Favourable tax regimes are just one of the things that attract expats to far-away locations, but the prudent expat must also keep a watchful eye on taxation back in his home country as well as his country of residence.
There is usually an obligation for you to pay taxes in the country where you reside, and sometimes this can extend to worldwide income although quite often it will be limited to income generated within the jurisdiction in which you live.
Each country tends to be different in the way its citizens are treated for taxation while living away from home. Some countries maintain that everything you earn at home and abroad is taxable, while at the opposite extreme others say absolutely nothing is taxable. The vast majority fall somewhere in the middle with complex rules often applied to specific circumstances.
If you are an American, everything is taxed no matter where you live in the world. You are entitled to an annual allowance of up to US$91,400 tax-free income, but everything over that is taxable. This has led to the development of double taxation agreements (DTA) between countries, so that if you pay tax on earnings in one country you will not be taxed again on that income in the US, provided a DTA exists.
Australians are exempt from earnings derived outside Australia while non-resident for tax purposes during a tax year. So, if you are working outside Australia for the whole year and you qualify as a non-resident for tax purposes, then your earnings will not be taxed in Australia. To qualify, you generally will not have resided there for more than 182 days in any tax year while residing in a home outside Australia.
Canada is similar but there are certain criteria where you may be considered resident and therefore liable to tax on worldwide income even if you do not actually live there. These would include having a place of residence available for you to occupy, having a Canadian driving licence, and having a bank account in Canada.
A large majority of other countries base tax on a combination of where income has been derived and where you were physically resident during each tax year. If you have the right combination of each, you will likely be exempt from taxation in your own home country.
In the UK the government seems to be changing its attitude, having recently announced clampdowns on people it feels are unfairly getting away with not paying tax. The rules are not easy to follow and there is no black and white. Regulations revolve around whether you have “ordinarily resident” or “resident” status. If you are a UK citizen you are almost certainly ordinarily resident, meaning that you normally live there. You are definitely resident in any tax year where you spend 183 or more days there. If you have been there for fewer than 183 days you may be non-resident for that tax year. The UK tax year starts on April 8 and finishes the following April 5.
A recent case seems to be creating a precedent for a definition of residence for tax in the UK. The High Court declared businessman Robert Gaines-Cooper a UK resident even though he was physically present in the country for fewer than 91 days in the year under review.
To be considered non-resident for tax, you must not be in the UK for more than 182 days in any single year and a total of fewer than 91 days average per year over the number of years away. In 2008 Her Majesty’s Revenue and Customs changed the administration of the determination of arrival and departure days. Prior to that time, a day of arrival and a day of departure did not count as days resident. So, if you arrived in the UK on a Monday and left the next day you were not considered to have been in the UK at all. However, since 2008 the rules state that each midnight you spend in the UK counts as one day of residence. So, arriving on a Monday and leaving on a Tuesday counts as a day.
Mr Gaines-Cooper was running a business based in the Seychelles while his wife and son remained resident in the UK. He frequently visited the UK and effectively had his life centred there. He claimed that he was in fact resident in the Seychelles and visiting the UK. HMRC determined that in fact he lived in the UK and visited the Seychelles _ exactly the other way round. The court upheld this opinion and ruled that Mr Gaines-Cooper was in fact resident in the UK for tax purposes even if he was not physically there for more than 91 days a year.
Are you a British expat living in Thailand? Is this likely to affect you? Watch this space next week.
Questions to the author, Andrew Wood, can be directed to PFS International on 02-653-1971 or email to firstname.lastname@example.org