Dubai: If you are an individual earning an income in more than one country, it is vital to understand the role taxes play on your income. This is where the need for tax planning comes in.
Tax planning is simply the process of analysing a financial plan or a situation involving your finances from a tax perspective. The objective of tax planning is to make sure there is tax efficiency.
Tax planning is a significant component of a financial plan. Reducing tax liability and increasing the ability to make contributions towards retirement plans are critical to saving money.
Tax planning comprises various considerations such as size of income, the timing of said income, timing of purchases, and planning such taxes are associated with other kinds of expenditures.
Also, the chosen investments and the various retirement plans should go hand-in-hand with the tax filing status as well as the deductions in order to create the best possible outcome.
Understanding the basics of tax planning
With tax planning, one will be able to streamline his or her tax payments such that he or she will receive considerable returns over a specific period of time involving minimum risk. Also, effective tax planning will help in reducing a person's tax liability.
Tax planning can be classified into the following:
• Permissive tax planning: Tax planning which falls under the framework of the law.
• Purposive tax planning: Tax planning with a specific objective.
• Long-range or short-range tax planning: Planning executed at the beginning and towards the end of the fiscal year.
How important is tax planning for expats?
Tax is always an issue of concern for expats and what they pay depends on the country deemed their main residence. The main point to remember is that tax is not a one-size fits all option for expats.
Every country has a different approach to taxing income and gains. Expats with cash, investments and property in more than one country should ideally have a local adviser in each one to make sure they are keeping up with the latest changes.
Most tax advisers are qualified to give advice in one country and do not have the time or resources to give an expert opinion on taxation in more than one.
Key aspects of tax are residence and domicile
The two important aspects of tax are residence and domicile. Both are explained below. Residence affects where and how an expat pays income tax and capital gains tax.
Domicile comes into play over estate planning – the laws that dictate how someone’s wealth is divided when they die.
Although an expat can change their residence, domicile is determined by rules relating to their nationality and place of birth.
FAQ #1: What’s the difference between tax residence and domicile?
Domicile is a complicated concept that is determined at birth. The main factors are where someone’s parents were domiciled. So, if you parents are both British, then your domicile of origin is the UK.
Domicile is unlikely to change, even when an expat makes a new home in another country.
Residence determines where someone pays income tax or capital gains tax, except for Americans and Eritreans, who must report their worldwide income and gains to the tax authority in their former country.
Domicile determines where inheritance taxes are paid and how someone’s estate is divided.
Other complications surround domicile for expats. To resolve any issues over inheritance and estate planning, always talk to a suitably qualified professional in each country where you have assets to avoid unforeseen errors that could become costly later.
FAQ #2: What is inheritance tax?
Inheritance tax is a wealth tax levied on the estate of a dead person and some gifts they made during the seven years before their death.
Countries treat the way they handle dividing the estate of a dead person according to their own laws.
The different rules under each type of law are why expats should make a will in each country they have cash, property or investments to make sure their wishes on disposing of their estate are followed when they die.
Always take will-writing advice from a suitably qualified tax professional as how taxes interact across borders is a highly technical field.
FAQ #3: What is the difference between tax avoidance and tax evasion?
Most countries allow taxpayers to arrange their financial affairs so they pay the least tax after applying reliefs and allowances. This type of tax avoidance is not illegal and the right of taxpayers the world over.
The proviso is that taxpayers conduct their finances in an open and honest manner. Whereas when it comes to tax evasion, it is deliberately not telling the tax authority about income or gains.
To do so is a crime and generally involves secrecy and maintain offshore bank accounts and investments in the hope they cannot be traced.
An international tax reporting network over 100 countries, including the UAE, signed up for:
To stamp out tax evasion and to ensure taxpayers declare any hidden money and investments, most countries in the world have signed up to a Common Reporting Standard (CRS) network.
Common Reporting Standard (CRS) is an international tax reporting network, wherein countries swap information on taxpayer cash and investments.
It is set forth by the Organisation for Economic Co-operation and Development (OECD), and advocated by G20 countries. More than 100 countries have signed up to exchange information under the CRS.
The CRS is essentially a broad reporting regime that draws extensively on the intergovernmental approach to the implementation of the US Foreign Account Tax Compliance Act, otherwise known as FATCA.
Similar to FATCA, the CRS requires all financial institutions resident in a participating jurisdiction to identify and report any reportable accounts (typically persons tax resident in a CRS participating jurisdiction).
As of January 2020, over 100 jurisdictions have signed or committed to sign the CRS; including Bahrain, Kuwait, Lebanon, Qatar, Saudi Arabia and the United Arab Emirates.
In 2015, the UAE enacted Common Reporting Standard Regulations that applies in all UAE jurisdictions, including financial free zones such as the DIFC.
For expats should become tax compliant as soon as possible because the likelihood is the tax authority in the country where they live will be tipped off about undeclared income and gains in other countries.
Key takeaway: How do taxes apply to an expat’s income?
Expats pay income and capital gains tax in the countries where they are resident, unless that country does not levy the tax.
But an expat cannot choose where to be tax resident to benefit from lower tax rates, it’s considered a matter of fact by the courts depending on several factors such as:
• Where their main home is located,
• Where they spend most of their time
• Where they bank and pay bills, like utilities and council taxes
• Where they have family and other social ties
For example, on leaving the UK, British expats should file a Form P85 to tell HM Revenue and Customs (HMRC) that they are leaving the country and to finalise any UK tax affairs. Similarly, there are systems in place in each country.
Expat is not a value-added term for tax purposes as it simply means someone who lives in another country. Expats are not tourists, but people who spend longer than a few weeks abroad.
While someone who works for a year or two in a foreign country is an expat, he or she can also stay tax resident if they maintain their ties with home and intend to move back at the end of their assignment.