When we talk about international tax advice, many of you may have the vision of Jimmy Carr talking to his dodgy financial advisor asking him what country he’s never been to before so he can take the majority of his fortune to next.
In fact, you start to pay international tax when you have been earning income from two different countries. The tax laws within the country where you earn the most income will take precedence. For example, if you earned £5,000 in Germany, then income tax should be first calculated according to German law. In other words, income tax laws will apply if you were physically present in that country when you earned it. Exceptions do apply however, for instance, if you have earned rental income from a house in the USA, it is very unlikely Germany will try charging tax on this income whilst you were overseas in that country.
Different countries will apply different tax rates to you depending on whether you are a resident of that country; many countries adopt a physical test when applying tax onto a person, stating that if the person has been in the country for 183 days or more than they are eligible for resident’s tax. Other countries will base their residency tax on what type of visa you held at the time.
When you have earned tax abroad, most countries will exempt part or all of your tax from home country taxation, this is where manipulations have occurred in the past through non-taxable locations such as Luxembourg, Monaco and Malta. Countries such as the USA will actually put a limit on how much tax you are allowed to claim in a year from abroad before you have to pay taxation back home. At the moment this accounts for income taxation on the first $87,000, however this figure does rise year on year. This amount also factors in the time spent abroad. For example, if you spend just six months abroad, this figure will be cut in half and accumulate to $43,500.
Tax treaties act as a way of avoiding double taxation, (this is when the same taxpayer is held liable for his income that he earned by two different countries) as they are bilateral as opposed to multilateral, meaning that only two countries may enter the account.
Overall, international tax laws are massively complex and can often contain hidden traps or restraints, so we do recommend that you should take up the option of getting international tax advice, should you be earning abroad and confused by the options available to you.
This article was written by Michael Forbes, for international tax advice visit www.lubbockfine.co.uk
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