Paying
tax is a fact of life. But who collects the tax if you work in more than one
country? Rob Outram explains the ins and outs of expat taxation
Argentinian
soccer star Diego Maradona returned to Italy, scene of some of his greatest
triumphs, earlier this year. At Rome airport an unusual welcoming committee
greeted him: a party of Italian tax police were there to press a claim for 52bn
lire (about £17m or US$25m).
Maradona
might well dream of being able to travel the world in his own personal tax
haven, free from such intrusions. A project to make such dreams a reality is,
if the backers can gather their next round of capital, about to get under way
in the Central American republic of Honduras. The "Freedom Ship" is
the brainchild of a number of Americans and others operating as ResidenSea
International. It has been devised not as a cruise ship but as a floating
community: 4,320 feet long and home to 80,000 or 90,000 people.
The
Freedom Ship will have schools, hospitals, offices, a range of duty-free shops
and even an on-board airport. And as it would spend most of the time sailing in
international waters, it would have no income tax, real estate tax, sales tax
or import duties.
ResidenSea
are careful, however, to play down any suggestion that the Freedom Ship has
been designed primarily as a tax dodge. Marketing spokesman Roger Gooch says,
"There are some tax advantages but that is not the mission of the ship.
"There
is not an opportunity for US citizens to save tax. But for some EU citizens
there is an advantage to being offshore. It is their own responsibility to find
out what tax benefits they may have. We are not checking out CPAs [accountants]
around the world; we are shipbuilders!"
Tax
saving or not, there is no doubt that through a project such as the Freedom
Ship, or simply by being mobile enough, it would be technically possible to be
resident nowhere. But whether this represents a tax wheeze or a tax nightmare
is another question. John Whiting, a tax partner with PricewaterhouseCoopers in
London, explains: "Yes, it is possible, if your home was a ship cruising
in international waters. But you do have a residual liability. If I were not
resident in the UK but working here, I’d be liable for tax. Different countries
have different rules, but it’s hard to get out of the system."
Most
countries will seek to impose tax on income earned within their borders, even
if the employee is only there for part of the time. If your home country and
the host country have a tax treaty, the host country may accept that if you are
paying tax at home you do not have to pay income tax locally on what you earned
during your short visit. But if you are technically resident nowhere, you will
not be able to rely on such a treaty and you could actually be worse off as a
result. If you are working in a low- or no-tax environment, like Saudi Arabia,
that’s not an issue, but such regimes are the exception.
Whiting
says: "The question is, if I go to Outer Mongolia, when do I start paying
tax? If you go anywhere for more than half of that country’s tax year you are
almost certainly paying tax. It’s quite possible that a country would want to
tax you if you were there for less than half a year."
Just
how much time is needed before a business visitor becomes a
"resident" – the typical rule is 183 days, but this can vary – and
how much of your other income the host country’s tax authorities will be
looking to get a slice of, are the key questions.
According
to Whiting: "There are grey areas and you have to know the quirks of each
country. A lot of our work as tax advisers is trying to avoid paying tax two or
three times on the same income. You could easily be in a situation where the UK
thinks you are resident here, and Outer Mongolia thinks you are resident there.
And if you are a US citizen then you owe Uncle Sam wherever you are."
The
US government is unusual in demanding tax on all the income its citizens earn,
no matter where they are in the world. Americans can only escape a double tax
hit on every dollar, yen or euro they earn through a series of tax treaties.
Even revoking one’s citizenship would not provide an immediate saving: tax
liabilities will continue to apply for another ten years afterwards.
For
US companies, as for others, the number of employees on short-term assignments
is greater than ever. Daniel Orchant, a partner with the International
Executive Services Group of accountants KPMG in New York, says: "KPMG’s
international HR survey of 300 top multinational companies found that for 40%,
as many as one-third of their international assignees were short-term (ie the
assignment was for less than a year).
"In
Europe, you also have the phenomenon of the ‘Eurocommuters’, living in, say,
France or Belgium during the week and in Holland or Germany at weekends."
For
KPMG and its competitors, it’s a growing market. Orchant says, "Our
business in this field has grown by 20-30% each year for the past five years.
KPMG looks after the tax affairs of around 20,000 US expats each year."
Expats
on short-term assignment are typically paid with a "split payroll",
where some element of their salary and benefits is paid, and taxed, back in the
home country. But some countries do demand that expats come clean about all
their earnings: India, for example. Elsewhere in Asia, the Japanese and Koreans
have woken up to the fact that many expats get significant stock options and
they are now demanding that the host country gets its share.
Many
tax regimes are tightening up. For example, the Czech Republic is to withdraw
concessions which previously allowed "foreign experts" to escape tax
on their overseas income. And in Hong Kong, proposals are being mooted to force
employers to collect tax, after the government auditor found that many foreigners
simply leave without paying their tax dues.
Some
regimes are simply chaotic and expats face the dilemma that they may incur
major difficulties by filing a tax return and bringing themselves to the
taxman’s attention. In Moscow, accountants Arthur Andersen estimate, fewer than
8,000 of the city’s 20,000 expatriates bother to file. And in Indonesia, the
government is considering an amnesty for the many foreigners who, like 98% of
the Indonesian population, do not register for tax.
Employers
cannot afford to leave tax matters to their employees, says KPMG’s Orchant,
because very often the employer will be targeted if the tax authorities suspect
wrongdoing. "Penalties vary depending on whether the error is seen as
negligence or outright fraud. They can be harsh, but it’s also a stain on your
corporate citizenship, which can be very serious."
Underdeclaring
income for tax or social security purposes, or in some cases even moving
currency out of the country, can be a serious criminal offence. It is important
that employees accept responsibility for their own tax, but also that they get
the help they need to stay within the rules. Employers often insist that those
on expat assignments use a reputable firm of advisers to help file returns, and
that relocation and "tax equalisation" (see glossary on page 24)
payments made on the employee’s return are subject to their settling up any tax
issues with the host country.
The
problem for HR departments is keeping track of short-term assignments. Gardiner
Hempel, partner with the international employment solutions practice Arthur
Andersen in New York explains: "You have what we call ‘stealth expats’.
They are under the radar and don’t get picked up, often until it is too
late."
Hempel
says: "People presume that there are no tax implications if you are
working abroad for less than 183 days a year under most tax treaties. But not
all countries are part of the tax treaty network. For example, Hong Kong is
not, and if you work in Hong Kong for 61 days in any one year you will be
taxable."
But
how does the HR department know when to start the clock ticking? Companies that
use one travel agent for all their business travel can ask for data which shows
who has gone where, if data protection rules allow them to do so, suggests
Hempel.
It
is all too easy for an employer to break the rules unwittingly. In a tax regime
where the employer must withhold tax – like the UK’s "pay as you
earn" system – penalties can be incurred even if the home country payroll
department is not aware that they should be doing so. Ignorance of tax law is
no excuse.
Tax
planning should be part of preparing for any expat assignment at an early
stage, since the repercussions of any mistakes will be felt by both the
employer and the expat. There are no easy solutions for anyone who hopes to
beat the taxman at his own game.
Glossary
–
Residence – the test of whether or not you are living in a given country. In
any given tax year, an individual could be resident in more than one country.
–
Domicile – a term in UK tax law indicating an individual’s
"permanent" residence. A foreigner resident in the UK but domiciled
elsewhere has considerable tax advantages.
–
Tax treaty – an agreement, usually bilateral, between two states. Tax treaties
exist between most developed countries to ensure that their citizens do not
incur a double tax liability when working overseas.
–
Avoidance- avoiding or reducing tax by legitimate means.
–
Evasion – tax avoidance by unlawful means.
–
Tax equalisation – to ensure that an expatriate’s take-home pay is maintained
at the same level it would be at home, an employer makes up for any additional
tax charged by the host country.
Tax
sans frontieres?
Contrasting
examples of tax traps and tips
Mr
H is a hotels consultant who travels widely in Europe, carrying out projects in
hotels for clients. He is a UK national but has no home in the UK and, on
average, visits the UK for fewer than 91 days per annum over four years, so he
is not UK resident.
He
visits numerous overseas countries in the course of his work, including
Germany, Spain and Norway, where he discovers to his surprise that he must pay
local tax on his employment income. If he had been UK resident he would have
been able to claim relief from local tax under the UK’s double tax treaty with
each of those countries.
Mr
D is a French national. He travels widely in Europe for his employer in the
drinks industry and seeks to minimise his and his employer’s tax and social
security liability in France, where he is currently resident. He therefore
makes his home in Denmark with his wife and children, buys a house there and
becomes Danish resident.
His
visits to Denmark are for fewer than 42 days in a six-month period and as he
does not perform any employment duties there, he is not taxed on his worldwide
income in Denmark as a resident (which would be very costly). He is employed by
a UK company and performs some duties there, but as he is non-UK resident, the
UK income tax payable is minimal. He also has some employment duties in France,
but as his employer is registered in the UK, under the European social security
rules, contributions are payable in the UK – at much lower rates than in
France, where they might amount to 45% for the employer alone on unlimited
income.
Source:
PricewaterhouseCoopers
Precautions
and advice
–
Get professional tax advice for all expatriate assignments.
–
Don’t leave tax affairs as the responsibility of employees. Mistakes will
impact on your organisation’s corporate reputation and relations with the host
government.
–
Tax agreements between most developed nations mean that with openness and good
planning, your staff should not lose out.
–
Tax havens are a great way to avoid paying tax only so long as that’s where you
are earning your money, and nowhere else.
Further
information…
For
more information on international tax liability, take a look at the following
Web sites:
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