May 2010 (101) – Short-term Residence Benefits


My apologies to all of our readers for the delay in sending out our May newsletter, but it was a particularly hectic month for me for both client and academic work.

It started with four days of teaching an international tax course at the Institute of Advanced Legal Studies (part of London University) for an MA course for mature students.  Partners of law firms, multinational tax managers and Revenue officials (including one from the anti-avoidance section!) kept me pretty well focussed for the first week of May.  One of our students has written a summary of the course for those who are interested which can be found on our website (click here).

The main part of my academic work was finalising International Tax Systems and Planning Techniques, the new edition to be published in September 2010, which had to be submitted to the publishers by the end of May.  More about this in a later newsletter.

And finally on the academic front, I needed to prepare for my lecture entitled “The Peripatetic Resident” for the ITPA meeting in Venice held at the beginning of June, in which I discussed the problems of ceasing tax residence in various jurisdictions around the world, but also some of the benefits of changing one’s tax residence to another jurisdiction (even a high tax one).  It was Aristotle who was first attributed with the use of the word peripatetic when he taught philosophy whilst wandering around the Lyceum of ancient Athens, but as I explained in Venice, wandering is not the same as total emigration.  Such is the philosophy of anti-avoidance legislation.

Client work in May was also extremely busy, with a few clients being concerned at the bullet point on page 31 of the new UK Government’s Coalition document, “Our Programme for Government”, which states “We will review the taxation of non-domiciled individuals”.  This, together with my analysis of residence for the Venice programme, has prompted me to write an article for this newsletter explaining why the media in general has misinformed the public about UK legislation affecting “non-doms”’.

Tax benefits for temporary residents around the world

 Reading the UK media, it would appear that foreigners living in the UK are given a unique tax break which no other country offers.  Whilst it is certainly true that there are some individuals who have been resident in the UK throughout their life and are still classified as “non-doms”, the majority of non-domiciled individuals have been living in the UK for relatively shorter periods.  I have to admit that the 17 out of 20 year law for deemed domiciled status for inheritance tax is a reasonable compromise for individuals who are resident in the UK on a long term basis, and I fail to see why this is not extended for income tax and capital gains tax purposes as a simple, clear and fair way of dealing with long term residents.

For shorter term residents, the remittance basis of taxation (with or without an annual levy) is certainly not unreasonable and has parallels throughout the world.  Thus Australia has a five year temporary residence benefit for those immigrants under a 457 visa, with a similar five year benefit in Canada for residents structuring their affairs appropriately through offshore trusts prior to immigration.  Switzerland has the well-known “forfait” arrangement (which Zurich has recently abolished) whereby immigrants are taxed on a lump sum basis regardless of their foreign earnings, and similar tax rulings can be obtained in Austria.  Ireland and Malta have a remittance basis of taxation similar to the UK, whilst an “inpatriate” regime exists in Portugal, Spain and France where flat rate taxation may be incurred on local source income only.  Israel has a 10 year period whereby immigrants are only taxed on local source income and foreign income and gains are entirely exempt even if remitted to Israel, and this period is currently under discussion with a view to extending it to 20 years.  Countries such as the Netherlands, Luxembourg and Belgium offer exemptions, generally 30% of taxable income, for foreign executives who take up temporary residence in these countries.  Then, of course, there are the countries operating a territorial system of taxation such as Hong Kong, Singapore and South Africa.

By repealing a beneficial direct tax regime for temporary residents, the UK government may indeed raise a limited amount of additional revenue from direct taxes on those who remain in the UK, which may or may not exceed the revenue from direct taxation for those leaving the UK.  These latter individuals are usually the super-wealthy individuals who can indeed become non-resident of the UK without great financial difficulty.  And it is these very same super-wealthy people who contribute enormously to indirect tax revenue in the form of VAT on products and services acquired in the UK as a result of their continued residence.  To drive them away would be madness.

This reminds me of the famous Aesop fable: “A man and his wife had the good fortune to possess a goose which laid a golden egg every day.  Lucky though they were, they soon began to think they were not getting rich fast enough and, imagining the bird must be made of gold inside, they decided to kill it.  Then, they thought, they could obtain the whole store of precious metal at once; however, upon cutting the goose open, they found its innards to be like those of any other goose”.

I hope to see you soon, and in the meantime send you my best regards.