Expats that ignore the tax regulations in their home countries are doing so at their own peril
Are you liable for income tax while living in the UAE?
Just because the UAE is supposedly a tax-free jurisdiction does not mean that expat residents can forget about paying income tax.
Many new expats who land in the country breathe a sigh of relief after leaving their heavily taxed home country, while failing to realise they may still have an ongoing tax liability.
The tax authorities can still catch up with you, particularly if you have earnings back home, such as rental income, dividend payments, savings interest and royalties, or capital growth on stocks or property.
Most countries will want to continue taxing those sources of wealth no matter how long you are living overseas.
Fiona McClafferty, a senior manager at accountancy firm Deloitte Private, Middle East, says the biggest tax mistake UAE-based expats make is failing to realise they may still have a tax exposure or reporting obligation in their home country.
“This could either be by virtue of holding real estate or investments there, or being tax resident without realising it.”
Tax rules can change from year to year and so it is important to keep up to date with the rules in the relevant jurisdictions, she adds.
Find out if you are liable for tax in your home country here
South African expats, for example, are currently facing changes with a draconian tax regime set to come into play following an announcement in the February 2017 Budget that from March 2019 expats may no longer be exempt from paying income tax on their overseas earnings.
This will see them charged up to 45 per cent income tax on worldwide earnings, payable to the South African Revenue Service (Sars). Under current rules those who work in another country for more than 183 days a year do not have to pay income tax on their overseas earnings.
“There is a lot of concern from South African expats, especially in countries in the Middle East, which has a benign income tax system, that the new proposals by Sars will have catastrophic consequences,” says David Denton, the head of international technical sales for Old Mutual Wealth.
For all expats in the UAE property is usually taxed in its physical location, rather than where the owner is resident, Ms McClafferty says: “This means even non-residents can be exposed to property taxes, although the scope and definition will vary significantly from jurisdiction to jurisdiction.”
Where income is concerned, once you are established as resident in the UAE most countries will only tax income sourced from back home, and will not touch your earnings over here. However, there are exceptions such as the United States, which is notorious for pursuing its citizens around the globe and charging tax on their worldwide earnings.
The rules vary according to the country so you need to study yours, or risk being stung by steep penalties for tax avoidance. Get it wrong and you could face a nasty shock when you finally return home.
The furore over the removal of the “foreign earnings exemption” for South Africans has alerted many to the fact that, in common with expats from many other countries, they should already have been paying tax on income and gains from any savings and investments in their home country. Currently, South African expats who have retained their ordinary resident status need to declare and pay Sars income tax on worldwide investment earnings and gains, at rates of up to 45 per cent. Those who have not done so may have to pay back tax and penalties, and Mr Denton is urging them to seek financial advice as early as possible.
Your country of residency is determined by a number of factors, of which one of the most prominent is the 183-day rule stating that if you spend more than six months in one country, you are resident there.
They may take into account other factors, such as whether you are accompanied by your family, where your main work or business is based, where your bank accounts are held, and where your property and other assets are located.
The UAE has drawn up a series of double tax agreements (DTA) with more than 70 different countries with “tiebreaker provisions” to determine which country can tax your worldwide income. If you are resident in the UAE, but have income and capital gains from another country, there is a danger that you could end up paying tax twice on the same income, in both countries.
This may apply to, say, dividend income and capital grains on shares and funds you hold back home, or rental income and capital gains from any property. A DTA between the UAE and the country in question should end the threat of paying tax twice on the same income. The UAE’s DTAs are regularly revised, say, every five years with the rules differing from agreement to agreement, so find out what the UAE has agreed with your relevant country.
However, not every country has signed an agreement, notable exceptions are Australia and, again, the US.
Sam Instone, the chief executive of Dubai-based wealth advisers AES International, says when it comes to tax, the onus is always on the individual to understand and meet their obligations.
“Failure to do so can result in financial penalties over and above any tax due, and possibly even a criminal conviction.”
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As well as residency, you may also have to consider where you are domiciled, typically the country of your birth that you are likely to return to after any stay abroad, he says. “Britons often make the dangerous and potentially expensive mistake of assuming that because they are not resident in the UK, they are not domiciled there either.” If you were born or raised in the UK, or your father was, HM Revenue and Customs (HMRC) will consider you British domiciled. “No matter how long you reside overseas, your worldwide estate could be subject to UK inheritance tax when you die,” says Mr Instone.
US expats are even more vulnerable. “Many are shocked to discover that the obligation to file US taxes does not end when they take up residence in a new country, the Internal Revenue Service will tax citizens no matter where they reside,” Mr Instone adds.
Stephen Downey, a chartered financial analyst candidate at Holborn Assets, has seen British expats sell off all their UK property and close their UK bank accounts to avoid being considered British domiciled. “This means that when they die as a British citizen, HMRC government will find it difficult to argue that their domicile is in the UK.”
He says the tax burden on US citizens is far more severe: “They have to pay up to 40 per cent tax on non-US domiciled unit trusts and mutual funds, pay taxes on global earnings and investment income and capital gains, regardless of their residency.”
Paying taxes unnecessarily can inflict lasting damage on your retirement plans, he adds: “Incurring a charge of, say, 25 per cent a year creates a further ‘tax drag’ on investment performance, on top of other charges.”
Many UAE-based expats will eventually return to their home country, at which point they will be become residents again, subject to the local tax regime, Mr Downey warns.
The dangers of failing to declare all the tax you owe, whether accidental or otherwise, are increasing as financial information is increasingly exchanged across borders under the Common Reporting Standard (CRS).
Ms McClafferty says expats should regularly check that they are fully tax compliant in all relevant jurisdictions. “It is preferable to disclose and correct any mistakes or omissions and pay all outstanding taxes before a tax authority discovers the issue themselves. Seek professional advice from an individual qualified in that particular jurisdiction.”
Failing to write a will, or more than one will for those with multi-jurisdictional estates, can trigger unintentional inheritance or estate tax implications for expats in their home jurisdiction, she adds: “Often the statutory rules for intestacy do not enable the estate to access the most favourable tax treatment.”
Although most expats may be glad to escape their home tax authorities some may want to consider making voluntary payments to their former country in the shape of National Insurance contributions – to retain their eligibility for local state-funded healthcare or pension benefits.
Ms McClafferty adds: “It depends on the jurisdiction, and the personal circumstances under which your are working abroad, so again, you may need to seek advice.”
As ever with tax, nothing is simple.