Image by Earl – What I Saw 2.0
Editor’s Note: This post a guest post by Marion Harrington, who is an expert at the whole international tax and finance side of things. We’re currently co-creating The Location Independent Guide To Tax & Finances (US edition) which will be available in February and as a primer Marion will be sharing some of the most important aspects about international tax & financial planning in this mini series…
There you are in your lounge one rainy Sunday afternoon, fantasising about your “soon to be” location independent life galloping across the desert on a camel like Laurence of Arabia, laptop squeezed in between your knees and a hump when you are knocked out of your reverie by an IRS advertisement on the TV reminding you to file your tax return.
“Goodness me yes”, you say, “I must get down to sorting out the tax thing for when I’m travelling”.
So, you Google “international tax advice” and start scrolling down through the plethora of web sites, ex-pat forums and blogs. You dip into a few…
“Hmmm…there seem to be a fair amount of contradictions here – even between companies offering the same services; don’t think I’ll bother with the forums – they’re just full of people flogging their own stuff; these two bloggers have similar profiles so why are their experiences so different? It’s all rather confusing…
I know – let’s have a look at the “official” government sites: the IRS talks about “citizenship”, the UK about “domicile” then there’s Spain bleating on about residency. I’m a US passport holder spending time travelling round Europe so are they separate concepts or the same thing with a different word?
Help! Where on earth do you start with all this? *Glances at TV* – ooh look! The Matrix movie has just started. Must watch that…”
“Sorting out the tax thing” is yet again pushed to one side. Does this sound like a familiar scenario?
Just as being chained to a corporate cubicle for the rest of your working life is a singly unappealing prospect for all of us here in the LIP community, many people hold the same view about tax issues.
But ranking in priority after doing the washing up and cleaning out the cat litter tray, Mr Procrastination will have you in his grasp before you can say Fairy Liquid and silicon gloves. That is, until you receive a nasty letter from your home tax office which reaches you whilst sight-seeing in the Amazon Rain Forest.
The net result is that you end up with a bigger problem than you would have had by tackling the subject head on well before setting out on the road.
Consider This Scenario…
S and J (UK passport holders) decided to travel round Spain for a few years before settling down and getting married. Both had a master’s degree from the Oxbridge universities and had held down well paid jobs in major corporations.
During this period they had saved as much money as they could and in their spare time had put together a couple of internet businesses which they planned to launch when they were on the road. Being higher rate taxpayers, S was adamant that he was neither going to pay exorbitant professional fees nor pay tax to any jurisdiction worldwide and considering himself a reasonably intelligent man, carried out his own research and put together his own tax structure.
Despite being warned by various professionals that his idea was flawed, savings were moved to a bank in Antigua and any income derived from the internet businesses were to be channelled to the same place. Whenever they wanted income the plan was that they would pull it down through another bank account based in Gibraltar via ATM cash machines in Spain.
After filling in the relevant HM Revenue and Customs forms informing the authorities that they were leaving the country, the couple thought nothing more about their tax affairs until a few years later when:
- They discovered that one of their banks was in receivership
- They received a backlog of increasingly urgent UK tax office demands which had been sent to their forwarding address but their friend had forgotten to notify them
- An official notification from the Spanish tax office indicated that an investigation into their tax affairs had been opened following bank audits as it was suspected “they were carrying out commercial activity on Spanish territory and therefore subject to Spanish regulations” Note: There are 3 paper rolls inside Spanish ATM machines – 1 for client transaction requests, 1 for the bank and 1 for the Spanish Hacienda or tax office.
Worrying scenario, no? But here are the top three reasons why location independent people still avoid organising their tax affairs:
It’s Complex…
This is true even for non-LIPs. Add globe-trotting to the mix and its trickier still to come up with a legal, transparent, easy-to-maintain and tax efficient solution for your particular personal situation.
It’s Boring & Time Consuming…
Research eats away hours at an alarming rate. And you know what it’s like researching a subject that fails to excite you – it’s just plain boring. Would you prefer to be working on your online business and passive income streams or burrowing through the maze of international tax law on site after site?
Qualified & Tailored Advice Is Expensive…
One member of the Location Independent community was quoted £175 per hour to investigate their case. In an effort to keep down costs, another made a few phone calls outlining plans to her local accountant and financial advisor. Neither had the expertise to help as they were only qualified and insured in one country. Only somebody schooled in international affairs will do – at a price, which for most, might well demand a personal loan.
If you would like to find out more about how our forthcoming Tax & Finance Guide (and the service which we’ll be launching later in the year), why not get a head start and follow our dedicated LIP Finances account on Twitter? (it’s protected for now but request to follow & we’ll let you in!)
This is very interesting. Another thing to investigate is student loans. many people assume that because they are outside the UK and earning less than the threshold for paying back the loan in the UK, that they are not eligible to repay the loan.
In fact, if you are working overseas (or earning income in an offshore bank account), there are different thresholds for paying back student loans and you still need to pay even if you are earning less than whatever the minimum threshold is in the UK. (I can’t remember what is is because I haven’t been back there for the last 6 years).
You did it Marion!! A great and a very relevant post. Congrats!
Absolutely fantastic post. This is a subject I’ve been researching myself for a while now (from Finland’s perspective). It is pretty complex. Will probably write a post about it in he near future. I’ll definately want to check out the LIP taxguide when it comes out. Great work!
@Wil – good point on the student loans, thanks for stopping by to comment.
@Agata – watch our for more from Marion – definitely one of the Roundtable’s success stories, eh? :)
@Juha – it is definitely a complex topic wherever you’re from. We’re really excited to be working with Marion to try & shed some light on this area for other LIPs.
Nice introductory post; I look forward to following this series and your upcoming guide!
I hope you’ll address a topic that is easy to overlook for us young(ish) eager professionals, but which can have significant tax implications both now and later in life: retirement savings and retirement.
Many (most?) countries provide incentives for retirement savings, such as deferred tax, no captial gains tax, et c. It is not necessarily clear, however, how such incentives translate into an international setting.
As for myself, I moved from the US to Sweden last year and am struggling with how to handle my retirement savings. If I leave the money in the US, where will distributions be taxed? If I convert my 401(k) to a Roth IRA, will the tax free withdrawals be honored in Sweden or elsewhere in the world? And so on…
(if you would be willing to provide advice here or would like to do a case study for an article on the topic I’d be happy to elaborate on my situation. If not I won’t bore you with details.)
It’s an interesting situation. I’m currently working through the details myself. As a US citizen who moved to Bulgaria, I’m currently working through how I pay my taxes for 2009.
2008 I have no worries about because we lived off of our savings and spent the year getting settled into our new home, but definitely have to pay for last year, and that’s when things get complicated, because I work for a wide variety of international clients.
US tax laws are /strangle. I’ve hired an international firm to help me deal with the basics, and to be honest, they weren’t that expensive. My accountant back in Colorado used to cost me about 500 dollars a year to deal with my S Corp, and this is just about the same to deal with all of my international stuff.
The one thing that I’m still not knowledgeable about is whether or not I owe any taxes for Bulgaria, considering I live here but I don’t “work” here, if that makes sense. Plus my wife is a Bulgarian citizen, so it gets even more complex :)
Ah, the joys of taxes!