Here’s Why You Need to Learn Tax Before Working Abroad

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Moving to another country to study or work can significantly expand your horizons and take advantage of opportunities you might not find locally. Many people are immigrating for better job opportunities, higher wages, and access to better education.

If you’re interested in expanding your horizons abroad, getting to know your target country is crucial. This step includes researching the country’s culture, language, and customs. The job description and requirements are also worth noting if you want a job there.

Remember that each country has its own “charm” that would, otherwise, be vastly different from the culture you’re used to. Do thorough research to help minimize culture shock and adapt quickly to the new place.

Before making the switch, there are many factors, from food and living costs to traditions and lifestyle. One significant factor that hopeful expats often overlook is a country’s tax policies, which can significantly impact finances. Understanding your target country’s tax laws can help you make informed decisions about your move and ensure that you’re well-prepared for this exciting new stage of your life.


How Are Taxes Applied When Working Abroad?

Your tax residency status deciphers which country taxes you and which parts of your income are taxable. However, many countries have different standards for what they consider a tax resident.

Countries can also vary in how they apply taxes, which parts of your income they tax, and even what constitutes a year—calendar or a fiscal year.

Many countries generally apply the 183rd-day rule, where they consider you a tax resident of the country once you spend 183 days, the majority of the year, there. However, countries like the U.S. and Switzerland have their own rules. These varying standards and definitions can be a tax accounting nightmare and lead to your income being double-taxed in certain situations.

For example, if you’re working remotely for a US-based company but are not a citizen or tax resident, you might still need to pay withholding taxes on U.S. source income on top of your local income tax. The amount taxed or any exceptions depend on any tax treaties between the U.S. and your resident country.

Tax management can be even worse if you’re doing certain types of freelance work. Freelancers must be aware of all their clients’ income tax laws on top of their own to ensure compliance.


5 Reasons to Learn Local Tax Laws Before Working Abroad

Because of the interconnected and often confusing way countries apply taxes, you might run into problems. The trick is to start learning more about them before working so you can prepare in various ways.


1.    Comply with all requirements

Proper tax compliance means you don’t need to worry about any penalties or fines associated with tax filing errors. Errors can go unnoticed for years, quietly accumulating until found. Unfortunately, when found, the government can hit you with a hefty fee that’s often retroactive. In severe cases, improper filing of taxes can cause the country to deport you on the grounds of tax evasion.

You’re likely working abroad to take advantage of higher salaries and better job opportunities; however, making tax errors can counter both goals. The added fines can quickly eat into your income. Your employer might let you go, causing you to return home with a criminal record, making prospects even worse in your home country.

You’re likely used to how taxation works locally, but since a different country has another system, it’s easy to make mistakes after moving. Emigrating for work should be a grand new chapter in your life that shouldn’t start with easily avoidable errors that will only hurt you down the line.


2.   Maintain credit score

Not paying your taxes on time or failing to comply with tax regulations can negatively impact your credit score. Taxing bodies can report non-compliance fines and penalties to credit bureaus after a certain threshold or when they need to file for a claim on your property to make up for the unpaid tax.

Your credit score determines your ability to make loans and credit cards. It can also prevent you from buying specific properties, so maintaining a good credit score is crucial if you stay in a country long-term.


3.   Maximize income

A clear understanding of tax laws can ensure that you can take advantage of any tax benefits available. For example, tax laws in Australia allow residents to enjoy no taxes on their first AUD 18,200, along with lower tax rates than non-residents past that amount. Certain benefits require an application before the government applies them, even if you are eligible.

Working abroad can be challenging; the least you can do is ensure that you’re receiving everything the government owes you by learning of any tax benefits for which you’re eligible.


4.   Avoid double taxation

As previously mentioned, it’s possible to have your income taxed twice – once by the country you’re working in and once by your tax residence. For example, if your company’s government has a 30% income tax and your home country has a 25% income tax, you’re receiving less than half your salary – unnecessarily so.

Tax treaties, also called Double Tax Agreements (DTAs), are written decisions between countries to resolve the issue of who gets to tax which parts of a foreign agent’s income. Your income tax rate can vary wildly depending on which country has these rights.

It’s important to note that in some instances where you don’t have enough time to qualify for tax residency, even with a DTA, you might have to pay double taxes for at least the period before your tax residency changes.

Additionally, if you’re looking for work abroad to avoid a high local income tax rate, it’s best to ensure that your target country’s rate applies to you. If a DTA is present but favors the country with the higher tax rate, you might receive a much smaller salary than expected.


5.   Create better financial plans

You can use your knowledge of local and foreign tax laws to better plan your finances by making the most of any tax deductions or credits available.

For example, some countries allow you to claim deductions for work-related expenses such as travel and accommodation. On top of DTAs, some countries offer foreign tax credits to offset your tax liability by the amount you’ve already paid in taxes abroad.

Different countries also tax investments differently, so you can use your tax knowledge to select tax-favored savings and assets to maximize your capital growth and minimize tax liabilities. You might even leverage your understanding of two different tax systems, your original and your target country’s, to find investment vehicles with minimal tax burdens from both countries.

Knowledge is power, and understanding the rules that affect you is crucial in making a thorough and secure financial plan.


Tips for Learning Foreign Tax Regulations

Learning the intricacies of tax regulations is a challenging but often rewarding endeavor, as with most legal matters. Here are a few tips to help you with the process.

1.   Use the right resources

When learning about taxes, it’s best to use materials straight from the source. Many tax authorities have websites with details on tax regulations. Laws can change, and third-party guides might be outdated and no longer accurate.

If you are using a third-party article or roundup, ensure that the details are updated and accurate. This tip also extends to tax treaties that might affect you.


2.   Hire a professional

Legal writing is often confusing for the average person, which is where tax professionals can provide their expertise to demystify any legal jargon. They can also offer insights to minimize tax burdens and improve financial plans.

Some services offer guidance through every step of working abroad – from finding and recommending countries and job opportunities to applying for your work Visa. These services can be beneficial as they streamline the process and directly inform you of everything you need to prepare.


3.   Consult with other expats

The information you can find online often differs from the realities of working abroad. Other expats with experience working in your target country can share their experiences and prepare you with a more grounded idea of working in that country.

There are a lot of websites and forums where expats share information, tips, and stories about working abroad. If you have a job offer, you can use their sources or directly ask about their other foreign employees and their experiences working with the company.


The First Steps Towards Your Future

Working abroad is an exciting chapter in any professional’s life, but it requires know-how and thorough planning to pull it off successfully. Understanding your target country’s tax laws is vital for anyone who wants to work abroad. Depending on how thoroughly you appreciate their complexities, these laws can significantly hinder or benefit your foreign endeavors.

With a proper understanding of foreign tax laws and regulations, there’s no reason why you shouldn’t enjoy the opportunities and benefits that other countries offer. Take the lead, tread carefully, but remember to enjoy!

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