Expatriate taxation - CIOT - The Chartered Institute of Taxation

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CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 5 Issue 5: Domicile: State or federal 5.1 This issue is whether domicile is a relationship that is applicable to a country or federal entity (eg the USA, Switzerland, UK) or to a lesser legal jurisdiction (eg New York State, Zug Canton, Scotland). It has an impact for Britons with domicile of origin in the UK who have settled abroad, and are now expatriates who come to the UK and will move to a new location (not back home) after the assignment has completed. It will also apply to many other countries with a level of domiciliary jurisdiction below the country level. Canada, Spain, Australia and China are countries that immediately spring to mind as ones with sub-country legislatures. Yugoslavia, Russia and Czechoslovakia are classic historical examples. 5.2 The US sends many expatriates to the UK, and the issue of an expatriate who moves permanently from one US state to the UK and then on to another state or country raises questions. Applicable law 5.3 As Issue 4, there is no statutory legislation, and the tax cases and other cases remain the same. However, it is interesting to note that, until recently, people were regarded as domiciled in the UK and, of course, all of tax law refers to people domiciled in the UK. Current practice 5.4 Until 2004, this issue was given very little consideration as it was of limited practical impact and HMRC never appeared to take the point. However, the incidence of domicile affects so many areas of taxation, as seen above in Issue 4, that it can be important in those cases where it has an impact. 5.5 Practice varies across the profession, and within single firms of accountants there will be conflicting views, so it is impossible to say what the current practice is. 5.6 There is a reference to this situation by HMRC on their website at the technical manual references IHTM13021 and IHTM1302. 5.7 HMRC now argue (they never did “overtly” in the last century) that you are domiciled to a state/canton/province, as opposed to the overriding country, where there are separate laws covering the state/canton/province. This means that, for those with a UK domicile of origin who establish a domicile of choice in another location, there is a risk that an assignment to the UK for employment will trigger a return to the UK domicile. This would especially be so for expatriates who have “back to back assignments”, ie those coming to the UK who then move to a new “expatriate” location and do not return home. Peter Ashby 24 6.2.07
CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 5.8 The classic example of where this could have a major impact is a mythical Briton, Mr A, who leaves the UK when three years old and settles in Vermont, USA (with his parents). He becomes a US citizen and renounces his UK citizenship. He moves to a New York City boarding school at age eleven, then to New York university and rents a flat at age 18, and buys a house at age 25 with his wife. He takes a job with ABC New York when aged 50 and gets a divorce at age 55 when he is sent to the UK for a 5-year secondment. Whilst here in the UK, he sells his New York home and puts the money in the bank account in Jersey, and his goods are in storage in Texas as he is buying a new home in either Texas or Florida to retire to after the secondment is over. He makes a will with his parents’ lawyers in Vermont before coming to the UK. He has children in California and an ex-wife in Iowa. At age 58 he is run over by a Clapham Omnibus. The house in Texas/Florida is not yet purchased. Where is he domiciled 5.9 Under Vermont law, he will be able to have a valid will as he has no other will at the time he writes the will, and he is thus domiciled in Vermont for testamentary purposes. However, this does not make him domiciled in Vermont as a domicile of choice under UK tax law. 5.10 According to the HMRC view of the law, his domicile of choice would have been New York State (probably when he was 25) but, on arrival in the UK, as his domicile in New York State has ceased and he has no other domicile within the US (under UK law), he has no domicile of choice. As a result, his domicile of origin in the UK is restored. 5.11 Can this be right Logically no, but that has no place in tax law. Strictly yes, if the state is the basis of domicile for tax and not the country. 5.12 Interestingly, there is a Double Taxation Agreement between the US and the UK, for UK Inheritance tax and US equivalent taxes, which is an agreement between the US federal government and the UK Government. It refers within the agreement to being domiciled in the US and the UK, and even applies tie breaker provisions to determine which country takes precedence in the event of someone’s being domiciled in each country under the domestic laws of each country. If you cannot be domiciled in “the USA” according to the UK tax authorities, how can there be a Double Taxation Agreement providing for such a situation entered into by the UK Government through its then agent, the Inland Revenue Proposal 5.13 The common sense proposal would be to have the UK HMRC recognise that there is only one set of laws as regards taxation, and that is the country laws which relate to taxation, ie UK law, US law, etc. There is no English, Scottish or Northern Irish tax system at the moment, although there are provisions for a Scottish income tax. Therefore, in the example above, Mr A should have a domicile of choice in the US, as his will is drawn up in Vermont, on the basis that he is, has been and wants in the future to be a US citizen living permanently in the US except for temporary absences. Peter Ashby 25 6.2.07
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Expatriate taxation - CIOT - The Chartered Institute of Taxation

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