Taxation rules for expats are becoming more complicated as their home governments make increased efforts to raise revenue and improve tax compliance. If governments had acted in the same manner as financially prudent individuals, we might not have landed in the mess we have been facing for the past few years.
When we run into financial difficulties at home we keep a close eye on our income and expenditures, making sure we do not spend more than we receive. As a result we either increase income or reduce expenditures, and sometimes we do both.
In a practical sense this may mean getting a second job or perhaps even starting a little business in addition to our full-time occupation. It could also mean expanding and generating further revenue from an existing business. We also attempt to reduce unnecessary expenditures, perhaps by having fewer nights out or cutting down on "luxuries" such as meals in expensive restaurants or weekend trips.
Governments attempt to do the same sorts of things on a larger scale. In fact, this is exactly what they are trying to do right now because the global financial crisis of 2008 left many of them with massive holes in their budgets. Even prior to this they were getting deeply into debt by spending more than they received and then borrowing the difference.
The situation has become untenable, leaving many administrations far in debt, with the stark realisation they are spending far more than necessary. Simultaneously, revenue has been greatly reduced because tax collections have declined with people earning less or even nothing as unemployment grows. Any increase in the number of people out of work leads to greater expenditures on welfare benefits, further exacerbating the situation.
This is true in such economies as the United States, the United Kingdom, Greece, Spain, Portugal, Ireland and many more.
In their attempts to increase income, governments are looking very carefully at their tax revenues and trying to find ways to widen their tax net. Many are trying to close the gaps on people considered to be avoiding or evading their obligations as taxpayers.
How might this affect you as an expat? The fact is that your home government is going to be looking at ways to increase tax revenue and if that means asking you for a bigger slice of your income, it will not be shy; believe me.
As part of a long-term plan the US has introduced the Foreign Account Tax Compliance Act, or Fatca. This involves a set of rules to ensure that all US nationals and US taxpayers worldwide report the assets they have and the income they are generating. These rules are complex and implementation has been delayed many times. The latest word is that they will take full effect by the end of 2014.
One of the major difficulties is that the US government has asked other governments to comply by making reports on US taxpayers within their jurisdictions. Banks and financial institutions are to report assets and income transactions to their respective governments, which then pass on the information to the US government.
One problem is that some governments have asked the US to reciprocate by submitting the exact same types of reports about their (possibly tax-evading) nationals. The US government has objected because it goes against its privacy laws.
Nevertheless, Washington has decided to push on and implement the new rules. The immediate impact is that some banks and financial institutions have decided the rules are simply too difficult to administer, so they are beginning to refuse to deal with American customers.
Similarly in the UK, Her Majesty's Revenue and Customs (HMRC) has increased efforts to deal with non-compliance. It claims to have collected additional revenue by uncovering tax frauds and recovering taxes that should have been received years ago.
HMRC has also tabled new residency rules that appear to have a double effect. The intent is to clarify your status as a tax resident in any given year. This clarity should lead to more revenue collection.
In the past, UK rules about tax residency have been a little unclear. The rule of thumb many expats have relied on has been an average of 90 days per year in the UK. In fact, the rules are much more complex. When cases have gone to court, the outcome has always revolved around whether the individual taxpayer has the centre of his or her life in the UK or elsewhere. This is open to a far broader interpretation than a specific number of days.
Thus the new residency rules take account of factors that are intended to reveal whether a person has a life centred in the UK or elsewhere.
This involves answering specific questions that ultimately will make it clear whether you will be treated as a UK resident for tax purposes.
The draft regulations make it clear for expats who are working abroad full-time, but for those who have retired, it is rather disconcerting. If you have family ties in the UK or accommodation available to you when you visit, then the number of days you are "allowed" to visit is drastically reduced.
One of the nicest pieces of news for expats in recent international taxation comes from the Australian Tax Office. Australian expats enjoy exemption from tax on income generated outside Australia when they are expats and therefore don't physically reside there _ provided the income is not remitted to Australia.
Very often Australian nationals enter into investment contracts with life insurance companies through long-term savings plans and offshore personal portfolio bonds. Sometimes they then repatriate to Australia prior to the completion of their investment obligations to themselves. This becomes a problem because once they take up residency again, the investments become taxable in Australia.
The Australian Tax Office has now announced that any life policy with an investment element will be exempt from such taxation provided at least 10 years elapse from the start of the investment, and as long as certain other rules are complied with.
Expats are living in an ever-shrinking world. This results in a seemingly ever-increasing exposure to taxation in your home base. In the vast majority of cases, if you are an expat complying with all the rules of your home country, then you are really quite safe. However, we all need to be aware of the growing number and complexity of tax regulations and make sure we are not caught out by them.
It would be interesting to hear readers' opinions or personal experiences in this regard.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to email@example.com.
About the author
- Writer: Andrew Wood