Expatriate taxation - CIOT - The Chartered Institute of Taxation

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CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION d) When the employee is a US citizen and is taxed on the basis of citizenship and also works in the UK. The US is reserved for special comment as it taxes its citizens on a worldwide basis regardless of source or residence. The interaction between the US and the UK is the subject of a research topic on its own, and is not fully covered here. More details can be found in the excellent Tax Bulletin on this issue: see http://www.hmrc.gov.uk/bulletins/tbse6.pdf 7.7 The principle of tax credit relief is simple and obvious. When you pay tax in the UK and another country on the same income, one country should allow a credit for tax paid in the other country. However, there are two big issues here. Who gives credit to whom, and how do you calculate the tax that is available for credit Who gives credit 7.8 After years of debate, it is now almost universally agreed that the country of residence, if it taxes employment performed in another country, should give credit for tax paid in the workplace country in respect of work performed in that country. 7.9 Whilst there is some argument about how to determine the earnings to attribute to working for any particular day, or whether you are working solely for the benefit of the UK employment when you are in the UK, the general rule is that, if you spend a working day working in the UK, then that is UK-sourced employment and subject to UK tax. The UK, as source country, does not give credit. 7.10 When an employee is seconded to work in the UK and works in another country for a day and pays tax there for that day’s work, the tax on that day’s work (in the country of source) should be offset against UK tax due on the same income (as the country of residence). The tax credit is only available if the UK taxes that income as well as the country of source. 7.11 For UK ordinarily resident taxpayers, the UK taxes on a worldwide basis, so credit would be due as taxes would be paid in the UK. If the taxpayer is not ordinarily resident, then UK tax would only be due if the income were remitted to the UK. How to calculate the credit 7.12 Calculating the UK tax on a slice of income which is doubly taxed causes only two calculations to be considered. The first is called the top slice tax, and this calculates the tax at the highest marginal rate in the UK. The second is the average rate method, and is effectively a proportion of the total tax due on total income, applying that average rate of tax to the doubly taxed income. The current practice is to take the top slice, and for many expatriates that will be at the higher rate of 40%. By definition, average rate tax must be lower than the top rate of tax, as the UK tax rates on individuals are progressive. Peter Ashby 30 6.2.07
CIOT RESEARCH PROJECT ON EXPATRIATE TAXATION 7.13 Calculating the foreign tax on the same, doubly taxed income creates the following issues: a) The UK tax year is almost always different to the foreign tax year so, unless the income is a payment on a specific date, then there will be two foreign tax years to take into account in order to calculate the tax rate applicable to the doubly taxed income. b) The other country may not tax it the same way, eg it could be income tax here and capital gains tax there. c) The countries may tax it at different times, so claiming a tax credit cannot always be done contemporaneously. d) There is the issue of using either the tax rate of the top slice of income or average tax rate in the foreign country on all income. e) When calculating the average tax rate in the other country, there is the issue as to whether you take foreign tax credits into account when calculating the numerator of the equation tax paid/taxable income. 7.14 To fully appreciate the problems, we should examine the problems above in a little more detail. a) Different tax years 7.15 The main problem here is that each tax year may not be affected in the same way. For example, if a US employee has a salary of £1m in 2005 coupled with a farm loss of £1m, he would pay no US tax; if he has a salary of £1m and a bonus of £10m taxed in calendar year 2006 but relating to 2005 and a salary of £1m and no bonus in 2007, then a UK tax charge on the bonus paid in March 2007 would be given a tax credit based upon three-quarters of 2006/7 and a quarter of 2005/6, whereas a bonus paid in May 2007 would be based upon a credit of three-quarters of 2006 and a quarter of 2007. The tax paid is identical in home and host country, but the credit could be different. b) Income taxed differently 7.16 This causes two sorts of problems. The first is where there are two different taxes applied to the same income. For example, some share scheme income is taxed as capital gains or as income, so it is possible for one country to tax the income and another to tax the same quantum as gain. Having capital gains tax involved throws up the problem that the spouses may make transfers to each other of assets which give no tax charge so a transfer from, say, H to W followed by a sale by W could give a tax charge on H as income and on W as gain. The follow-through rules of tax credit do allow for this, and the position is hinted at in Statement of Practice 6/88 paragraph 3 which outlines the principle thus: 7.17 “The principal requirement for the granting of credit … is therefore that the overseas tax should be computed by reference to the same gain as the UK tax. There is no requirement that the respective tax liabilities should arise at the same time or that they should be charged on the same person.” Peter Ashby 31 6.2.07
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Expatriate taxation - CIOT - The Chartered Institute of Taxation

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