CHAPTER 8
THE TAXMAN COMETH
| In all probability, your compensation will be higher in your overseas post than in your job back home. Being able to hold on to as much of this income as possible, while legally minimizing taxes, is the goal of most expats. One of the problems of being a US expat is that your worldwide income is taxable regardless of where you are stationed, where the assets are located, or where the income is earned. This is not the case in many other countries and for non-US expats. Regarding savings and taxation, what applies to you in your specific circumstances is generally determined by US tax law and by whatever tax treaties that exist between the US and your host country. The US has |
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| negotiated treaties with many countries so that US expats in those countries are not double-taxed-the IRS gives expats credit for taxes paid to foreign governments with which the US has such treaties. There are volumes of tax advice written by authorities worldwide. The goal in this chapter is to review general areas of concern and advise you to have good tax representation at home and abroad. Make sure these advisors communicate with each other. Ideally, pick one tax advisor who understands the home and host jurisdiction, but you probably won't find this person very easily. Most importantly, select someone who will pay attention to you and your needs. | ||
Some US expats in a foreign country hear about all the creative things
other non-US friends and co-executives are doing with foreign bank
accounts, offshore trusts, and other creatively aggressive mechanisms,
and consider doing likewise. Be very careful-what non-US nationals can
do legally may not be legal for you. Unfortunately, for US citizens,
all worldwide income is taxable, whereas other countries may not tax
income earned outside the country. For example, in the UK, if a
non-domiciled UK resident is employed by a non-UK resident employer and
performs all of his duties outside the UK, the compensation arising is
taxable only to the extent it is received in or remitted to the UK. If
you are a US citizen, proceed cautiously with aggressive advice. The
best advice is to pay your taxes. The US is the best in the world at
surveillance and can track every bank wire in the world every day (over
one trillion dollars in transactions). You will never elude them in the
long run.
TAXATION BY THE HOST COUNTRY
Besides paying US taxes, you may have to pay taxes to your host
government(s). Your host country may or may not subject you to tax on
worldwide income. Some host countries tax non-residents only on income
received in their country. The taxation of residents usually depends
upon whether an individual is domiciled inside or outside the host
foreign country. A person's domicile is usually considered to be his
permanent home. Generally, foreign nationals on employment assignments
for overseas employers are not regarded as domiciled in that country.
There are various tests to determine whether you are considered a
resident for tax purposes. Here are some questions and data points you
will need to determine for your tax planning:
· Residency is often based on the number of days spent in the country
in
any tax year. Find out when the year starts and ends.
· Whether and how you are taxed may also depend on the reason for your
stay in the country (for example, employment or travel) and on whether
your time living there exceeds a cut-off limit beyond which you are
eligible for taxation by that country. Will you average more than the
maximum number of days per year as a visitor?
TAXATION BY THE US GOVERNMENT
What compensation can be taxed by the IRS? Basically, everything is
taxable except where excluded by the Internal Revenue Code. Some income
can be tax exempt in your host country, (for example, moving expense
reimbursements and lump-sum relocation allowances). However, many
elements of your taxation package are subject to taxation. The
following items in your compensation package may be taxable:
· Reimbursements for foreign taxes. Compensation is often "grossed up"
by your employer to balance any additional tax payments and to provide
tax equity
· School tuition reimbursements
· Home leave reimbursements
· Cost of living allowances
· Housing allowances
· Benefits in kind
· Employer's contributions to a foreign pension plan
· A deferred compensation plan when paid to employee
· Medical insurance premiums paid by an employer
These are only examples of certain income tax situations. The interplay
between two tax jurisdictions should be left in the hands of experts.
As stated previously, you need a tax expert in your home country and one
in your host country. Ask a co-worker or fellow US expat who has lived
some time in your host country to refer you to a reliable tax expert for
help. Make sure that you are familiar with the tax return dates of your
foreign host country-your US tax advisor doesn't know foreign
requirements in most cases. Also, when you leave to return home on a
permanent basis, make sure that you or your advisor alerts the foreign
tax authorities of your departure and completes proper documentation as
necessary.
EUROPEAN AMERICAN TAX INSTITUTE
There are many tax professionals throughout the world who have a need to
"stay current" on a variety of subjects. This need was addressed by two
Americans in Paris during the 1970s. Jim Myers and Rod Burton, along
with another partner, had the vision and drive to create the
European-American Tax Institute. The need to understand US tax law is
nothing new to "foreigners" according to Jim and Rod. They relate the
story of the famous British novelist Charles Dickens, who in the last
century was steaming out of New York's harbor being pursued by a boat
carrying tax officials from New York state claiming non-payment of taxes
after his brief lecture tour. E-ATI has 450 members from around the
world and is growing.
The US government continues to tax or at least require reporting of
income from both US corporations and individuals operating and resident
abroad. Nor can foreign companies and individuals operating in the US
get very far before coming up against US taxation. For the newcomer to
American shores, just obtaining a "Green Card" is more than enough to
necessitate the filing of a US tax return, even if the individual then
decides not to continue to live in the US.
Even today, the average American in the US might be surprised to know
that living abroad for extended periods does NOT result in the loss of
US citizenship but does entail continuing compliance with US tax law.
This means, among other obligations, reporting worldwide income and
being liable for US Estate and Gift taxes no matter how long the
individual remains an expatriate.
In the late 1970s the increase in foreign ownership of US businesses and
the growing number of US citizens living abroad inspired the creation of
The European-American Tax Institute. E-ATI was founded in Paris in
1978, and its stature as a professional organization for tax lawyers and
accountants has grown over the years. Chapter roundtables in major
European cities bring members together with informal discussions on a
variety of current tax topics. A typical evening roundtable might
feature a prominent Dutch tax lawyer leading a discussion on the optimum
structuring of European holding companies at a Dublin chapter meeting.
E-ATI's specialized seminars and courses update participants on changing
tax law including arcane and technical areas of compliance such as the
treatment of offshore income by US companies legitimately operating
abroad. Teaching US tax law to foreign tax advisers is a specialty that
E-ATI has developed for over ten years. Courses have been held not only
in Europe but as far afield as Sydney and Montreal. For one large
Italian company, E-ATI held a program in the company's "executive
campus."
Recently, Institute members attended E-ATI's Annual Congress in Cannes
which attracted top-level speakers from the US Congress, Treasury, and
IRS. The conference offered US government representatives a unique
opportunity not only to explain the latest changes in US tax law but
also to find out first hand the European tax community's reaction to
their latest "simplification" act. The result was a conference of
outstanding quality and enjoyment.
A bi-monthly newsletter keeps members on both sides of the Atlantic
up-to-date on the comings and goings of other members in what is a very
mobile profession. A typical item in the E-ATI News reports that the
London tax manager (herself a Scot) of a giant US entertainment group
has been promoted and transferred to the New York headquarters.
Many E-ATI members are European nationals, engaged in some aspect of tax
work connected with the US. While most are employed in corporate tax
departments, at least 25 percent deal with individual tax work, often
helping US citizens abroad to comply with the obligation to file tax
returns each year and assisting in tax planning. E-ATI has proved to be
a unique resource in Europe for keeping tax advisers current about US
tax requirements. Unless the US Congress changes its mind about taxing
American citizens abroad, this resource will be needed indefinitely.
With the global village now truly with us, E-ATI sees its original role
coming full circle. Having started off helping Europeans to grasp the
nettle of US taxation, the Institute is now active in the US with a
program of tax roundtables and European tax courses being presented in
several US locations. Prestigious business schools such as Fordham
University, New York University, and Golden Gate University are acting
as hosts. At last, European tax lawyers can now explain the
intricacies of their own national tax systems to receptive audiences of
US tax advisers.
What's next on E-ATI's agenda? Maybe expansion into South America or
Asia. In any case, the dramatic increase in cross-border transactions
(mergers, acquisitions, and joint ventures) and the development of more
complex tax systems in many countries in the last few years suggest a
bright future for The European-American Tax Institute. Whatever
direction E-ATI takes in forthcoming years, I'm sure Jim and Rod will
continue to lead their organization in the right direction.
