How to be an Expatriate – Expat Taxation

As part of Angeles Xtra’s, ‘How to Be an Expatriate’ article series, here we look into a topic very close to most expatriates thoughts – the taxation of expat earnings. An important consideration if you plan to live and work abroad.

Expat Taxation

Most expatriates either work overseas or live and work abroad part time, but have their permanent home or country of residence elsewhere. This is why a basic understanding of expat taxation is an important topic in learning how to become an expat.

Part of how to become an expat is understanding that ignorance of a country’s tax laws, your own or the country in which you work, can mean that if you are not careful you may find yourself being taxed both in the country where you work abroad, and where you live at home - an unwanted and unexpected financial burden for anyone!

Taxation of Expatriates

Expat taxation can and does make a considerable difference to the cash expats can legally obtain. Although there are many levels and types of taxation, in the main taxation of expatriates is set by two factors: The country in which you live and work abroad, and your country of origin and/or domicile (permanent home).

• Expat taxation where you work
  In regard to expat tax payable in the country where you work abroad, some countries, most notably in the Middle East, have no income tax, or at least no expat taxation. Many other countries charge a general rate of income tax for all workers in that country, with the rate of tax usually dependent upon the size of the salary, no matter if the workers are expats or local nationals. Unfortunately, some other countries have special rates of expat taxation, with expat income tax, as well as other taxes, sometimes called ‘government fees’ levied on an expat’s wages. 

• Expat taxation or expat income tax in your home country or country of domicile
  Certain countries have laws that levy tax on any income, whether earned in-country or as an expat overseas; America (USA), Canada and, as of 2009, Australia are good examples. If you are a citizen of these countries (or any other country that taxes income wherever earned), you must pay annual income tax even if you are an expat and live and work abroad. This applies even if you are an expat that works abroad in one country and have set up a home and live in a third country.

  Though rare, in some cases this means you may be working and paying expat income tax in one country, paying income or other tax on money you send back to the country where you live, and also have to pay tax on your annual earnings in your ‘home’ country.

  Happily, because many countries have taxation agreements, what is more usual is that if the country in which you work levies expat taxation, as long as there is an agreement between your ‘home’ country and the country you work in, you can obtain tax credits. If this applies, at the end of each year you get a tax payment confirmation from your work country (normally supplied b your company). You then provide this to your home country tax or revenue offices and you receive credit for the tax you have paid out overseas.

  Although it differs between countries, generally, if for example you paid 20% income tax in the country where you work, and your home country tax rate is 25%, you would only be liable for 5% tax to your home country. Unfortunately, if you pay out 50% tax at work and your home country rate is 25%, you get no additional credit.

  This type of tax arrangement between countries means that you pay your tax and are entitled to your home country benefits, e.g. pension rights.

• Non-Residency expat taxation exemption
  In some countries, for example the UK, if you are a citizen that works overseas and do not return to that country for more than a few days each year, you are not liable for tax on your overseas earnings.

  If you are a citizen of such a country and work overseas in a country that also has no expat taxation, this means you do not pay income tax anywhere – although you may well loose pension rights, etc, in your home country.

  If you work in a country that taxes your wages, if that country has a tax agreement with your home country you may well be able to get tax credit for what you pay, which would mean you get to keep all of your home country pension rights, etc. 

  If you pay income tax or some other expat taxation in your country of work, and that country and your home country or country of domicile has no tax agreement between them, unfortunately you have lost out. There are very few countries that provide any form of benefits or pension rights to expats, even if those expats have lived and worked in that country for many years.  

Practical Example

As part of learning how to become an expat, if is often beneficial to see practical examples of the effect of expat taxation…

…I’m a British expat that lives and works abroad and have been a non-resident of the UK for many years. As such I have no liability for any expat taxation, income tax or any other tax to the British government. My permanent home (domicile) is in the Philippines, but as I do not work in the country, I pay no expat income tax or other expat tax to the Philippine government.

When working overseas in Saudi Arabia, where there is no expat taxation, the upside was that I was not subject to any expat taxation or other income tax; the downside was I also had no entitlement to a UK state pension, free care services, unemployment benefits, etc.

However, this situation changed when I began work in Papua New Guinea (PNG). As an expat working overseas in Papua New Guinea, I found my expat taxation rate to be a whopping 42%.

My American, Canadian and (from 2009) Australian colleagues had the tax they paid in PNG credited against their tax due in their home country. This meant they paid no more tax than they were liable to if working at ‘home’ (and they were entitled to ‘normal’ benefits as a tax payer in their home countries). I on the other hand had to pay tax in PNG and received nothing in return. I have no tax obligation in the UK or my country of domicile (the Philippines), so I am not entitled to any tax credit. This means that all of my payments into the PNG tax system provide me with no return – no benefits, no pension rights, health care, etc.

How recognizing expat taxation effects how to be an expatriate    

In learning how to become an expat, as you plan to live and work abroad you must take expat taxation into account when looking for work overseas. Put simply, as an expat you must learn what, if any, annual tax liabilities you have in your home country; (and if applicable your country of domicile); what the expat taxation or other tax rate is in the country in which you plan to work – and whether the different countries involved have any reciprocal tax agreements.

Being an expat often means that you must weigh the benefits and drawbacks of each job, and each country in which you plan to live and work abroad. Do this before agreeing to a contract and you will save yourself a lot of grief and unexpected and unwanted surprises. 

About the Author

Live and work abroad was Tom Henry’s plan, and he has been a successful expat for more than three decades. He learned how to be an expatriate by trail and error and, apart from many manuals and training books, he passes on his experience as the author of both The Philippines Expat Survival Guide and the Papua New Guinea & Port Moresby Expat Survival Guide. 

Related Articles

How to be an Expatriate – Living and Working Overseas: Expat Family

Being an Expat 101 – Expat Basics

Being an Expat 102 – Rotational and Residential Contracts

Being an Expat 103 – Contract Twists

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