The Taxation of Pensions:Issues, conceptsand international experiencesRobert Holzmann (Austrian Academy of Sciences, Vienna)Bernd Genser (University of Constance)Joint Vienna InstituteThursday, January 17, 20193:45 p.m. to 5:15 p.m.
Motivation: There are issues Pensions systems/retirement income are complicated issues Taxation of income (wages, profits, .) are complicated issues The taxation of retirement income/pensions is a very, verycomplicated issue The portability of pensions across national borders is acomplicated issue The taxation of pensions across borders is a very, very, verycomplicated issue that is not on the radar screen ofeconomists and policy makers
Motivation: Do these issues matterand is there a solution? Pensions/retirement income is an increasing tax base of countriesas population ages and retirement income becomes more formal International mobility of workers and retirees is increasing, at timesinfluenced by tax arbitrage Current taxation rules and practices of pensions create a doublefairness dilemma: between countries and between individuals The OECD model convention and the existing network of bilateraldouble taxation treaties do not pay attention to the fundamentalintertemporal character of pension taxation Our proposed solution is to move from back- to front-loadedtaxation under three payment options
OutlinePart I: The Taxation of Pensions: A very briefintroduction (Holzmann)1. Pension systems, their pillars and taxation2. Three phases of earnings-related income taxation3. Two basic concepts of pension taxation: CIT and EITPart II: The Taxation of Cross-Border Pensions:Issues and proposal (Genser)4. The state of cross-border taxation of pensions5. The double fairness dilemma of back-loadedpension taxation – for countries and individuals6. The proposal: Front-loading taxation under threepayment options
Part 1: The Taxation of Pensions –A very brief introduction1. Pension systems of countries consists of variousschemes (pillars) with different objectives, benefittypes, financing and taxation modesKey objectives: Poverty reduction, incomereplacement/consumption smoothingBenefit type: Defined benefit, defined contributionFunding: Unfunded/non-financial, funded/financialTaxation: At contribution/saving; returns;disbursement/benefits
Multi Pillar Pension Taxonomy and TaxationTarget GroupLifetime Informal FormalPillarpoorsector sector0XX12xMain CriteriaCharacteristicsSocial pension, at least socialassistance, universal or revenuesContributions Returns Benefitsn.a.Contributions,maybe xemptn.a.XXPublic pension plan,publiclymanaged, unfunded DB or DC(i.e. NDB, NDC)MandatedXOccupational or personalpension plans, funded DB orfunded tsXXXVoluntaryFinancialassetsx/ n.a.x/ n.a.x/ n.a.3xXXOccupational or personalpension plans, funded DB orfunded DC4XXXHome ownership, medical care,family support, etc.Note:ParticipationTaxationImportance of each pillar for each target group:XVeryX Moderate x LittleSource: Holzmann and Hinz 2005, Genser and Holzmann 2018n.anot applicable
2. Three phases of earnings-relatedretirement income taxation At contribution payment (saving effort) C– Example: Income Y 100, contribution rate 10%, tax rate20%C 0.1*100 10;T1 0.2*100 20; or T2 0.2*(100-10) 18Taxed: TExempt: E At return receipt (rate of return) on accumulations(financial or non-financial) [E or T] At disbursement/benefit receipt [E or T]Note: In countries often lower tax rates t or even subsidies s are used tofurther retirement savings
3. Concepts of (retirement) income taxation Differ in their tax base definition/phase of taxation andviews on the importance of distortions on savings/laborsupply decisions Comprehensive Income Tax (CIT): Tax base for aperiod/year is consumption plus change in net wealth(i.e. any form of savings) Expenditure Income Tax (EIT): Tax base is only individualconsumption; non-consumption expenses and net savingsare excluded Tax treatment of retirement income over life cycle underCIT vs EIT– CIT:– EIT:T-T-ET-t-E or its equivalence E-E-T The actual income taxation of retirement income in andacross countries varies across pillars with some dominanceof E-E-T and heterogeneity for 2nd and 3rd pillars (Table 1)
Table 1: Income Taxation of Pensions in OECD StatesTaxStatutoryOccupationalPersonalT-T-ENZ, TRNZ, TRT-t-EAU, DKAUT-E-tIT, SEDEt-T-Et-E-TSKCA, FR, GB, MT, NLBE, HR, NOAT, FI, HR, NOt-t-tFRE-t-TDK, LV, SET-E-ELV, PLt-t-EAUAUAT, BE, FR, MT, PTDKt-E-tCH, DE, EE, LI, NOAT, BE, FR, LU, MT, PTE-E-TAT, BE, CH, CY, DE, DK, ES, FI, GR, HR, IR,IS, IT, LU, MK, PL, RO, SI, SKCA, CH, ES, FI, DE, GR, HR, CA, CH, ES, GR, HR, IS, NL,IS, NL, SI, USPL, SE, SI, USE-t-tCZITIT, LVs-E-TSEt-E-EAL, HU, LT, MECZ, HUCZ, EEE-t-EMECYCYE-E-tLI, LV, PT, TR, USEE, GB, IR, IS, ROGB, IR, LU, PL, ROE-E-EAM, AZ, BG, BY, GE, MC, MD, RS, RU, UABG, SKBG, LT13
Part II: The Taxation of Cross-Border Pensions Issues and Proposal4. The state of cross-border taxation of pensions The national rules for pension taxation- are highly diverse within countries- differ between countries (Table 1) If individual pension income contains cross-border pensionbenefits, national tax rules are complemented by bilateraltax treaty rules and the complexity of pension taxation issubstantially increased (Table 2) Rising mobility of workers and pensioners will substantiallyincrease the share of pensioners who receive cross-borderpension payments (Table 3)
International double taxation occurs, if- income tax is levied on worldwide income of a resident, and- foreign source income is also taxed in the source stateBilateral tax treaties signed to avoid international double taxation on income(since 1850) internationally coordinated by the OECD Model Tax Convention recommend two avoidance methods- tax exemption in one of the two states- tax credits in the residence state for income tax payments inthe source state assign the right to tax income for each type of taxable incomeand define the avoidance method for each type of income
Table 2: Tax Assignment of Cross-border Pension BenefitsTax assignment inGerman tax treatiesStatutorypensionsExclusive residencetaxationCA, CH, CZ, EE,ES, FI, GR, HU,IR, IT, LU, PT,SE, SI, UK, USOccupationalpensionsAT, BE, CH, CZ, EE,ES, FI, FR, GR, HU,IR, IT, LU, MT, NL,PL, SE, SI, UK, USExclusive sourceAT, BE, DK, FR,taxation,IT (citicens),progression proviso MT, NL, PL, SEin residence countryFR (mandatory)non-exclusive sourcetaxation, tax creditin residence countryCA, DKPersonal pensionsAT, BE, CH, CZ, DK, EE,ES, FI, FR, GR, HU, IR,IT, LU, MT, NL, PL, PT,SE, SI, UK, USCA, DK (rents),Source: Genser/Holzmann (2018), Wellisch et al. (2008), tax treaties1
Table 3: Recipients of statutory German pensionsNumber ofpensionersTotal %)(100%)Pensioners living1,7461,6291,427outside Germany(6,84%) vingin Eurostat(4,54%)Source: Table1.1;Online(3,78)Database (3,16)GermanyPotential recipients2,7842,5742,201of cross-border(11,38%) (10,29%) (8,99)pensionsannualgrowth rate0,42%2,03%4,05%2,81%Source: Genser and Holzmann ( 2016, based on Eurostat Online Database, June 2015)
5. The double fairness dilemma ofback-loaded pension taxation (E-E-T) E-E-T taxation of pensions is a key concept of OECDcountries and promoted in EU documents E-E-T taxation creates a fairness dilemma for crossborder pensions Source state receives no tax on migrants’ earned incomespent on pensions contributions if residence state hasthe exclusive right to tax pension payments Migrants are double taxed if source countries try to avoidincome tax losses by pre-taxing pensions while pensionwealth is accumulated because treaties only allow taxcredits for source taxes on pension benefit payouts
Table 4: Migrants tax burden for different regimes and assignmentsresidence principleE-E-TT-E-ET-T-EA1 income120120120A1 pension saving242424A1 tax base96120120A1 income tax28,83636A2 pension benefit484848A2 tax base0024A2 income tax007,2B2 tax base484848B2 income tax14,414,414,4000B2 tax credit128128128total income 1/total tax 1/38,445,652,8in A / in B28,8/9,636/9,640,8/9,6source 2812838,445,652,838,4/036/9,6 40,8/9.6Parameters: labor income in A 120, income tax rate in A and B 30%, pension contribution rate 20%,normal rate of return 50%, excess return rate 50%, A1 working period in A,A2 retirement period in A, B2 retirement period in B
Motives for pension taxation in the residence state:- better information on personal circumstances of tax payer(ability-to-pay, world-wide income)- simple individual tax compliance (only one tax authority)- exemption only for recipients of cross-border public pensionsAdministration of E-E-T on cross-border pensions:- monitoring foreign pension benefits and foreign taxes is costlyfor the residence state- source-taxed migrants have to comply with tax authoritiesin source and residence state- double taxation of migrants if source countries pretax pensions,because the Model Tax Convention does not consider credits forthese tax payments- no feasible way define and to monitor bilaterally acceptable taxcredits based on past income tax payments
6. Income taxation with pre-taxed pension incomeStarting positiona. pension taxation should be feasible over the wholepension cycle (contribution, pension wealthaccumulation, pension benefit)b. pensions should be taxed efficiently under the cashflow/ expenditure taxation (Fisher/Kaldor principle)c. avoidance of international double taxation of pensionsmust incorporate the whole pension cycle
Essentials of the pre-taxed pension income proposali. Deferred income taxation of saving, viz. E-E-T, is equivalent toimmediate taxation of investment savings plus taxation of excessreturns on capital wealth, viz. T-t-E (front-loaded expendituretaxation)ii. Applied to pension taxation equivalence implies that in presentvalue terms a pensioner‘s tax burden over the pension cycle is thesame under E-E-T and T-t-E (see table 5)iii. Under T-t-E, pension benefits are regarded as withdrawals frompre-taxed pension wealth and exempt from income taxiv. For pre-taxation states there is no requirement to assign the rightto tax pension benefits in double taxation treaties
Table 5: Expenditure tax burden on migrants under different tax assignmentsA1 incomeA1 pension savingA1 tax baseA1 income taxA2 pension benefitA2 tax baseA2 income taxB2 tax baseB2 income taxB2 tax credittotal income 1/total tax 1/in A / in Bresidence 648014,400012812838,438,428,8/9,638,4/0source rs: labor income in A 120, income tax rate in A and B 30%, pension contribution rate 20%,normal rate of return 50%, excess return rate 50%, A1 working period in A,A2 retirement period in A, B2 retirement period in B
Attractive features of front-loaded pension taxationi.No international double taxation of pensionsii.No tax revenue losses in source state as a migrant‘s pensionwealth is fully income taxed in the source country wheneverhe/she emigratesiii.Only minor revisions of double taxation treaties are required ifstates maintain back-loaded pension taxationiv.Reduced compliance and administration costs of pension taxation- no itemized pension saving in tax returns- substantial reduction of tax return filing for pensioners- pre-taxation of excess pension wealth returns directly bypension fundsv.Pensioners‘ tax allowance leaves room for tax-free marketactivities
Tax payment options with pre-taxed pension incomeDoes front-loaded pension taxation cut disposable period income?Three pre-paid tax payment optionsi.indirect tax payment by the pension fundii. deferred tax payment in line with pension benefit payoutiii. phased tax payment over the whole pension cycleWhy may deferred payment of T-t-E pension tax liability bedesirable?- cash flow effects similar to deferred pension tax- deferred tax revenue access as a break for government expenditure- gross pension wealth accumulation may earn higher return rates
7. Concluding Remarks The complex and inconsistent status quo of taxing old-age pensions isunsustainable in a global environment While useful in a closed economy setting, EU recommendations forE-E-T cannot be efficiently combined with existing double taxationtreaties in a global economy setting Replacing E-E-T by T-t-E taxation opens an efficient coordination path tosolve the double equity dilemma of cross-border pension taxation We hope that coordination in pension taxation will become a topic inthe agenda of the EU Commission and G20 and provide a broader forumto check the potential of front-loaded pension taxation and confirmthat improvement in efficiency and equity, protection of national taxrevenue, and simplification of tax administration and tax compliance isfeasible.
Select ReferencesGenser, B. and R. Holzmann. “The Taxation of Internationally PortablePensions: An Introduction to Fiscal Issues and Policy Options.” CESifo DICEReport 1-16, 24-29, Munich.2018. “The Taxation of Internationally Portable Pensions: FiscalIssues and Policy Options.” In The Taxation of Pensions, ed. R. Holzmannand J. Piggott, pp. 443-479, op.cit.2019. “Frontloaded income taxation of old-age pensions: Forefficiency and fairness in a world of international labor mobility.” CESifoWorking Papers (in print).Holzmann, R. and R. Hinz. Old-Age Income Support in the 21st Century: AnInternational Perspective on Pension Systems and Reform. World Bank:Washington, DC.Holzmann, R., and J. Piggott. 2018. The Taxation of Pensions. CESifoSeminar Series with MIT Press: Cambridge, MA.OECD. 2017. Pensions at a Glance 2017: OECD and G20 Indicators. OECDPublishing: Paris.Wellisch, D., S. Lorz, K. Thiele, and R. Gahl. 2008. Besteuerung derAltersvorsorge. Nomos, Baden-Baden.
3. Two basic concepts of pension taxation: CIT and EIT Part II: The Taxation of Cross-Border Pensions: Issues and proposal (Genser) 4. The state of cross-border taxation of pensions 5. The double fairness dilemma of back-loaded pension taxation –for countries and individuals 6. The proposal: Front-loading taxation under three payment options