collecting and remitting sales tax on transactions they facilitate, even when the products are sold by third-party vendors using their platform.
What is an Income Tax Return?
An income tax return is a document that an individual or business uses to record their income and claim deductions. The main purpose of an income tax return is to determine how much money you owe or are owed from the government. It also provides information about your financial situation so that your taxing authority ensures that the correct amount in taxes is paid.
How to Calculate Income Tax
How you calculate income tax will largely depend on two factors: whether you’re calculating for an individual or a business, as well as the taxpayer’s location.
As an employer, you’re responsible for withholding the appropriate amount of income tax from employee wages. Because tax rates vary by location, it can be helpful to use an employment cost calculator when calculating payroll to help determine rates for a specific jurisdiction.
However, if you’re looking to hire abroad, you might want to consider partnering with a global employment or payroll provider who can do this on your behalf. This helps simplify the complex task of international payroll processing.
