The travelling taxpayer

Corporate tax rates worldwide continue to fall and there have been some significant reductions in European countries. But for those who travel regularly, taxes on individuals are an important consideration. For people moving within the European Union (EU), the UK’s membership in the EU guarantees the freedom to live and to work anywhere within the member states. More and more individuals are now finding that they need to spend some period of their careers working outside their home country, and it is not uncommon to have investments or properties in other countries. Such cross-frontier activities inevitably raise tax issues which can be quite complex. A current KPMG survey of worldwide corporate tax rates shows some significant developments. Between 1996 and 2002 the average corporate tax rate in the member countries of the EU has fallen from 39 per cent to 32.5 per cent. The trend in the wider group of OECD countries has been similar with a reduction from 37.5 per cent to 31.3 per cent. The EU countries which have reduced their rates include France, Greece, The Netherlands and Portugal, with Luxembourg the star cutter as the 2002 rate of just over 30 per cent is some 7 per cent lower than the rate of the previous year. Among the EU countries the UK rate of 30 per cent ranks it firmly at the lower end. But it is still some way behind Ireland which has a current 16 per cent rate and a target of 12.5 per cent. As ever with statistics, such bare comparisons can be dangerous if used in isolation. For businesses, it is the total tax burden on their activities that is relevant. A key feature here will be the cost of employment, including social security. Issues such as pensions and healthcare are very lively topics for debate in the UK at present and, if the UK government decides to use taxation to fund individual spending on healthcare, this could well lead to additional burdens on UK employers. No habitual abode Perhaps the first issue is to decide which country has the main right to tax an individual’s income and gains. As yet there is no move to harmonisation of the topic within the EU. Some countries, such as the UK and Ireland, have a fairly objective test based on the number of days of residence. Others, such as France and Germany, have a more qualitative test relating to the centre of economic interest or the place of habitual abode. As a result, it is possible to be resident in more than one country at once and, in theory at least, to be resident in none. The latter example is perhaps more attractive but if an individual spent, say, 130 days in Ireland, 90 days a year in the UK, 120 days in the US and for the remainder of the year travelled elsewhere, they would in theory be resident in none of these countries for tax purposes. This is not all gain as such a lifestyle would be exhausting. Nevertheless, the life of a fiscal nomad certainly has attractions if you are prepared to contemplate the careful management of time and the costs of travelling that are required. Just as with companies, to look solely at the rates of tax on income does not give a very accurate picture of the likely tax costs of living in a particular country. Other relevant issues will be the tax base, whether this is joint or includes deductions for family; the extent to which social security or health care charges are attached to all income; the number of allowances available and the point at which higher rates of tax become payable. The UK, with the top rate of 40 per cent on taxable income roughly in excess of Ł34,000 (E55,082), still remains a low tax country for individuals. In contrast, the top rates in Germany and France are well in excess of 50 per cent and in Belgium of 55 per cent. From a personal tax point of view, there are relatively few bargain countries outside North-West Europe. Portugal has a top tax rate of 40 per cent. For those who are thinking of moving location on retirement and living off pensions and investments, it is important to understand the general principles involved. The method of taxing capital gains differs widely across countries. The UK taxes such gains as the top slice of income, but tapers the gain according to the period of ownership and the nature of the asset. Some countries tax relatively few capital gains. Belgium for example exempts most investment gains. Germany does not tax disposals of quoted shares and certain other assets. Spain has at present a flat rate of 18 per cent for capital gains on assets held for more than one year, and more favourable treatment for certain assets owned for more than 10 years. The latter rules may not apply after 2002. In general, where there is an appropriate double tax treaty, pensions which are not derived from work for the government are taxed only in the country in which the individual is resident. The country from which the pension arises, or from where it is paid, is required to give up its tax. However, for a potential UK expatriate who has a significant pension (and no fears about the new FRS 17 accounting standard), this may not be a real benefit. Giving up UK tax at 40 per cent is not necessarily a bargain if the resulting tax liability in the host country is at a higher level. Taxes on Inheritance Finally, and the word is used advisedly, the traveller must consider taxes on gifts and inheritances. There is a very clear dividing line between the UK system, which is based on common law, and the civil law basis of inheritance in other countries. In very broad simplification, in the UK individuals are free to leave their property to whomsoever they choose, and inheritances are taxed regardless of who receives them, except for gifts to surviving spouses. In contrast, under civil law countries there is so-called forced heirship, whereby property passes to beneficiaries under fixed rules. The rate of tax applicable to inheritances is graduated so that the taxes are higher where property passes to more distant relations. Some countries also have annual taxes on wealth and although these are relatively modest, with rates of perhaps no more than two or three per cent, they do pose an additional burden of administration. The French tax code rules that the total amount that can be taken in any one year in income taxes and net wealth taxes is limited to 85 per cent of taxable income. On a more positive note, it appears that Italy has effectively abolished inheritance tax in most cases. So your descendants may encourage you to retire to Tuscany or Umbria and take your chance with forced heirship. For someone who has investments or property in another country and is thinking of taking up residence there, the basic principle must be to take some good professional advice before leaving. There is no one country which is an obvious location for those who like to enjoy a high standard of living with good weather, good food and low taxes on income, gains and inheritance – or if there is, please let me know. John Battersby is a partner in the national private client group of KPMG and has been integral in establishing an international network of advisers to offer guidance on the issues raised in this article.