As children, we were all too often gullible and so vulnerable to our parents’ often wicked sense of humour that really served to keep us in check. I remember the hideous ‘Monster’ that lived under my bed, waiting patiently for my feet to touch the bedroom floor after I was told it was time for me to sleep; or the ever-present Boogie Man that would be everywhere all the time, ready to pounce on unsuspecting children who were not home before curfew.
The monster under the bed was real and the Boogie Man was definitely going to get me, of that I had no doubt. As an adult, I am fairly sure that the Boogie Man also moonlighted as my boss in at least one or two companies in various times …
Joking aside, there really is a Boogie Man for adults and he’s busy collecting taxes. The analogy to pouncing, unsuspecting children and curfew really does apply as far as I can see. You can’t avoid death and taxes, so they say – and so enters the Grim Reaper and Boogie Man.
Almost every day I am asked questions that I am absolutely not qualified to answer. And it’s about tax. Specifically, how tax affects expats (or non-expats) and international companies (a company not in your country of residence). I do what most people in my position would do and I ask the experts – the brave souls that have made a career out of understanding the Boogie Man and possible ways to reduce the pain of dealing with him (or how to get home before curfew to avoid pain altogether).
But I’m going to tread where I should not and write down a few common themes that come up so frequently when the Boogie Man is mentioned. These themes, or perhaps warnings, might just help the unsuspecting child within to be a little bit more street smart and therefore reduce the fear, a bit, of the unknown. These themes and warnings are, as always, my own opinions based on what I have seen the past 20 odd years doing what I do – let me present it as Q&A with the Boogie Man:
Q1: I don’t live anywhere. I am an international traveller, working and traveling from country to country, so I don’t need to pay taxes anywhere. Right?
A1: Boogie Man says … wrong. Basically, everyone who works has a tax residence or, even worse, will be challenged by the Boogie Man to prove that they do not have to pay taxes in their home (origin) country. Common test for this include where you are ordinarily resident, where your spouse and children live and go to school, where you have the strongest ties, where you spend most of your time and, so it goes.
(My philosophy here? Better to pay taxes somewhere as resident, than try to be non-resident anywhere, pay tax nowhere, and potentially have a whole bunch of Boogie men from different countries chasing you)
Q2: I own a company in Sandy Beach Offshore Islands. The income is earned offshore, and I don’t bring the money back home. So, I don’t need to pay taxes here. Right?
A2: Boogie Man says … wrong. And he will whack you with his big ‘tax evasion’ baseball bat – very painful indeed. Most countries tax their residents on worldwide income, the Boogie Man doesn’t care where the income is earned.
(Some countries use a territorial tax system (tax only on locally sourced income), but these are the exception not the rule).
Q3: I have a cousin who lives in Sandy Beach Offshore Islands and I just use his company’s bank account. Even though it is my money. The Boogie Man can’t get me for that.
A3: The Boogie Man says … wrong. This is your money in a foreign company’s account, you are the beneficial owner and likely control the money yourself.
(Same principle as in Q2)
Q4: I have a company in Sandy Beach Offshore Islands that I use for invoicing all my foreign clients. It is an active trading company and I trying to grow that business, maybe to sell it one day as a profitable ongoing concern. The Boogie Man won’t get me, will he?
A4: Boogie man says … maybe not. Some countries allow tax deferral so that you can actively grow your business in foreign countries with say territorial tax systems, and not have to pay tax on it immediately when the profit is earned. Instead, tax may be deferred until repatriated and the pre-tax profits can be reinvested to make the foreign nest egg grow bigger and faster.
(This is one question for the brave souls I mentioned above. While the principle is simple, the application can be complex and needs expert hands for guidance. If done correctly this can be very useful for attracting investors, exiting the business, growing international markets quickly and so on. It doesn’t work for all situations in all countries as no two Boogie Men are the same).
Q5: Setting up foreign companies is just simply dodging taxes and is only for criminals who want to hide money. There is no other benefit. Isn’t that right, Boogie Man?
A5: Boogie Man (and perhaps even the Grim Reaper) says … wrong. Many tax authorities have clear guidelines for local entrepreneurs setting up foreign companies and some have even included detailed sections on how to report income and deal with repatriating or reinvesting profits. Companies do set up such foreign entities to put them on equal footing with other companies, to give some tax breaks, develop R&D facilities, safeguard their IP, partner with foreign companies to open new markets, reducing their business risk to their head office company should a foreign venture not go well, and so the list goes on.
(For the serious entrepreneur and company director, tax is but one part of the equation when looking at global markets albeit an important one. Sadly, the cases we see in the press everyday highlight the companies and company directors that got it wrong and perhaps really were trying to evade taxes. I am always wary of anyone that proudly states they want to set up overseas because they pay too much tax).
I have no doubt I opened a can of worms with my treatment of the Boogie Man here; and I may well have it all wrong when it comes to my analogies and comments, but I feel obligated to write it down nevertheless if, for no other reason than to point out some common misconceptions about international tax as I see it, and maybe create some discussion.
I restate that I am no tax expert. I don’t offer tax advice – never did, never will. But I have seen enough Monsters and Boogie Men in my lifetime to know a little about their nature. And I also have the utmost respect for the brave souls who look into the eyes of the demons every day and fearlessly assist unsuspecting individuals to find their way home.
