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Lowtax Expat Briefing

By Lowtax Editorial
22 August, 2012

Countries seeking to boost the quality of their workforce and attract people and certain skills often do so by offering foreign workers tax incentives, such as reduced rates of income tax. However, with many governments battling to turn around deep budget deficits and finding ever more imaginative ways of raising revenues, expats are finding themselves increasingly under attack from revenue-hungry governments and tax inspectors in some countries, and here we summarise some of the more notable developments in expat taxation to have emerged in recent weeks.

Unsurprisingly perhaps, given the ongoing Eurozone crisis, many of the negative developments have taken place in Europe.

With the government having substantially undershot its 2011 deficit target, expats in Spain, especially those with overseas income and investments, are coming under the tax collector’s glare. The Hacienda – Spain's tax authority – is now routinely investigating all forms of investment and pension income from overseas, acting on the basis of information supplied by banks in the jurisdictions concerned, and a number of expat residents have reported receiving letters about their offshore bank accounts. Peter Howarth, a former tax inspector in the UK who now advises expats in Spain on tax matters says: "It is the first time we have seen the Hacienda using information supplied by a tax haven to pursue tax on undeclared income. The Hacienda has also sent enquiries based on information received from other OECD tax authorities."

Both residents who have offshore accounts and those who are claiming non-residence but have told their bank they live in Spain may be affected by the Spanish tax authority's clamp down. The Hacienda's task is also being made easier by the ready availability of data online to find recalcitrant taxpayers, and tax experts believe that it is only a matter of time before the Spanish authorities begin to use Land Registry records to track down British expats, who make up the bulk of Spain's expat population, with property in the UK.

Similarly, those who own a second home in France and are foreign can expect to pay more tax under proposals being considered by the newly-elected administration of President Francois Hollande. The new Socialist government wants to assess non-resident holdings of French property to general social contributions (CSG), currently at a rate of 15.5%. Under the existing law, non-residents are only liable to a withholding tax of 20% on rental income and 19% on capital gains arising directly or indirectly from French property. The liability to CSG would result in an increase to 35.5% and 34.5% respectively. There are, however, doubts as to whether such a system of taxation would be compatible with European law, specifically rules providing equal fiscal treatment irrespective of nationality, and the French government can expect to be challenged if the changes are introduced.

At least French expats can breathe a sigh of relief that Nicolas Sarkozy did not stick around long enough to carry out his threat to tax them on a similar basis to which the US taxes its citizens residing abroad. In his enthusiasm to prove to the electorate that he was no ‘President of the Rich’, a jibe directed at him by his main rival Francois Hollande, he was proposing in the run-up to the election to ape the US system with plans to attach nationality to taxation. Under these plans, people living abroad for ‘legitimate’ purposes, that is, for professional or family reasons, would not have been affected by these plans. However, those who moved abroad for the purpose of reducing tax while retaining their French nationality would have paid the same amount of tax as if they were resident in France. How this would have worked in practice – the line between ‘legitimate’ and ‘illegitimate’ was bound to open a can of worms – remains unclear. In any case, evidence supplied by the national union of tax officials (SNUI), a body linked to the finance ministry, to a Senate hearing suggests that the number of French tax exiles has been much exaggerated by politicians. According to the SNUI, only one in one thousand individuals subject to French wealth tax (ISF) actually leaves France each year. Not that things are likely to improve under Hollande. His call for a new 75% top rate of income tax in France will probably increase this trickle of expatriations to a steady flow.

The situation for expat Americans, which is already bad, could be about to get a whole lot more painful, especially for those thinking of taking the dramatic step of relinquishing their citizenship (sadly, just about the only way to break out of the global iron grip of the Internal Revenue Service). If it becomes law, the so-called Ex-Patriot bill (short for Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy) would not only re-impose taxes on such expatriates, but would also bar those individuals from re-entering the country until they had paid their taxes in full. Any expatriate with either a net worth of USD2m, or an average income tax liability of at least USD148,000 over the last five years, will be presumed to have renounced their citizenship for tax avoidance purposes under the proposed law. The individual will then have an opportunity to demonstrate otherwise to the IRS. If the individual has a legitimate reason for renouncing his or her citizenship, no penalties will apply. But if the IRS finds that an individual gave up their passport for substantial tax purposes, then it will prospectively impose a tax on the individual’s future investment gains, no matter where he or she resides. The rate of this capital gains tax will be 30%, in keeping with the rate that is already applied on non-resident individuals for dividends and interest earnings. The Ex-PATRIOT bill would also improve current law to ensure such an individual cannot re-enter the US after renouncing his or her citizenship, so long as the individual avoids these taxes. It is questionable, to say the least, whether the IRS would be able to enforce such a law. Nonetheless, the extra-territorial bureaucratic juggernaut known as FATCA looked pretty improbable when it was passed by Congress, but is slowly rumbling towards reality all the same.

The Ex-Patriot bill is, predictably, the work of two Democrat members of the Senate – Charles E. Schumer of New York and Bob Casey of Pennsylvania – and was proposed in response to the decision of Facebook co-founder and partial owner Eduardo Saverin to give up his US citizenship in order, it is being said, to avoid taxes on profits he expected to collect after the social-networking company recently went public. Saverin has lived in Singapore since 2009 and had dual citizenship, but then renounced his US citizenship in September. A little more surprising though was the revelation by John Boehner, the Republican Leader of the House and a major thorn in the side of President Obama as he attempts to raise taxes on the rich, to come out in favour of the bill. While other Republican politicians are sharply critical of the bill’s ‘class envy’ bias, Boehner felt obliged to admonish Saverin when he was asked a question on ABC television, calling Saverin’s move “absolutely outrageous” and saying he would support the Schumer/Casey bill, if such legislation was found to be necessary. It would probably take a Democrat majority in both houses of Congress for these proposals to pass however, so all eyes will be on the results of November’s elections.

Even the Cayman Islands, of all places, gets into our bad books in this briefing with its recent proposal, since rescinded, to tax foreign workers. The euphemistically-titled ‘Community Enhancement Fee’(essentially a payroll tax, and the first direct tax to be proposed in the Cayman Islands), announced by the Cayman government as part of the 2012/13 budget on July 25, was to involve a 10% levy on expatriate workers' income above USD20,000 per year, along with a further levy of 5%, payable by employers, in respect of non-resident employees engaged in certain categories of work. Prime Minister McKeeva Bush justified the new tax by arguing that it would prevent the government from introducing more radical measures, such as an income tax, and would prevent him from having to lay off up to 700 civil service staff with the government struggling to make ends meet. However, it was quickly discarded following an outcry from the islands' financial services professionals, who have underscored that the tax-free environment the Cayman Islands have historically offered is critical to the territory maintaining its position as a world-leading international financial centre. The financial services industry, which was the primary target of this tax, and which relies on a steady supply of employees with skills that are often only found abroad, has not got away scot-free though. In a new package of measures due to be presented to the Legislative Assembly in late August, work permit fees above USD1,000 will increase by as much as 35%, on a progressive basis. A 5% increase will impact work permits costing between USD1,000 and USD2,999, increasing to a 35% increase for work permits presently costing more than USD15,000.

There is one ray of sunshine however, and it is to be found in Portugal. While its fiscal problems have been well publicised and the country has teetered on the brink of bankruptcy at various points in the eurozone crisis, the government has recognised the value that expats can add to the economy, and in a welcome move, it recently streamlined its special expat tax regime introduced in 2009. Under the rules, individual taxpayers deemed to be “non-habitual residents” (residentes não habituais) can apply for the special regime if they are either high-net-worth Individuals or “high value-added” employees or self-employed individuals, provided they have not been resident in Portugal for the five years preceding the application. Successful applicants are entitled to a special flat 20% tax rate on income sourced in Portugal for a period of 10 years, in addition to an exemption on foreign income and eligibility for tax treaty benefits. Initially, one had to jump through various official hoops in order to be admitted to this special regime, a major one being the Portuguese Revenue’s requirement that applicants show documentation from a foreign tax authority confirming that they had been resident abroad, and that foreign-source income was “effectively taxed” in the source country, both during the years preceding residence in Portugal and during the years of residence in Portugal. However, after tax advisers complained that these requirements were excessive the tax authority issued a circular in August clarifying that it was no longer necessary to prove previous residence in a foreign country, thereby making the scheme available for so-called 'perpetual travellers'.

While there are still plenty of other countries out there which welcome expats, whether retirees, investors, or employees with certain skills, there are others that are making life increasingly difficult in tax terms, and this is a situation likely to continue with governments hungry for cash.



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