INTERNATIONAL TAX PROBLEMS
International working, investing and tax
As the world grows smaller, more and more people are running into international tax problems. Many people find themselves working overseas. Many businesses, even the smallest, find themselves buying or selling goods or services overseas.
All sorts of problems can pop up.
Will you be double taxed? Or get a tax concession?
“I worked overseas. Do I pay tax there or here or both places?”
How are my fringe benefits, like my living away from home allowance, taxed if I go and work overseas?”
“The tax credit on overseas income which I am supposed to get doesn’t offset my tax here. Why not? Can I do anything about it?”
“I left my home here to work overseas and bought a house there. Can I get the main residence tax exemption on both houses?”
“I want to set up a company overseas. Will I be taxed on its profits?”
“My dad died in England. Am I taxable on the income being earned by his estate in the UK?”
“I am moving from UK to Australia. Will my estate have to pay inheritance tax?”
“My business works for a foreign business. Do I have to charge them GST?”
These are some of the sorts of tax questions we have been able to help people with, often in conjunction with their overseas advisers.
In many cases, tax treaties can protect taxpayers against double taxation. They can provide clear rules for deciding if this or that type of income is taxable by this country or that or by both. Usually, where income is taxable by both the country of source (where the income is earned) and the country of residence (of the taxpayer), a careful examination of the tax treaty will provide the solution. Even where income is taxable by both countries, the home country will usually grant a credit for the foreign tax (though it may be incomplete).
Most people think of tax havens as exotic “offshore” places in James Bond movies, such as the Bahamas, Switzerland, Hong Kong or Monaco.
However, for most people the best tax haven is usually at home. For most taxpayers in most Western countries, the best tax havens are their homes and their superannuation or pension funds. Few countries (for often sensible reasons) tax either the family home or retirement savings savagely.
For the wealthy, offshore tax havens can be more attractive. The reasons, however, often have as much to do with asset protection or finding a single place for managing investments in many countries without running into repeated double tax or double corporate regulation problems.
Nonetheless, since the 1990s the Organisation for Economic Co-operation and Development (OECD – unkindly dubbed by critics as the Organisation for Economic Co-operation in Decline) has promoted aggressive anti tax haven legislation among its member countries. This has been in response to the increasing ability of mobile capital to shift from high-tax to low-tax jurisdictions.
Taxation of foreign income
Thus most OECD countries try to tax the foreign earnings of their taxpayers by including as foreign earnings some or all of income or gains arising:
- in foreign or transferor trusts funded or owned by a taxpayer;
- in foreign companies controlled or owned by a taxpayer; and
- in certain funds accruing for the benefit of a taxpayer.
These rules vary from country to country and may be described under various names such “foreign trust”, “transferor trust”, “transfer of assets abroad”, “controlled foreign company”, “passive foreign investment company”, “foreign investment fund” rules.
It is therefore essential when looking at any investment by a taxpayer in most OECD countries to check his or her “foreign income” rules to ensure compliance.
Transfer pricing and thin capitalization rules
Just as OECD countries worry about business and capital leaving and no longer paying tax, they also worry that capital or business coming within their borders may not pay enough tax. Thus the OECD countries have developed elaborate rules to try to ensure that the country where profits are “really” sourced gets a cut of the profits.
The rules against transfer pricing are meant to stop companies deducting away all their profits as payments to an offshore parent company or an affiliate.
The rules against thin capitalization are meant to try to stop companies stripping out most of their gross profit as interest payents to parents or affilates.
Tax complexity abounds
You will thus see a a paradox. Most countries (like most human beings), when it comes to tax, want it both ways. They want to tax the “foreign income” of “their” taxpayers and they want to tax the local income of foreigners. This leads to tax conflict between the “source of income” country and the “residence of taxpayer” country.
That is the fundamental reason why tax treaties are necessary and why international tax and investment rules can be very complex.
It thus pays to check things out before you invest out of Australia or into Australia or take a job out of Australia.
This applies equally – or even more so – to US persons or UK taxpayers or others investing out of their home countries.
We can help people investing in Australia or through Australia or out of Australia. We can also work with clients from other OECD countries who are interested in investing in the Asia-Pacific region.
US, UK and other overseas clients
As we are generally familiar with US, UK and some other countries’ tax systems, such as those of Canada or New Zealand or Hong Kong and Singapore, we can also work with overseas advisers to give the best possible advice to clients.