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Don’t believe the expat tax gossip

The too-good-to-be-true tale of cheap iPhones

Imagine your trusted expat friend, Charlene Charity, tells you this:

Hey, I see your cell phone is falling apart. Joe Teacher who lives down the road from me just got like five iPhones for half-off on Amazon. You should snag a couple!

This clearly falls into the category of “I’ll believe it when I see it.” So you hurry home, open your browser, wander over to Amazon (or better still, Amazon Smile, to be a little charitable), and find the exact iPhone in question on sale for a meager 3% off the original price. What’s going on here? You find 3% off instead of 50% off! What gives?

The problem with the iPhone gossip

After calling Charlene, chatting with Amazon support, and even a quick visit with Joe Teacher, you discover five problems with the iPhone gossip.

1. It was old info: The sale ended two weeks ago.

2. It didn’t apply to you: It was only for members of Amazon Prime.

3. It was a bad source: Charlene means well, but she’s not terribly detail-oriented. Remember that time she told you that in the local Spanish dialect that “embarazada” meant embarrassed? Boy, did she get you in trouble!

4. It was the wrong kind: While Charlene’s story had you drooling over the latest model iPhone, the expired sale you found was actually on an Android knock-off. It wasn’t even the right kind of phone. And finally…

5. It was not verifiable: Even if you thought Amazon had made a mistake and should honor the 50% off iPhone deal, you had no proof. You had no published article, old screenshot, or correspondence from Amazon that could support your case and get you what you wanted.

iphone

The iPhone gossip turned out to be pretty disappointing. Your friend, Charlene, isn’t evil and neither is Joe Teacher. The iPhone gossip just didn’t work out for you as planned. No problem. At least you hadn’t lost any money over it or broken any laws. With taxes, on the other hand…

The too-good-to-be-true tale of cheap taxes

We are all desperate for definitive answers about in which country (or countries) we have to pay various taxes, how much, and why. We’d ask colleagues, nationals, friends and even the neighborhood cat if we thought it could help.

While it is vital to talk to other expats about taxes, it’s equally vital to validate the information for ourselves. The stakes are too high. When it comes to acting on the wrong gossip here, we run the risk of breaking tax laws, facing back taxes, owing steep penalties, or even over-payment.

The problem with the tax gossip

The same five problems we had trying to purchase that iPhone apply here:

1. It was old info: When we first arrived in our new country, didn’t we all have people say something like, “Oh, you’re gonna miss peanut butter,” or “dental hygienists,” or “fast internet”? Within weeks we discover that that info was outdated. Those things that didn’t exist 5 or 10 years ago are readily available now. Times change. The same happens with tax regulations. New treaties are written, new laws signed, and new methods applied.

In our first post about taxation, we mentioned a pilot who was taxed for spending more than 60 layover nights in a Hong Kong hotel in a calendar year. That 60-day limit was a law change from one year to the next.

Imagine how much could have changed since your expat friends or organization did the research into taxation where you are now living. Look at the price of that iPhone for yourself before you click “Buy.” Look at your host country’s tax regulations for yourself before you decide not to pay your taxes.

2. It didn’t apply to you: This is easier to slip into than most realize. Joe’s income tax may be treated very differently than Charlene’s. Maybe Joe is paid by a national company while the other is paid by their American nonprofit. Maybe Joe is considered self-employed, but Charlene is an employee. Or maybe both of them get paid by their US based-charity, but Joe’s employer owns a small office abroad and Charlene’s doesn’t. Any of those distinctions could change their income tax requirements, depending on their relevant tax treaties and local laws. Joe could easily follow Charlene’s tax-paying advice and never know about these seemingly insignificant differences. Come audit time the word “insignificant” doesn’t exist.

Remember how that Amazon deal only applied to Prime members? Well, dual tax residency is a lot more particular than that. Is Charlene from Canada? The same rules don’t apply. Is Joe an Australian? It is a totally different situation.

3. It was a bad source: The US tax preparer your dad passed down to you probably will not know how to do expat taxes (worse many “don’t know that they don’t know”). Michael tells the story of going to eleven tax preparers in Italy and in the USA. Seven gave him a “definitive” answer that was wrong (and either didn’t know about the tax treaty or refused to read it), one studied his tax situation for three weeks before giving up and referring him on to an international tax specialist, and three knew of the treaty and how it applied. What a mess!

4. It was the wrong kind: I often forget that there are different kinds of taxes. I know about social security, sales taxes, etc., but I often forget all the kinds of income taxes there are. Many of them are mentioned in the income tax treaties (wages, dividends, interest, royalties, etc.), but a few kinds aren’t mentioned at all (often US tax-protected funds like 529s, IRAs, etc. are not touched upon). Even if Charlene is accurately telling you that she didn’t pay any income tax on a certain transaction, that doesn’t mean it applies to us. She may be talking about capital gains, while we’re thinking about dividends. That tax tidbit we were just given is a red herring and could result in a painful tax penalty.

5. It was not verifiable: This indeed is an interesting issue. Have you ever been confronted with, “I heard of someone who won a court case,” or “…someone who was told by the local tax authorities that…,” or “…someone who got away with….” I’m not sure who that “someone” is, but he or she sure gets around. We’ve all heard stories like this that were somehow missing some key facts or not verifiable. They may be true, but they may not.

Kermit

Another one that seems to come up often is that a reputable tax preparer or even a local tax official states that US expats don’t have to pay income tax in this country. Our response should probably be, “Great! So do you have that in writing?” If it sounds too good to be true, it probably is, right?

Getting these things wrong will cost you more than an iPhone

Vagabond Finances is all for legal tax avoidance based on solid research and impeccable ethics. The expat tax gossip rarely comes close. In fact, it may very well put us in the category of tax evaders rather than tax avoiders. The difference is significant.

Charlene and Joe are great friends of ours, but everyone makes mistakes. That iPhone didn’t work out quite as we’d hoped and their tax advice might not either.

Our counsel here at Vagabond Finance is not to believe the expat tax gossip (or even Vagabond Finance!) but to use it to spur yourself on toward better research, solid information and the advice of financial experts.

Mark Mason

Missions is my calling. Finances is my hobby. Helping you is my pleasure. "Mark" is my ultra-ego.

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