Get some tax advice before you work your way around the world

Global mobility may be great for learning new skills, experiencing new cultures and finding new business opportunities, but don’t leave home without some tax advice, international tax experts advise.

More than 1 200 tax policymakers and advisors from around the world met in Cape Town last week for the International Fiscal Association’s annual conference focussing on the increasing complexity of taxation within and across borders.

The conference highlighted how countries are looking for new ways to collect revenue as traditional tax bases are being eroded by digital economies and currencies, as well as complex ownership structures used by mobile high net worth individuals.

You can still leave your home country and move to another, you just need to find the right tax adviser, Susanne Mederer, tax consultant at Flick Gocke Schaumberg in Germany, said during a discussion on cross-border tax issues.

The discussion highlighted how when you move to a new country, you need to be aware of:

• How long you can stay and what you can do in a country before you are considered a tax resident and subject to tax in your adopted country;
  
  
• Your tax obligations in your home country if you are still regarded as a resident or a citizen;
  
  
• Your tax liability for earnings from different sources such as interest on investments, dividends, pensions, and royalties or other payments from intellectual property;
  
  
• Inheritance or estate and gift or donations taxes when you give or receive money or assets; and
  
  
• Exit taxes when you leave your home or adopted country.
  
  

Reason to tax

The taxes countries impose need a justifiable “nexus” or connection to you to give the country the authority to tax, Cedric Ryngaert, a University of Utrecht professor of public international law, explained at the start of the conference. This authority should be recognised by the courts and internationally.

The conference heard that most countries tax on the nexus or basis of residency and the source of income and capital gains, but a few, like the United States, use citizenship.

In applying its residence-based tax system, South Africa, like many other countries, considers your habitual abode or the number of days you are present in the country over a period of five consecutive years, Jenny Klein, tax associate for law firm ENS, said at the cross-border discussion.

If you are tax resident, you will be taxed on your worldwide income and capital gains, and your estate will potentially be liable for estate duty, she says.

It is possible, however, to spend significant amounts of time in South Africa and remain non-resident, as long as you retain a permanent home and sufficient links to another country, she said.

If you plan to work in Germany, however, be aware that it is very easy to be considered a resident if you have any form of home or domicile in that country, Thomas Sendke, tax adviser at Flick Gocke Schaumberg in Germany, said.

A vacation home that is used for only a couple of weeks each year or even a hunting shed could be considered a domicile, he said.

A tax resident in Germany pays income tax at rates of up to 47 percent and capital gains tax at 26 to 29 percent. German residents giving or receiving gifts or inheritances are taxed at rates of around 30 percent depending on amounts and relationship between the parties, he said.

Sendke said if you stay for more than seven years, exit taxes at 28 percent of your assets apply.

Klein says South Africa also levies exit taxes in the form of capital gains tax on the wealth gained in assets during your residency. When individual residents leave the country and cease to be tax residents, capital gains on property and investments is taxed at rates up to an effective 18 percent.

Tax on non-residents

If you avoid qualifying as a resident in a country, you will pay tax in line with what are known as source-based tax rules that consider the source of income or gains and the rights of other countries to tax income and gains sourced in their country.

In the opening discussion, Victoria Plekhanova, from the University of Auckland, said countries have very different perspectives on whether they should tax non-residents and to what extent, making source-based tax rules very diverse.

These rules typically allow countries to tax interest income and their approach depends on whether they are exporting capital for revenue or trying to attract capital, she said.

When the borrower is a tax resident, the borrowed capital is invested in property in the country or the country’s bank deposits, leases or mortgages are used, the interest earned is likely to be taxed in that country, she said.

Source-based rules also provide for the taxation of dividends but countries have different approaches on this as well.

Annet Oguttu, professor of tax law at the University of Pretoria, says most countries use the residence of the company paying the dividend to determine the source and hence how to tax dividends.  Other countries focus on the company declaring the dividend.

South Africa obliges resident companies to withhold and pay tax on dividends they distribute, while tax rules apply to foreign dividends depending on how many shares you own and whether the dividends were taxed in another country and any double taxation agreements.

Klein said non-residents in South Africa pay income tax and capital gains tax on investments in South Africa and assets held here, but not elsewhere in the world, are subject to estate duty.

South Africa also deems foreign incorporated companies to be tax resident if they are effectively managed in South Africa, which can affect foreign companies with directors who choose to live in South Africa.

Personal services

If you plan to provide professional services globally from where you are in the world, be aware that countries have different rules on how to tax professional income.

Most countries have traditionally taxed this income in the country in which the service is rendered and at times consider the professional’s permanent establishment, Andrea Riccardi, a tax administrator in Uruguay, says.

But as more services are being rendered remotely and digitally, some countries are seeking to tax professionals when their services are used or paid for in that country, the conference heard.

Retirement

If you decide to spend your retirement in another country, check what rules will apply to your pension.

Johann Hattingh, a professor of commercial law at the University of Cape Town, said countries typically consider whether the pension income is from savings or if it is deferred employment income.

If your pension is deferred income from your employment, the source of your income will be the country where you were employed.

Oguttu said if you were employed in South Africa, your pension will be taxed as South African income.  But if you receive a pension under the social security system of another country or from employment outside South Africa, it is tax free, she said.

Hattingh said when pension income is regarded as income from savings, source-based tax rules are applied. The place where the fund was established or administered, or even where the pension contract was entered into may be considered, he said.