If I were an Expat (6/10): Taxes

Benjamin Franklin said "Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes."

 

Attributed to Einstein, "The hardest thing in the world to understand is the income tax"

If understanding taxes is difficult, understanding taxes simultaneously in two different countries is even worse. There is no supranational authority that  effectively coordinates the definition of tax policies internationally and that is somethig we find out when we become an Expat.

Let's start with an example, the tax year is different in many countries:

 

• Spain: January to December

• Australia: July to June

•UK: April to April

 

The beginning and the end of assignments can occur at any time of the year and depending on the day you start or end your expatriation, you will have a different tax treatment. 

Let me start by with some basic concepts:

 

Tax Residency is the key concept to define the fiscal sovereignty of countries. I found an article on tax residence (sorry, in Spanish) which helps to understand the meaning of being considered a tax resident in a given country, which implies broadly that "in the case of a resident, you may be subject to tax on your worldwide income, for all your income or gains, irrespective of where they were obtained or generated. Instead, in the case of a non-resident, you may only be subject to tax on the income earned or capital gains generated in the country.

Determining the tax residence is a complex issue. This concept is not only in the internal laws of each country but also in the Conventions for the Avoidance of Double Taxation signed under the OECD and used to define borders between the two countries. This means that, when analysing the tax residence of a person , we must always take into account not only the Country´s Personal Income Tax Law but also the conventions that are applicable." 

Another concept that is very linked to the Tax Residency is the Worlwide Income. Worldwide income refers to the income received in any country, as in many cases, Expats are paid during the assignment in both the country of origin and destination. You may presume that each income will be taxable in the country where it is paid, but this is NOT necessarily the case. In many cases, your tax residency in a given country will mean that you will be taxed on your worlwide income, that is, on the salaries país in both the country of origin and destination.

A withholding tax, is a government requirement for the Employer to withhold or deduct from the salary payment, and give to the administration. This payment is an "advance" payment for the employee of the final amount of tax to be paid.

 

It is important to clarify that the withholding tax does not necessarily coincide with the final tax to be paid, and this is sometimes confusing for Expats. There are differences between the withholding and the final payable tax due to a wide range of reasons: Income not related to your work or company (financial interests, capital gains or losses, etc.), tax deductions of a personal nature, etc. As an Expat, additionally, you may be double-taxed under certain circumstances.

In this context it is important to consider: 

• The company is required to withhold under the applicable tax law. 

• You are responsible for filing your personal income tax in accordance with the legislation in force in each country

 It is key to have these concepts in mind to avoid confusion

 

Many companies offer Expat tax advice to help you with your personal tax return in the country of origin and destination. Although it is the company that normally pays for this service, the beneficiary is the employee. The tax adviser will have access to personal employee information to prepare your tax return that they will never discuss with the company.

If you have any questions about this relationship, please clarify in the initial interview .

Ideally, as an Expat, it is important to understand how your taxes work but only to a certain extend as you cannot become a Tax Expert in a few days. My recommendation is to demand good service , while acting with caution when trying to interpret tax rules. 

The tax issue gets more complex as companies have diferent policies and approaches (gross, equalization, etc.). I will need a new post to cover these topics.