What does chasing the sun mean for tax regimes?

Now that flexible working practices mean we can all potentially make like swallows and follow the sun, what are the implications for national tax regimes?

Could the pandemic have made the long sought-after endless summer a reality? And if so, more prosaically, what does this mean for national tax regimes? Will we see a critical mass of economically active “swallows” build up over the next decade, leaving current tax approaches and regimes defunct??

Today, you don’t need to wait until retirement to become a swallow – that is, someone who follows the sun by having a second home somewhere, such as Cape Town, in the southern hemisphere where they spend the northern hemisphere winters.?Hybrid working is here to stay, and this enables an endless summer for anyone. People of any age and employment status can untether themselves from a fixed abode and routine to work from anywhere.?

Hit the road

Selling up and jumping into a camper van to meander across Spain and Portugal while still holding down a day job is now entirely feasible. With two rough years of a pandemic behind us, many people are seriously reviewing their place in the rat race and considering how they can improve their quality of life. An indicator of this is how the lack of flexibility around remote working is a significant reason why companies are losing people and failing to attract top talent.?

Technology-enabled collaboration and communication tools easily overcome geographic distance. And enforced working from home has demonstrated that remote working can be just as, if not more, productive than a bums-on-seats in an office approach.?

Tax perspectives

But what does this mean for today’s tax regimes? From one perspective personal tax is a contract between you and the state, where you contribute a portion of your salary to the state coffers to be spent on things such as education, healthcare and transport that benefit us all. However there are two sides to this particular coin. This is a complex topic with many issues coming into play. Space here does not allow for a comprehensive and exhaustive analysis of the nuances, but it is worthwhile to consider some of the more prevalent and contrasting views that come to the fore.?

For instance, given the “transactional” nature of the tax relationship, is it reasonable that by dint of your birthplace or acquired citizenship, you are required to contribute to the national resources of a country you don’t reside in? And yet, on the other hand, is it reasonable that you benefit from the shared resources of whichever country your camper van arrives in, without contributing to the building of those resources?

Shared resources

What about our individual obligation to contribute to resources we use? Is it reasonable that, thanks to your nomadic lifestyle and a smart, yet entirely legal, personal tax setup, you pay little or no tax at all, yet continue to benefit from shared resources anywhere in the world? The flipside to this is to ask whether it is reasonable for a country to deem your worldwide income, no matter where it is earned, as taxable in that country?

And what about retirement? Is it reasonable to live in one country for all your working life, and then retire to another country that hasn’t had the benefit of a penny of your personal tax?

Cat’s cradle

As it is, if you’re working in one country and are a citizen of another, there is a cat’s cradle of tax hoops to jump through that vary from country to country depending on each state’s foreign earning exemptions, double taxation agreements and changing rules during the pandemic. The messiness of the rules and regulations seems to indicate that the current framework for taxation is already taking the strain as the world changes.?

For instance, today’s rules could result in the country of your birth claiming the difference in taxes paid if you are living, working and paying tax in a country that has a lower tax rate. (Of course, it is highly unlikely that any tax office will come knocking to pay you a refund if it is the other way around!) Another example is that a single day spent in one country instead of another could cost you, or save you, significant amounts. And, entirely legal loopholes such as the?UK’s non-domiciled status rules?could save you, but cost your country of residence, millions. Clearly this degree of complexity is beyond most mere mortals and trying to keep abreast of changes in the rules will require the assistance of a dedicated tax expert.

If economically active swallows are the future of, or at least a significant proportion of, society, national tax regimes are surely going to have to change dramatically to adjust to this new reality. If they don’t, countries face a very real threat to their national budgets and ability to pay for running the country.

What is a reasonable new approach that is fair to the taxpayer and to the country whose resources are being used? Do we need to rethink now antiquated tax principles and disciplines entirely?

Roving tax

A start would be to make calculating and paying taxes far less complicated, especially if you don’t fit into a neat box of being a citizen of the country where you work and from where your income originates. And here’s a left-field idea: what about a pay-as-you-go personal tax system that is tethered to your current location? So linked to the nation whose resources you are using, and delinked from what is, in today’s world, an arbitrary relationship with your country of nationality or the origin of your income. An alternative reality is to scrap personal tax and replace it with a spend-based tax such as VAT. So you effectively pay tax where you are, for as long as you are there. Or are both these options effectively the same?

As published in AccountingWeb - 9th June 2022