7 Myths about International Taxes

Love and taxes... two things that people complicate much more than necessary. The reason for this being that a lot of people who don’t completely understand taxes (and love, for that matter) try to advise others about them. Over generations, this has caused many myths and confusion surrounding taxes.

What people don’t realize is that tax laws are ever-evolving, so something that could have been sound tax advice 10 years back could be of absolutely no value today! Unfortunately today many people, even the younger generation, still believe in these old ‘myths’. With the increase in acceptance of the concept of working nomads and location-independent businesses, these old myths need to be busted.

Below we have included the seven most common misconceptions about international taxes. Let us know your thoughts on them when you are done reading!

1. It’s better to NOT make more money to avoid paying more in taxes

‘The higher the income, the more the tax’ is the general rule in taxes, but it is not necessarily always correct. There are a lot of ways to avoid paying higher tax (legally!) by means available through the tax laws themselves.

Taxpayers many times have no idea of the deductions and set-offs available to them from their taxable income. A lot of digital nomads fail to deduct expenses from their income, which can be legitimately claimed as business expenses. Location independent businesses also cost a lot of tax claimable expenses, which are different from personal expenses of the owner. It is best practice to keep separate invoices and payment systems for your personal and business expenses, to have a clear difference and better claim of expenses.

There are a lot of tax saving investment schemes which are available to individual taxpayers in many countries. These schemes are created to boost investments and provide the dual benefits of tax savings and tax free returns. Make sure that you are aware of such schemes in the country where you pay your taxes! In progressive tax countries, where tax rate increases with the increase in income, it is very important to use these deductions and investments to avoid higher tax margins.

For digital nomads, there are even more options available to develop their international tax strategy. Getting their company registered in a low or zero tax country is something every nomadic businessperson should consider - just ask us if you want more information to get started! 

To put it simply, while everything around me kept changing – different countries, food, accommodations, languages, people – the only moments where I could find stillness was when I made time for myself and looked inward. Taking care of myself meant that I was able to then face all possible challenges that full-time travelling brings about and simultaneously grow a business, remain accountable and responsible, and maintain my productivity.

2. You can’t fix tax errors

A lot of people believe that if you made an error in filing your tax return, it is irreversible. This causes a lot of people to forego deductions and benefits available to them which they didn’t know before or forgot to claim.

However, this is far from the truth. You can file an amended return if you find any error(s) in your return. Every country has a time limit within which an amendment return, or rectification return can be filed, so beware of this before you go asking your tax office for an amendment from years ago.

Even if you find out that you have paid less tax than you should have or you forgot to disclose income, it is better to notify the tax authorities on your own by filing an amendment return, rather than having the authorities scrutinize your taxes themselves and find out. By doing this, you will have to pay a penalty which is better than stricter legal action.

These amendments are normally done only when you fail to provide all personal and financial information, or if you forgot to claim deductions. You do not need to file an amendment return for calculation errors. These errors will be automatically corrected by the tax authorities and conveyed to you.

If you have paid higher tax than you should have, you can file a refund request. Keep in mind that every country has different procedures and time-limits for this. 

3. Only the rich and wealthy can access tax loopholes

We often hear people saying that only the rich can exploit tax laws to their benefit. While this may have been true a few years, it no longer is with the increase in knowledge availability and sharing. Nowadays, everyone has the access to the strategies and loopholes in the tax system.

Unlike normal people, wealthy people don’t start thinking about their taxes at the end of the year. Rather, tax planning is a continuous process for them which is tied to their business plans. Similar to them, with a good financial advisor behind your back, you can also develop your business strategy, which will take taxes into account from day one.

The majority of wealth from the rich is invested in shares of their own companies. Their majority income sources aren’t salaries or personal profits, but capital gains. The benefit of having their income in gains is that capital gains, especially long-term capital gains, are taxed at lower or nil rates. Along with that, long-term gains can be planned and deferred in different years to avoid paying high taxes at high rates in a single year.

Deductions used by rich people such as donations and tax-saving investments can also be used by everyone. Gift exemptions are a good way of lowering your taxes which doesn’t require a complicated procedure. 

4. You need a complicated structure to lower your taxes

Another urban legend is that you need to have a very complicated business structure to pay less tax. One thing people should know is the difference between tax avoidance and tax evasion. Tax avoidance is using smart ways to find loopholes in the law itself, so by definition it is legal. Whereas tax evasion means paying low taxation by illegal means, such as hiding your income or showing false expenses.

Tax evasion needs complicated structures to fraud the tax authorities. Still more often than not, tax evasions are caught by authorities and is certainly not recommended. What you SHOULD do is plan your taxes properly without crossing the line of legality. When you are playing within the rules, you don’t need to have complicated business structures.

Structural planning is required to select the best possible way to operate your business, but it doesn’t depend solely on taxes. There are many factors to be considered before selecting your business structure, which has to be done on a case by case basis. Sometimes the cost of creation, administration, and the legal compliances of a complex business becomes more than the tax saved by it.

With the help of a professional international tax consultant, you can find the right structure, one that isn’t too complex and that immediately starts affecting your business while still lowering your taxes. 

5. If you live in a high tax country, there’s no way to save on taxes

This myth couldn’t be further from the truth.

Ever noticed that politicians, celebrities and wealthy people from high taxing countries still are able to pay very low taxes even though they presumably live in a high taxing country?

We guarantee you; even high tax countries have tax loopholes. In fact, the more developed a country’s tax legislation is, the more ways it’ll have inside to reduce your taxes. Just to name a few; every heard of trusts or foundations or holding companies and parent companies?

And would you be surprised to hear that every major high tax country actually created their own ‘microstate tax haven’ so that the richest could simply set up shop in those microstates?

Think of Guernsey, Jersey for the UK, Puerto Rico for the US, Andorra between France and Spain, Monaco, Campione close to Italy and the list goes on.

Did you also know that there are several ‘high tax countries’ that offer flat tax rate to the ultra-rich – basically, they’re able to pay a lump sum to the government and then their tax bill is settled.

But tax reductions are not only available for the rich in high tax countries, there’s multiple tax credits available and even government grants within certain industries.

The point is there are multiple ways in high tax countries to lower your tax bill. No doubt about that. 

6. Only companies as big as Google, Amazon, and Apple can have international tax strategies

Whenever the words like ‘International Strategy’ are used, people automatically assume it's about giant multinational conglomerates, such as Amazon or Apple. But you as an individual business owner can also create an international strategy for your business.

For nomadic entrepreneurs who travel worldwide while growing their business simultaneously, it is not just an option but almost a necessity to decide on a beneficial tax strategy. If you are travelling all the time and you don’t plan your tax strategy beforehand, you may be subject to double taxation in different countries.

Most of the time, the strategies used by such big companies are based on their business model, markets, and geo-polity, rather than just taking taxation as a factor. They will be entirely different from the approach you need to take for your business strategy. As a digital nomad, your business will not be affected by those physical factors, as you only have to focus on the legal and financial aspects in the country of your strategy. 

7. You can’t get out of being double taxed

Double taxation occurs when the same income is taxed twice. It can occur either in separate countries if it is a part of international business, or in the same country but through different tax payers. An example of income being taxed twice would be when a company is taxed at a corporate tax rate, and then the dividend the shareholders receive again being taxed in their personal income tax.

In the first case of double taxation in multiple countries, many countries have entered into bilateral agreements with other countries known as double tax treaties. These treaties decide whether the income will be taxed in the home country or the country where income arises. Using these treaties, you can claim relief from paying tax in one country, or use a tax credit for payment of taxes in the home country.

In regards to the second case of double taxation, the rules are created in such a way that double taxation should be avoided as much as possible. But businesses can also structure themselves in such a way that they are not subject to double tax. For example, to avoid dividend tax, small businesses can structure themselves as sole proprietors, partnerships or as an LLC. Another option is to treat themselves as employees in the business, rather than an owner and take salaries. This will be taxed in your personal income but available as a business expense to your company. 

COMMENT

As you can see in this article, there are many different tax myths, both new and old, that people still believe to be true. But these myths couldn’t be further from the truth, and here at Wanderer’s Wealth, we don’t want you to be paying higher taxes simply because you believe these myths are the truth. With the help of a professional in the tax field, you will be able to easily create a personalized tax structure that works for both your lifestyle and your business, while simultaneously allowing you to potentially owe thousands of dollars less in taxes per year, or even more!

If you believe these age-old tax myths but want to get up to date with the times and get your business working for YOU, reach out to us at [email protected], and we would be happy to point you in the right direction that works best for you!