Are you a foreign-national living in multiple countries (👋 Digital Nomads!)? Are you working in multiple countries (👋 Remote Workers)? How about investments in multiple countries?
If you fall into one of the above categories, you may trigger tax obligations in several countries. Navigating international tax systems can be complex, however, as a rule of thumb, where you are liable to pay taxation, will ultimately depend on a variety of factors.
Below I have outlined some of the most important elements to determining your global tax liability:
1. Domestic taxation systems
Globally, there are 4 different types of tax system that a country may use to collect tax, as follows:
- Zero tax system - these countries do not levy personal tax on any income or gains, irrespective of your resident status.
- Territorial tax system - these countries will only levy tax on local income and local gains derived from its territory, irrespective of your resident status.
- Residence tax system - these countries will levy tax on worldwide income and gains if you are tax resident.
- Citizenship tax system - these countries will levy tax on worldwide income and gains if you are a citizen of the country, irrespective of where you are living/working in the world.
Each country has a test or tests that will determine whether you are considered a tax resident in the county or not, in a given tax year. This will be the starting point - to assess where you are tax resident (this may be in multiple countries).
Once you have established where you are tax resident, your exposure to taxation in that country, will depend on the type of tax system the country imposes to collect tax.
2. The situs of the income or gain
If the income or gain is derived in a country that you are not tax resident, that country may still wish to tax the income or gain on the basis that it is a local income or local gain.
3. Double taxation agreements
There are certain situations whereby two tax systems will tax the same income or gain, which creates double taxation.
Countries worldwide have entered into agreements to provide guidance and agree rules that can be relied upon, to mitigate double taxation.
There are typically two outcomes, as follows:
- both countries will tax the income at domestic level, but one country will give a credit (deduction) for tax suffered overseas; or
- only one country will tax the income.
There may still be reporting obligations, even if the double taxation agreement, dictates that a country can no longer tax an income or gain.
Double taxation agreements also provide guidance on the rate of tax that may be applied to incomes or gains and therefore, should always be reviewed irrespective of double taxation or not, to ensure that your tax bill is reduced accordingly.
Emma is the Founder of Global Tax Consulting, a bespoke tax planning firm designed to assist individuals who are facing cross border tax issues. Emma works with expats, remote-workers and digital nomads with an overall aim to provide solutions that achieve efficiency and ensure compliance on a global level
👉 Schedule a consultation with Emma Today!