This article intends to explain some of the complexities and considerations involved.
2022-08-08
The recent story about the Colombian superstar Shakira failing to pay her taxes has sparked controversy around the world. She is accused of ''defrauding'' the Spanish government out of 14.5 million euros on the income she earned between 2012 and 2014 by not paying Spanish tax.
Shakira Isabel Mebarak Ripoll
The matter is complex, as foreign-earned income can be subject to a multitude of different types of tax legislation, depending on where the income was received and the tax residency location of the earner. Individuals and businesses alike can learn from Shakira’s ongoing tax fraud trial, by understanding some of the critical details.
This article intends to explain some of the complexities and considerations involved.
How is “Physical Presence” defined?
When understanding and navigating tax law, “Physical Presence” is when an individual remains in a location for an aggregated maximum period of time, or longer, per tax year. In most cases, this is equivalent to 6 months, or 183 days per year, though in some countries some exceptions apply.
In Argentina, for example, physical presence is only established at 12 months. Once physical presence is established in a given location, the individual is required to pay taxes on foreign earned income in that location, according to the local tax rates for income earned during the full stay. As the time is aggregated, it can be difficult to keep track of tax filing and payment obligations.
In Argentina, physical presence is only established at 12 months.
This has become a recurring theme of concern for Global Mobility and HR functions as it relates to compliance for frequent business travellers, International Commuters, and International Remote Workers. The COVID-19 pandemic also highlighted the complexities of the ''physical presence'' test, as many were stuck in entities they do not usually reside in, and were unaware of the tax implications they were.
See the article on top considerations for doing business internationally in 2022.
In some countries – most famously in the U.S.A. there is another type of tax residency: “Bona Fide Resident”. An individual may be a bona fide resident if they are a citizen of that country or a resident alien who's a citizen or national of another country with an income tax treaty in effect.
When individuals are bona fide residents, they are typically required to file taxes each year and may be exempt from paying taxes on income up to a capped amount if they qualify for a Foreign Earned Income Credit.
In the U.S.A., there is another type of tax residency: “Bona Fide Resident”
The onus is therefore on the individual to prove they qualify for an exemption, as the default position is to require taxes files and paid in the bona fide resident’s country. To complicate matters further, if no tax treaty exists, it is possible that an individual could be a bona fide resident of one country and obligated to pay taxes in that location, whilst also having established a physical presence in another country and required to pay taxes therein.
These types of cases are often in the taxman's spotlight, as they trigger a breach in tax obligations. Although it is often fines that are imposed, some cases may lead to launching criminal proceedings, as it may be considered tax evasion or a breach of the tax law.
Although it is possible to access general information concerning the matter, expert advice is often needed to truly understand the taxation across various jurisdictions and what bona fide rules could apply.
Learn more about the country-specific tax requirements by signing up for Centuro Connect.
What is “Derived Income”?
Adding additional complexity to tax requirements, it may also be the case that an individual would be required to pay income on any funds earned in a given country. In Lesotho, for example, anyone is obligated to pay tax on any income earned in Lesotho, regardless of their citizenship or tax residency.
In Lesotho, anyone is obligated to pay tax on any income earned in the country
As derived income is not contingent upon residency, it is likely that an expat or remote worker would be obligated to file and pay for taxes in at least the derived income location and one other country. Whether Shakira broke the rules of the Agencia Estatal de Administración Tributaria or not ( this will be decided in the courts), employers and employees can work toward compliance by following these important details:
- Work with tax experts in all locations where you have earned income or spend more than 30 calendar days in order to ensure compliance requirements are met.
- Allow a buffer of around 183 days for physical presence.
- Keep track of the location where each day is spent, including travel days.
- Remember rules can still apply even years after the time was spent in a specific location. It is important to declare time spent and evaluate potential outcomes.
Centuro Global is well-suited to assist with identifying and managing these risks and handling the related benefits, tax, and other issues–which can be complex and challenging to navigate. If you require any advice or support on tax and related legislation, please do not hesitate to contact us.
