Personal Income Tax and Social Security Coordination in Cross-Border Employment – a Case Study of the Czech Republic and Denmark

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 contributions 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 contribution 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 conclusions 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 currently applicable social security system for the person in question. In 2014, almost 1.5 million A1’s were issued in the EU to confirm short-term assignments (posting), and approximately 0.5 million were issued to confirm the situations for simultaneous activities and general exemption from the rules (European Commission, 2015a). These figures indicate that coordination between personal income tax and social security contributions involves a large number of cross-border workers within the EU.

An extensive literature exists on different aspects of coordination of social security and, separately, on double tax treaties. However, very few studies have dealt with the interaction between personal income tax and social security contributions. Pennings and Weerepas (2006) pointed out the differences in coordination of the two payments and argued for keeping the systems of both payments on a national level in all Member States, so that the systems would fit the varying coordination rules. The FreSsco analytical report (Spiegel, 2014) described the main features of both levies, as well as the challenges that lie ahead, and proposed some solutions to the stated problematic points. These solutions are discussed further in this article. The notion of tax was also a topic at the 2016 IFA Conference, while in the related report (IFA, 2016), the distinction in relation to social security contributions was seen as an inseparable part of the notion of a tax report. Regular studies, mainly of a comparative character, on the taxation of labour have been issued by the OECD and the European Commission, and together with available statistics, provide valuable sources for researching the interaction between personal income tax and social security contributions (OECD, 2016; European Commission, 2016). Thus, this article addresses a timely and important international topic and contributes a new case study to the discussion.

Relationship between personal income tax and social security contributions

The relationship between tax and social security contributions is complicated since the relationship is simultaneously both close and distant. The payments share some similar characteristics, but they are also very different in nature due to the divergent purposes of the payments (Kavelaars, 1992). Within the framework of mandatory social security schemes, both tax payments and social security contributions are obligatory. They are imposed by law and constitute directly non-refundable payments to public budgets (e.g. IFA, 2016). It is largely the question of their (non)equivalence which creates the distinction between the two levies. Whereas tax is usually considered to be a general contribution to public budgets with no specific purpose at the time of the payment, social security contributions are directly linked to financing the specific needs of the welfare system and are often required to be equivalent when it comes to the payment/benefit ratio.

Both personal income tax and social security contributions are levied on the income of individuals. Social security contributions are often limited to active income, i.e. work-related income (employment and self-employment), since one of the purposes is to secure the income of a person, in the event of their loss of ability to work, for various social reasons.

The fact that both the tax payment and the social security payment are partly levied on the same income and are burdens on similar subjects (individuals and employers) is a reason why some governments search, more or less successfully, for ways to merge the administration of personal income tax and social security contributions, in order to reduce the administrative cost both on the side of individuals and employers, as well as on the side of state administrations (e.g. Bakirtzi, 2011; Barrand, Ross and Harrison, 2004; Ennof, and McKinnon, 2011). Nevertheless, it is often difficult to overcome the core differences between the two payments. Since this is true at the national level, coordination of both payments at the international level is a further challenge.

Although States with low social security contributions often compensate by imposing higher personal income tax payments, this is not a rule. Different approaches to employers’ involvement also appear, while the contributions of employees, employers and personal income tax can have different effects on the economy (Goudswaard and Caminada, 2015). Figure 1 shows the interaction between personal income tax rates (y-axis), social security contributions paid by the employees (x-axis) and employers (size of the marker) in selected EU countries. Rates are taken from the OECD database and are for the average salary of a single individual without children. Even such a simplified comparison provides important information on the variation between employees’ and employers’ contributions and personal income tax between the selected countries.

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Figure 1.

Personal income tax and social security contributions paid by employees and employers, 2015

Coordination of personal income tax and social security in the EU

Tax and social security systems are treated differently at the EU level, since one is coordinated by double tax treaties between pairs of countries and the other by Regulation (EC) No 883/2004 on the coordination of social security (the ‘Regulation’). ¹

Personal income tax is coordinated by double tax treaties, which are concluded between pairs of countries. The role of the EU in the coordination of personal income tax is indirect; it is performed through the Court of Justice of the European Union’s (CJEU) decisions, which mainly remove discriminatory provisions (Terra, and Wattel, 2012). In respect of social security contributions, these are generally coordinated by treaties on the coordination of social security. For EU countries, the coordination of social security is based on the Regulation.

Coordination under double tax treaties differs significantly from coordination based on the Regulation, since they are based on different principles and rules (Kavelaars, 1992). Behind the rules in double tax treaties stands the agreement of the two contracting countries on the distribution of the tax paid in a given situation (who gets what portion of the pie), while making sure at the same time not to impose an additional tax burden on the individual. By contrast, the core principle of the coordination of social security focuses much more on the rights and benefits of the individual. The main aim of the coordination of social security is to secure the social security rights of a person.

As coordination between tax and social security contributions varies, which payment is tax under a double tax treaty and which payment is contribution under the Regulation must be carefully considered. It is not a simple distinction, as proved by several CJEU decisions. ² In these cases, the CJEU has broadly applied the Regulation in treating certain payments as social security contributions, even where the payments were otherwise designated, in cases where the payment was primarily intended to finance the social security scheme within the scope of the Regulation.

In 2008, in Denmark, there was a major change in the definition of tax and contributions regarding the labour market contribution of 8 per cent from gross salary, which was made by legislative amendments. ³ The reason for the change was that the termination of the Labour Market Fund, including the earmarking of the labour market contribution to the financing of specific initiatives within the social and employment area, had a consequence that the labour market contribution lost its character of being a social security contribution (Christensen, 2008). ⁴ The payments of labour market contributions would instead be included to in the ordinary state budget. ⁵ Prior to 1 January 2008, the labour market contribution was defined as a social security contribution but thereafter it was defined as a tax (Elgaard, 2012; Wiberg et al., 2011). During the transition period from 1 January 2008 to 31 December 2010, the labour market contribution was still relevant for social security purposes, since it was subject to EU regulation and bilateral agreements on social security (Wiberg et al., 2011; and Hansen, 2007). The name of the payment did not change with the legislative amendments.

Consequently, the labour market contribution was considered to be an ordinary income tax, like all other income taxes, and was covered by the double tax treaties. If Denmark cannot tax an income under a double tax treaty, it cannot collect payments of the labour market contribution. This could be the case if a person with residence in Denmark works in the Czech Republic for a Czech public employer, where the applicable double tax treaty would allocate the right to tax the income to the country of the respective public authority. ⁶ Another consequence of defining the labour market contribution as a tax, is that the labour market contribution would be included in the calculation of credit/exemption, according to the tax treaties. ⁷

Differences between personal income tax and social security contributions on a national level, as well as the different international coordination of both payments, can lead to undesirable results (for individuals or for countries) when the systems interact; typically if a person happens to be in a so called ‘cross-border situation’. This is obvious when the countries involved apply contrasting approaches to financing their welfare systems: one country financing its welfare system mainly from tax while the other using mostly specific contribution financing. This is particularly visible at the EU level, since the systems must be coordinated to secure the basic freedoms guaranteed by the EU: primarily freedom of movement of persons and services.

Rules applied to tax and social security contributions follow the core principles of the payments. Differences in the principles are thus mirrored in the rules. Such differences can easily lead to situations where the income of a person is taxed in one country while, at the same time, the social security system of another country also applies (Peeters and Verschueren, 2015).

Tax residence vs residence for social security purposes

Both double tax treaties (as specified in the OECD Model Convention) and the Regulation use the notion of residence. Tax residence is defined by the national legislation of each contracting country. As the definitions in the national legislations can overlap, the double tax treaty provides a set of criteria to determine sole tax residency. These comprise permanent home, centre of vital interest, habitual abode, and nationality. These criteria are applied in a given order until the decision on residency is made. Tax residence has a crucial role for tax duties, as the worldwide income of an individual is taxed in the country of residence. On the other hand, only income from source is taxed in the country where a person is considered to be tax non-resident.

Residence, for the purposes of social security contributions, is defined as the centre of vital interests, taking into account both personal and economic circumstances and interests. Tax residency is only one of the circumstances to be taken into consideration (Art. 11, Regulation 987/2009).

The similarity between residence for social security purposes, and the centre of vital interests as one of the criteria for determining tax residency, is obvious. Nevertheless, residence for social security purposes must be understood in a more general way. The reason for this is that for tax purposes, there can be two or more centres of vital interests. In such a case, another criterion applies. By contrast, residence for the social security purposes must be clearly defined as one place. Therefore, this centre of vital interests must be decisive.

The differences and similarities between personal income tax and social security contributions in the EU are illustrated in the table below:

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Table 1.

Personal Income Tax and Social Security Contributions in the EU – basic characteristics

	Personal Income Tax	Social Security Contributions
Primary International legislation	Double tax treaties	Regulation 883/2004 on coordination of social security systems
Determination of the country of payment	Taxation in residence or source country – eventually both countries can tax at the same time, double taxation then prevented by credit/exemption method	Determination of competent country based on the principle of single applicable legislation – contributions paid only to one country at a time
Basic rule	Tax paid where the work is performed	Contributions paid where the work is performed
Exemptions from the basic rules	Short-term assignments: less than 183 days Income is not paid by tax resident or permanent establishment in the state of work	Short-term assignments: Posting: less than two years, organic link with the “home employer” remains Simultaneous activities General exemption based on an agreement of the respective states (Art. 16, Regulation 883/2004)
Definition of residence	Tax residence determined by set of hierarchical rules	Residence determined as centre of vital interests; tax residence is only one factor to be considered

Source: OECD Model Tax Convention, Regulation 883/2004.

Cross-border employment: The Czech Republic-Denmark case study

Tax and social security contributions in Denmark

In contrast to the Czech Republic, the financing of the Danish welfare system, including the social security system, mainly comes from taxes, and only a minor part comes from social security contributions. Social security contributions are mainly paid by employers, while only a minor element is paid by employees. The balance between tax payments and social security payments changed significantly in 2008, when the labour market contribution at a rate of 8 per cent from the gross salary ¹⁵ was redefined into being an income tax instead of a social security contribution (Elgaard, 2012). ¹⁶

The social security contribution is divided in two categories. The first category includes the ATP Social Supplementary Pension contribution, which is a split payment between the employer responsible for two thirds, and the employee for one third of a yearly amount of approximately EUR 456. ¹⁷ The second category of social security contributions is only paid by the employer and consists of five different contributions to a total amount of approximately EUR 664 a year per full-time employee: ¹⁸ the AUB employers’ reimbursement system regarding education of trainees, ¹⁹ AES Industrial Injury Insurance, ²⁰ the Barsel.dk Maternity or paternity scheme, ²¹ FIB Financing contribution regarding unemployed, ²² and AFU, The Danish Labour Market Fund for Posted Workers. ²³

Personal income tax is paid at a 36.08 per cent rate ²⁴ on the gross salary, excluding the labour market contribution, since the labour market contribution is deducted from the gross salary before the tax rate is applied to the gross salary. An additional top tax of 15 per cent would be imposed on income of more than approximately EUR 62,765. The payments of ATP are deducted gross salary before calculating tax and labour market contribution. Basic characteristics of both systems are summarized in Table 2.

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Table 2.

Personal Income Tax and Social Security Contributions in the CR and Denmark - basic characteristics, 2016

	Czech Republic	Denmark
Tax base	Gross salary plus social security contributions paid by employer, so-called ‘supergross income’	Gross salary minus ATP employees’ part (1/3) and minus labour market contribution (8 per cent of gross salary after ATP)
Tax rate	Basic rate 15 per cent Solidarity surplus tax 7 per cent from salary exceeding 48 times average wage per year (approx. EUR 48,000)	Labour market contribution rate 8 per cent from gross salary after payment of ATP Basic tax rate 36.08 per cent, an additional top tax of 15 per cent imposed on income more than approx. EUR 62,765.
Assessment base for social security contributions	Gross salary Maximum assessment base applies for health insurance in the amount of 48 times average wage per year (approx. EUR 48,000)	ATP Social Supplementary Pension contribution of approx. EUR 38 a month
Social security contributions rates – employers’ part	34 per cent of which: 25 per cent for pension, sickness and unemployment 9 per cent for health insurance	2/3 of ATP Social Supplementary Pension contribution of which: 100 per cent for pension
Social security contributions rates – employees’ part	11 per cent of which: 6.5 per cent on pension 4.5 per cent on health insurance	1/3 of ATP Social Supplementary Pension contribution of which: 100 per cent for pension
Other contributions by the employer	Liability insurance paid by employers Paid from the assessment bases of all the employees for social security contribution Rates specified according to main field of business, ranges from 5,6 per cent to 50,4 per cent	Approx. EUR 55 per employee per month regarding: AUB Education of trainees AES Industrial injury insurance Barsel.dk Maternity or paternity scheme FIB Financing contribution for unemployed AFU The Danish Labour Market Fund for Posted Workers
Basic tax allowance	No standard tax allowance, tax allowances exist, however are subject to specific conditions	Personal standard allowance of approx. EUR 6,044 per year of gross salary
Basic tax credits	Basic tax credit for all tax payers approx. EUR 919 per year	Ordinary working tax credit 8.3 per cent of gross salary. Max. of approx. EUR 4,029 per year

Source: Respective Czech and Danish legislation as cited in the text.

Case study results

In Table 3, we present the effective taxation rates for all the variants, as defined in the strategy, for comparative purposes. As it is important to take into account both employees’ and employers’ contributions, we provide two variations of effective taxation. The first ratio (Effective taxation I) considers payments of employees only in relation to their gross salary. The second ratio (Effective taxation II) also includes the employers’ contributions and relates it to total labour costs, i.e. to gross salary plus employers’ contributions.

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Table 3.

Effective taxation of different variants of applicable legislation for personal income tax and social security contributions and different level of income, in per cent, net income in EUR

Variants of applicable legislation for personal income tax and social security	Level of the gross salary	Effective taxation I (ratio of tax and social security contributions paid by employee to gross salary)	Effective taxation II (ratio of tax and social security contributions paid by employee and employer to total labour cost)	Net Income in EUR (Salary - tax - social security contributions paid by employee)
VAR I: Personal income tax and social security contributions paid in the CR	Czech average salary	22.83	42.41	714
	Danish average salary	29.26	47.17	2967
	double Danish average salary	28.56	41.17	5993
VAR II: Personal income tax and social security contributions paid in Denmark	Czech average salary	19.79	26.25	815
	Danish average salary	37.67	38.85	2949
	double Danish average salary	53.18	53.62	4598
VAR III: Personal income tax paid in the CR and social security contributions paid in Denmark	Czech average salary	12.20	13.98	803
	Danish average salary	18.37	18.09	3415
	double Danish average salary	20.86	20.22	6630
VAR IV: Personal income tax paid in Denmark and social security contributions paid in the CR	Czech average salary	26.02	44.79	759
	Danish average salary	44.51	58.56	2663
	double Danish average salary	58.03	65.45	4192

* average salary in 2014 according to Eurostat: Czech EUR 925, Danish EUR 4,194, double Danish EUR 8,388.

The difference between effective taxation I and II is significant for the situations where Czech social security is paid (VAR I and VAR IV) due to high level of the employers’ part of the contribution. The difference caused by the Danish contribution is rather small and decreases with the level of income.

The results confirm that the effective taxation differs significantly for different variants of applicable legislation. For all levels of income, VAR IV provides significantly higher results for effective taxation compared to VAR III. Effective taxation II (including the employers’ contribution) differs the most in VAR III and VAR IV for the highest level of income considered, by 45.23 percentage points.

It is, however, important to point out that no general conclusions can be drawn for the comparison of all the variants since levels of income, as well as the characteristics of the national systems, are different.

At first glance, focusing on nominal tax rates, one might conclude that a person will be always better off paying taxes in the Czech Republic. The catch here lies in the different calculations of tax bases, when gross salary in the Czech Republic is increased by the Czech employers’ contributions and gross salary in Denmark is lowered by employees’ contributions (Czech or Danish), and regression of the Czech system caused by the maximum assessment base for calculation of the social insurance contribution. This is also seen in VAR I, when both personal income tax and contributions are paid in the CR. This regression is compensated for by the progression in the Danish system in other variants. The results would vary even more if other tax benefits, such as for children, as well as the level of welfare benefits, had been considered.

These differences between the national systems are hardly capable of being overcome by coordination through double tax treaties or by the Regulation. These can both deepen the mismatches or reduce them, depending on the specific situation of the person and levels of income. This should be taken into consideration in the discussion of possible harmonisation of coordination rules.

How to overcome the mismatches?

As there are differences among the social security systems and systems of personal income tax, their interaction can give rise to very different results for the final tax and social security burden on employees and employers.

Through a deeper analysis based on the case study considering these two countries (Denmark and the Czech Republic) with their contrasting approaches to financing the welfare system, the mismatches and impact on resulting tax and contributions liability can be seen in more detail.

To overcome these mismatches, several solutions can be considered, some of which have already been considered (Spiegel ed., 2014; European Commission, 2015b). Among the possible solutions are those that can be used with established legislation and processes, as well as those that would require significant change to the systems.

As the most feasible solution given the current legislation, exchange of information and cooperation between the relevant institutions could be considered. In particular, the use of exemption in the coordination of social security in such cases could solve undesirable mismatches, if used directly and in a coordinated manner across the countries. This would, however, only apply to cases where the individual is not satisfied with his/her duties, i.e. in cases of negative discrimination. The question remains of whether or not it is the positive discrimination of the individual that is undesirable and should therefore be avoided. Positive discrimination can hardly be avoided by the use of the exemption.

Harmonisation of the rules applied in the Regulation and double tax treaties could also be considered. Specifically, the unification of the posting rule for social security with the exemption for short-term assignments in double tax treaties, down from two years to 183 days to match the rule for short-term assignment in double tax treaties. The opposite, i.e. an increase from 183 days to two years in double tax treaties, could also apply. Nevertheless, it should be pointed out that both periods are based on the reasoning behind their respective systems. It can be said that 183 days is too short for social security and two years is too long for income tax.

Prolonging the 183 days rule for tax exemption to two years would mean that a person could live and work in a country for up to two years and, at the same time pay both tax and social security contributions in the other (sending) country. For tax purposes, the exemption would require withdrawing from residential taxation (taxation based on the fact that the person is resident for tax purposes in the country) and redesigning the role of permanent establishment as the condition for applying the exemption. Compared to the current situation and with relevance to the above case study, Denmark would, in this situation, get much less tax from those already living there (compared to the current 183 days, there would be another one and half years without tax). As the social security systems are based on the solidarity principle, the fact that a person living in the country for two years is not contributing to the system (by paying taxes) could be problematic. The systems that are based more on contributions would not be as vulnerable to this alternative.

On the other hand, if the posting rule in social security would match the length specified in the double tax treaties (183 days), the social security coverage would shift after a half a year of working in the country of work. This change would not require any change in residential taxation because the rule for tax would stay as it is. Compared to the current situation, Denmark as the posting state would be in a better position as it would not be responsible for the benefits of those who do not pay taxes to the system after a half of a year (in the current situation Denmark could be responsible for paying the benefits even when the tax is being paid in the other country). From a social security perspective, this would probably lead to many undesirable changes of applicable legislation (as the period of a half of a year is very short) and to an increase in general exemption claims. If the general exemption were issued in such cases, the mismatches would persist. Strict application of a half year posting rule for the purposes of social security (to overcome the mismatches) would be contrary to the purpose of the coordination of social security, which in principle should be applied for the benefit of the individuals concerned.

Further harmonisation in the terminology and definitions, such as the definition of residence for social security purposes and tax residence, can take place to avoid more subtle incompatibility. Without any further changes, however, the harmonisation of residence for social security and tax residence would not make much of a difference.

Much more complicated alignments of the systems would bring other solutions that assume that all socially earmarked taxes should be treated under EU Regulation on coordination of social security while all the tax benefits, that cover social risks, should be treated under the EU Regulation on the coordination of social security (Spiegel, 2014). The idea is logical as it has been already stated that the payments allocated to finance welfare systems should come under the coordination of social security. This applied in the past to separate payments where it had been decided that a special payment, even though considered to be a tax by the state, must have been included under the coordination of social security. Nevertheless, to break down the systems to their elements seems to be extreme and unachievable. Thus, we do not see this solution as plausible. In the case of the Czech Republic, where the tax and social security system interact closely, this would result in significant changes. The Czech tax system provides tax benefits for children in the form of tax credits. In certain situations, when those tax benefits are higher than remaining tax liability, it can be paid out as a tax bonus (involving a payment from the tax authority to the tax payer). Furthermore, the system is linked through the tax base from dependent activity, when social security contributions paid by the employer increase the gross salary to create a so-called supergross tax base. Solidarity surplus tax of 7 per cent, on the other hand, could be considered as supplementing social security contributions as it applies after the tax payer reaches an amount equal to the maximum assessment base for the purposes of social security insurance. Denmark, on the other hand, allows social security contributions paid by employees to lower the tax base.

Other proposed solutions (Spiegel, 2014) also involve a new level of coordination in the form of ‘supra coordination’ above the Regulation and double tax treaties in order to treat problematic cases; a new EU directive; or an international treaty; or a recommendation from the European Commission (2015b) to establish the concept of a ‘one-shop-stop’ to pay tax in one country only, as with social security. While this could be technically considered, it would mean a significant change in the legal order.

In order to compensate for tax and social security losses from cross-border employment, some states apply special compensation schemes, e.g. the double tax treaty between the Netherlands and Belgium. This compensation regime considers tax payments and social security contributions paid in both states and compares this with the situation in which the person would be taxable in one state only. The difference between the amounts would then be used as compensation. This aims to compensate for possible loss due to the fact that not all the tax-deductible items can be deducted if there is split taxation between the two states (Belastingdienst, 2018). Compensation regimes in the double tax treaties might be used to redistribute the tax revenues from the source state (where the tax is paid) to the resident state (where social security is paid). This would make it possible to compensate for tax shortages in those, such as Denmark, states that finance social security systems from tax. These regimes, however, would need to be specifically prepared and to carefully consider the design of financing schemes of the contracting states.

As the case study shows, it is not possible to draw general conclusions about the impact of applying different legislation to personal income tax and social security contributions; not just for two countries with quite extreme positions in terms of comparison of the two payments. Thus, we are of the opinion that one universal measure for all the EU states would not serve the purpose or be feasible. Further detailed comparisons would need to be done to search for similar patterns for all the involved states and to identify suitable measures.

Conclusion

Without coordination, the mismatches among the systems would create hindrances to free movement of persons and services. Personal income tax coordination is governed by respective double tax treaties among the EU Member States. Coordination of social security systems is under the baton of the Regulation. In cross-border situations, both double tax treaties and the Regulation apply. As there are differences between the principles and rules applied, individuals can get into all kinds of situations leading to various amounts of payroll liabilities, which could be possibly considered discriminatory.

This is why there is ongoing discussion of unification about personal income tax payments and social security coordination rules and about other systematic solutions to overcome the differences. The question remains, what measures should be taken to cure without facing unpredictable side effects later on.

To simplify the coordination of both personal income tax and social security, with close harmonisation of both systems, would technically work. Nevertheless, it would be better if current discussions focused on feasible measures in the context of the global political and economic situation, and with respect to the sovereignty of the EU member states (Peeters and Verschueren, 2015). We are of the opinion that different elements within the two systems result in too much variation of liability for tax and social security, even before evaluating the position of the person in respect of the benefits, that it would be very difficult to devise unified coordination rules.

In this case study of the Czech Republic and Denmark, we identified elements that influenced the amount of personal income tax and social security contributions. The most significant in this context are the differences in calculating the tax base. In the Czech Republic, social security contributions paid by the employer are part of the tax base. On the other hand, in Denmark, social security paid by the employee is deducted from the tax base. This is true even in situations where the tax system differs from the applicable social security system. For the purposes of the tax base in the Czech Republic, the level of social security contribution, as it would be calculated in the Czech Republic, is taken into account even when the Danish social security system applies. In Denmark, however, social security contributions paid in the Czech Republic can be deducted from the tax base, if the Czech social security system applies. This, together with low social security contribution rates in Denmark and high social security contribution rates in the Czech Republic, widens the differences to a large extent. The obligation of the state, applying the deduction of social security in national law, to deduct social security contributions from the tax base even if the social security contributions are paid in the other member state has been already confirmed by CJEU in the Rüffler and Filipiak cases (Spiegel, 2014). In the context of calculating the tax base in the Czech Republic, the Asscher Case is interesting. As the CJEU ruled, a higher tax rate should not apply just because of the application of another social security system or considered as a higher tax or a form of hidden social security contributions (Spiegel, 2014). Currently, if another social security system applies, hypothetical contributions are calculated for the purposes of the Czech tax base. This assures that the tax base from dependent activity in the Czech Republic is always the same no matter whether the person is insured in the Czech or other social security system. However, the amendment of Czech national law in 2019 makes it clear that actual contributions paid in the other EU states should enhance the tax base. In light of the Asscher Case, the question is whether, in the case of higher contributions in the other state, the tax paid in the Czech Republic should be considered as hidden social security contributions, as this would lead to a higher effective tax rate due to the fact that the person is insured in the other EU member state.

Other elements such as tax deductions and tax and social security contribution rates are also important, but their impact on the final tax/contribution effective rate is not as significant as the inclusion or exclusion of social security from the tax base.

The issue of mismatches between coordination of tax and social security was discussed at two workshops on ‘Tax and social security: the EU perspective’ in 2017. Those who participated in the workshops agreed that the problems arising in this context could be significant and possible solutions should be discussed further (Tepperová et al., 2018).

We would like to stress out that it is also important to discuss the solutions to possible mismatches taking into account all the elements of the national systems involved, since any rash implementation of radical rules could bring more fog to an already very complex environment.