I’ve been stranded in another country for 12 months – am I now a tax resident there?
The COVID-19 pandemic has dramatically complicated issues of tax residency
In an era where people were able to easily and regularly criss-cross the globe and maintained multiple residencies, the question of ‘what happens if I’m unable to leave’ was never one of concern.
However, the onset of the COVID-19 pandemic left entrepreneurs and individuals with high net worth facing significant challenges, such as the tax liabilities associated with inadvertent tax residency and accessing the exemption permits necessary for international travel.
In our latest Q&A, Baker Tilly International’s high net worth specialists Alison Wood from Australia, Nigel May from the UK and Ian Halligan from the US analyse how COVID-19 has changed cross-border planning and the challenge facing many of how and where they choose to continue to play out COVID-19.
Resident or not?
As well as considering their personal position, the risk of physical presence creating a permanent establishment tops the list of concerns as individuals stranded in foreign jurisdictions begin questioning whether they may have triggered residency accidently therefore leading to additional tax liabilities for them, their families and their corporations.
As Alison Wood explains: “When the pandemic hit, the Australian Prime Minister asked all Australian nationals to return home. As a result, many of our clients are now questioning whether they may have inadvertently created a permanent establishment for their entity and dragged it into the Australian tax net by adhering to that advice and by themselves being physically present in Australia.
“This is a fluid situation. We haven’t had the time or opportunity to plan as we would normally do; we now have to consider residency status on a more frequent basis due to new time constraints.”
The devil is certainly in the detail, as people have not had the freedom of movement that we have traditionally had and that has impacted on residency to a great extent, explains Nigel May, partner in the UK.
“One of the most fundamental mistakes we are seeing people make is assuming that rules that apply in one country will apply in another. The rules may be similar, but there are subtle differences and it’s this fundamental mistake that people are stumbling over,” says Nigel.
Many countries have implemented emergency measures to relax rules and prevent people from unintentionally breaching tax residency codes. But in many instances, legislation has been brought into effect ‘on the fly’ Alison stated, and not as well thought through as it could have been with the benefit of review and broad consultation. For some countries, guidance as to what the consequences are and, more importantly, how to mitigate those consequences has been lacking.
However, what is clear is that the true implications from a tax perspective of this pandemic will likely take time to play out as Nigel explains.
“This is tax’s version of ‘long COVID’. The issues we are talking about here are only going to emerge fully over the next few years as we uncover what people have done and where they have been – and the tax consequences will, inevitably, follow.
“There are a huge number of connotations to this situation that will take an awfully long time to play out. Within Europe, for example, it is relatively common for individuals who are residing in one European State to find themselves locked down in another. How that plays out will take time to uncover.”
The UK has the so-called Boomerang Rule, which centres around the concept of domicile. An individual born in the UK with a UK domicile of origin and who has been an expat and established a non-UK domicile of choice, will immediately regain UK domicile by becoming a UK resident. We have seen instances where clients who have been based long-term in the Caribbean, Australia and elsewhere find themselves – almost definitively – UK residents for the tax year to 5 April 2021 under UK domestic law, and – unless there is some mitigation given – have fallen back into the UK inheritance tax net as a result of the boomerang rule which their previously adopted domicile of choice outside the UK had provided them with significant protection.
No magic wand
When the pandemic broke, many foreign nationals wanted to return to their home country because of family reasons. But as Ian Halligan, partner from the US explains, it is not that easy.
“We’ve seen instances of foreign nationals here in the US who have been here for many years – with citizenship and Green Cards. When COVID-19 took hold, many made the decision to give up their Green Card status, their US citizenship, leave the US and return home. In most cases, to do that you need an appointment with the Consulate, and those appointments are not easy to get right now. So even if you want to break US tax residency, it’s not just a case of waving a magic wand. It’s a step process – and that process is not happening as quickly as any of us would like.”
This is a sentiment echoed by Nigel with him stating “there is no ‘get out of jail card’ at the moment”, while Alison explains: “I’ve had many conversations with HR Directors who have assignees waiting for them in various locations and airlines tickets purchased. But their personnel can’t get through the departure gate because they’ve got no Exit Permit. That’s been both challenging and a source of frustration for clients.”
“With ongoing travel restrictions, it’s no longer a case of counting the days and staying out of a country for X amount of time to avoid the tax pitfalls,” says Ian.
“Communication is key. Those tweaks, those potential changes in lane that Governments take, we need to alert clients to them, leading to individuals avoiding becoming ‘inadvertently stranded in places’, adding to their expenses dramatically!”
A client in Australia began planning for a transaction for which it was important that they were not a resident in Australia when the transaction was executed. Everything was going according to plan – and then COVID-19 hit. Not only did purchasing a ticket to leave the country became a challenge, but the client needed an Exit Permit to allow them to board the plane, which could not be guaranteed.
A silver lining?
Perhaps one silver lining of the pandemic is that it has forced us all to slow down.
“I am seeing Aussies who have been away 15/20/25 years who are now wanting to return home, and we have been able to help them plan for that”, says Alison.
“I always say, if you are coming to Australia as a permanent resident or citizen, we need 6-9 months planning to ensure you don’t fall into the high rate of tax at 47%. But of course, we rarely get the luxury of time to plan. Now that people cannot get here as quickly as they were able to previously, we have longer to think through those plans. While that’s physically frustrating, it affords us time to ensure the individuals can restructure their personal affairs and their investments before they inadvertently drag everything into the tax net.”