There are a number of reasons for this, ranging from idle curiosity through jealously to a genuine fear that some countries and companies are taking unfair advantage of international tax rules, hurting the competitiveness of companies ‘back home’ and costing lots of lost jobs.
As someone who has been actively engaged in the field of international tax for nearly 40 years, it is fascinating to see how it has evolved, how quickly it is evolving and the increasing impact this is having on people and companies with activities in more than one country.
In the slightly Alice in Wonderland world of international tax it does not help that countries’ tax codes (tax laws) are – naturally enough – written in their own language. However, it helps even less when you realise that, even when translated, words and phrases have different meanings in different places.
When it comes to international tax – where making the wrong decision can cost you thousands or millions of dollars – understanding exactly what the law says and means is vitally important. It is also not easy. That’s why good tax lawyers can charge so much money!
There are a number of concepts that you will need to understand if you’re thinking about tax at an international level. The way they apply in each individual country is dealt with in the tax guide for that country but, for now, some general words will probably help.
Taxable Base: this is the assessed value upon which the tax that you will have to pay is calculated. There will usually be a separate tax base for each category of tax: e.g. your income, your home, your total assets or an amount you have just inherited
Tax Liability: this is the amount of tax that, taking into account all of your circumstances, you should be paying. There is usually a separate tax calculation (and so tax liability) for each category of tax.
Nationality: This is the country of which you are a citizen. You will carry its passport. Of course, if you are a citizen of more than one country – and surprising numbers of people are – things get a little more complicated but the good news is that, unless you live in the US (or Eritrea), you will not find that you will be taxed on the basis of your nationality. If you do live in one of those poor benighted countries, you will need to be particularly careful in the tax advice that you take and you will need to make sure that either your local tax adviser understands the tax laws back home or – more probably – that you run your provisional thoughts about tax planning through your home adviser as well as your adviser in the countries where you’re living, working, doing business etc.
Domicile: This is a tricky little term that has different meanings in different places. In many countries it means little more than the place where you (or a company) are usually resident but in others, notably the UK, it has a much stronger meaning and you are only treated as being domiciled in a country if you have a very strong connection with that country. In other words, the mere fact that you live there for half the time would not necessarily mean that you were domiciled there.
The important of understanding the definition of domicile is that, in some countries, you become liable to some taxes on the basis of your domicile rather than your mere residence.
Ordinary residence: As the name suggests, this tends to be defined as the place where you are usually resident. The test is, typically, whether you spend more than six months of the year living in that place (although some countries apply different rules). In a great many countries the fact of ordinary residence is one of the main triggers for tax liability in that country.
Residence: Residence – in the sense of mere presence in the country for however short a period – very seldom gives rise to tax liabilities. You can safely go on vacation to Costa Rica without fearing that they might decide to tax your worldwide income! However, if you are Madonna or some other person who earns money from a short period of activity in a country you may find that there are rules that try to capture some tax from what you have been doing.
Tax avoidance: Tax avoidance is the process of arranging your affairs in such as way that, quite legally, you minimise your tax liabilities. There is a general principle applied in most countries that you only have to pay tax in the circumstances where the law says you must pay tax and so if something is not included as a taxable item you will not pay tax upon it.
An increasing number of countries is trying to tackle the perceived problem of ‘aggressive’ tax avoidance by trying to impose limits on how creative you can be in arranging your affairs so that you do not have to pay any or much tax. Whenever you are in the position where you may be liable to pay tax in a country you will need to understand what can and cannot be done when it comes to reducing your tax liabilities. See the tax guides to our individual countries for more information about this.
Tax evasion: Unlike tax avoidance, tax evasion is illegal. It is doing things that the law does not permit with a view to not having to pay any or as much tax in the place in question. It can range from simply not telling the tax man about some item of income or capital gain to coming up with spurious ownership structures or claimed deductions to reduce or eliminate your liability.
A common saying in the world of taxation is that the different between tax avoidance (legal) and tax evasion (illegal) is the thickness of a prison wall.
There are, literally, hundreds of other terms used in the world of international tax but getting your head round just these few and understanding what they actually mean in each of the countries of relevance to you is a good starting point.