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Is Costa Rica no longer a “Tax Haven”? Written for Brits, but some points apply to Americans.
Expat Taxation Issues
By Andrew Wood — Your Money —12 Nov 07
Tax mitigation strategies can come in many different forms. They
can also come from diverse sources of wisdom. One of the
earliest recorded examples of the existence of professional tax
advice being given can be found in ancient Sanskrit writings,
which continue to be observed in some regions for probably very
prudent reasons.This counsels the need to protect oneself and possessions by
keeping them out of harm’s way and at a suitable distance such
as: “Keep five yards from a carriage, 10 yards from a horse, and
a hundred yards from any elephants. But the distances one should
keep from predators cannot be measured.” Horses and carriages
may no longer present a problem to foreign workers and property
owners, but other predators lurk.Consider the EU Tax Directive for example. This was created two
years ago after EU member tax authorities decided to co-operate
by exchanging information about investors in each member
countries to a central database. Certain countries objected on
the basis that their businesses and ultimately economies would
be adversely affected. Obviously jurisdictions such as the Isle
of Man, Jersey, Guernsey, Switzerland and Luxembourg among
others would be concerned as they are world-renowned financial
centres. It was thus decided that a withholding tax would be
imposed on interest paid to account holders for those countries
that decided not to exchange information.There are ways to obviate this. Each individual is unique and
thus you should seek professional advice if you feel you want to
find out about your own situation.It is true that there is growing collaboration among colleagues
in tax departments in the US, Canada, Australia and a host of
others. Nationals of these three countries, along with UK expat
communities scattered around the globe, continue to be monitored
and examined.Tax mitigation and inheritance protection stratagems, like all
other issues of asset protection and indemnity, must always be
revised and rebalanced on a regular basis to ensure that
investments and family unit interests continue to stay abreast
of the times and ahead of ever-changing markets and taxation
issues. A quarterly review of your total situation is a good
start.Tax issues and effective measures to negate problems need not
necessarily be complex or expensive to implement. Neither should
they be dismissed as immaterial or unnecessary.One area of concern is whether private banking is a safe method
to conduct transactions. This is an area where fiction can
easily merge with fact and vice-versa. Having won a number of
Supreme Court cases in various US states, American expats
holding assets in the favorite offshore tax havens of Costa
Rica, the US Virgin Islands and formerly safe harbours of the
Caribbean, will find that the banks there are far from private.
UK tax inspectors have now been granted similar powers to force
banks to disclose confidential account records of individuals
who hold deposits above certain limits. Smaller investors are
still potential subjects of these scrutiny exercises. though
perhaps down the queue behind the larger account holders now
being checked.A recent change in the “dead day” rule has been applied in the
United Kingdom. This rule relates to the treatment of the days
you arrive and depart from the UK. Until recently the days of
arrival and departure did not count as days in the UK for
taxation residence. Recent changes have reversed this. It may
seem a little insignificant but if you travel many times per
year to the UK you could end up exceeding the time period for
qualifying as non-resident for tax purposes. This is an average
of 90 days per calendar year and no more than 180 days in any
single tax year (April 6 to April 5). Similarly if you have an
extended visit to the UK and plan the days exactly, you could
get caught out if you consider the days of arrival and departure
as days outside the country.Inheritance taxes (IHT) are also a popular discussion point and
raise many issues. Numerous British subjects seem to think that
they can “resign” from the UK and are immediately non-domiciled,
thus being exempt from IHT. This is not so. In a number of cases
they have not actually severed all ties from the UK and leave
such things as owning a property, belonging to a club or society
or perhaps having a bank account. These simple facts will ensure
that you remain domiciled. Many people are also not aware that
if you have a foreign spouse who is not domiciled in the UK,
your estate will be subject to IHT. There are ways to minimize
this liability.The message is clear. Engage a professional adviser to review
your affairs and keep you abreast of all the developments
affecting you as an individual.The basic tax fundamentals between Brits and Americans are different.
Americans are taxed on their worldwide income – period. Brits are not.
I have always suggested to American friends that whatever they are doing with their money, and wherever they bank that they should assume their affairs are being reported even when they are being ‘assured’ that they are not.
I know for a FACT that information was shared with American authorities when I worked in offshore investments in the Cayman Islands in the 90’s and at that time it was supposedly all ‘confidential.’
There has been no confidentiality investing ‘offshore’ for Americans for as long time and less than ever for everyone else.
Scott Oliver – Founder
WeLoveCostaRica.comUncle Sam (or actually the Federal Reserve) always has their hand out…or perhaps better put, in the pockets of every American (including me!) I even have to pay a “city” tax on wages that I earn while working inside a particular city. It’s where my office is located, but I do not actually reside in the city, yet am taxed 1% anyway. Go figure.
Well, if you don’t want to pay for the city services you use you’ll need to find someone to pay your share. In the meantime, please don’t drive on the city streets, expect police or fire protection, or use the toilet at work.
Edited on Nov 13, 2007 13:50
David, businesses themselves within a city and county pay enormous amounts in taxes that supposedly go towards the infrastructure and services provided in that city or county for the supposed priveledge of having a business in that town. The sales tax, property taxes, etc. in those cities or counties the same. To scold someone for complaining about a city collecting an income tax in my opinion is just wrong. Why intelligent people ever allowed their government to start collecting an income tax is beyond me. All that allows governments to do is expand their size and the more that happens the less control the people have. That is a simplistic view of course, but it’s not rocket science either.
dk, you are certainly correct that businesses pay taxes which go to support municipal services. So do city residents and homeowners. The problem is that they don’t pay enough taxes to cover all the services that are needed, and some of those who benefit (non-resident non-taxpayers) pay nothing. You’re welcome to complain about income taxes, but somehow somebody has to pay the bills. And if the income taxes on non-resident wage earners in question were abolished then those who are not taxed on property in the municipality would benefit without contributing. And property taxes would have to go up.
And, by the way, what possible more equitable way can you think of to impose the burden of taxes than by taxing current income? Seniors all over the U.S. are in danger of losing their homes because property taxes required to pay for municipal services are beyond their now-limited means. If they were taxed only on current income, their ability to pay would be commensurate with their current means rather than upon their former condition of affluence which has long since become irrelevant.
First of all I would argue that if you eleminated government waste you could eleminate personal income tax completely. As to the issue of a city imposing their own income tax seperate from State and Federal, my argument against that is that when you come into a city that you do not live in, almost everything you do within that city is already taxed. If you are driving a car, you have paid taxes on the gasoline you are using. If you buy any products in that city, eat out at restaurants, go to a show, etc. you are paying taxes on each of those items. So the non-resident wage earner is already paying a good portion of their earned income in different forms of taxes to the city they work in. So it is not an issue of them benefiting without contributing. They are paying for the benefits they receive within that community. The company you might be working for in the city that you do not live in is already paying an enormous amount of taxes for having that business within that city. I just do not buy the argument that a city needs to tax personal income. The optimal word there is “need”. Again, with most cities as it is with States and Federal government, cut the waste and you would have a suplus of funds.
Dkt2u the sun must be getting to you down there! The US government cut the waste and tax us less LOL! You mean run government like one would run a profitable, healthy business? The central bankers make far to much money just the way things are….
Remember when personal income tax was supposed to be temporary? During WW1 I believe. Once they start, they never let it go. Like tolls on the bridges, until they are paid for…
Edited on Nov 15, 2007 18:36
dk, the problem with the strategy of cutting all the waste in government spending lies in trying to define it, so I ask you, just what would you propose to cut on a municipal level? Please give us a list of the ten or so things you would be most willing to do without and we’ll see if we can form a consensus. Heck, maybe we can start a movement.
In fact, I’ll go first . . . I’ll nominate police departments (we can all just carry guns), the fire departments (there’s no economic justification for them), streets and roads (everybody’s driving 4wd SUVs anywway), public water supplies (we all drink Perrier now), public sewage systems (just do it on the lawn), solid waste removal (that’ll get us to reduce, reuse and recycle), public health (if you don’t like food poisoning, don’t eat in the restaurants), education (today’s fourth-grader ain’t gonna be my gerontologist), and a couple more I’ll think of later. Now, what’s your list?
And now that we’ve eliminated the waste in government, you can recoup that one percent of your income (fully deductible on your federal income tax return, by the way) that’s so crimping your lifestyle and crushing your dreams.
And, dk, I’ll add one more dimension to the question: How, exactly, do you know that there is any significant waste in government? Please cite us some facts. What specific things does your municipality do that you know to be a wasteful or wastefully done, having examined the numbers? How much does it add up to? Please give us a specific number.
Alfred, I’m not quite old enough to remember when the federal income tax was supposed to be temporary but, like many ideas that we love to hate, it met a need then and now. Can you imagine how the United States would be today had the North not had the draft? Can you imagine how the world would be today had we not had a military draft in (say) 1916 and 1942? Can you imagine the United States today as it would be without the Interstate Highway system, the Tennessee Valley Authority, or the western dams?
And I’ll reiterate my earlier assertion that, much as we love to hate it, a current-year tax on most recent-year income is the only practical means of imposing a fair and equitable system of paying for public spending which, unless you’re really serious about shooting it out with the muggers (I mean you, Alfred), is the only way to pay for public services.
Edited on Nov 16, 2007 05:15
Libertarian politics intrigue me and when someone starts talking about eliminating the IRS my ears definitely perk up. However unwieldy big government becomes it still seems to offer more protection for the Volk. It’s either the Fed’s or big biz, talk about the lesser of two evils? It seems it’s the central bankers who have us all by the b$$$$ going back to Jekyll Island and beyond right to the present moment. Here’s some info on government waste as well as some classic liberal critique;
http://www.freecanadian.net/articles/grace.htmlhttp://www.nader.org/template.php?/archives/776-The-Unanswered-Grace-Report.html
Who’s right or wrong?
Okay, Roark, I’ll go along. Just what would you do with Social Security? Specifically, what is your plan to pay the benefits now being received or about to be received in, say, the next thirty years by the Baby Boomer generation?
And how is it that those benefits, or maybe you’re referring to the bureaucracy that administers them, constitute waste in government? Are you suggesting that it’s wasteful to pay those benefits to non-productive members of society? If yes, maybe we should just begin collecting icebergs, eh?
Good points, David, good points indeed. I don’t want to abolish income tax. The point I was making, was that taxation always starts out with a problem that needs to be solved. Once it is solved, they never stop the revenue stream. They just divert it to other and new programs. I don’t disagree we need an income tax, or other forms of financial support for government. I would like to see the government become more efficient, and use our tax dollars wisely, by not granting funds to study ridiculous, unfounded “scientific” projects and such. Pork barrel spending is another joke.
I know you were a former public employee, and by all accounts most probably a responsible and diligent public servant. And I thank you for your service to our nation. There are others who goldbrick and should be taken to task, I know a few. You can’t deny governmental employee waste and freeloading exists.
Essential government services, like the ones you mentioned, are just that, essential. We need government to protect and defend its citizens. That is their primary job.
While I do not expect to be holding off the muggers with my own firearm, The police can’t be everywhere, and usually show up after the crime has been committed. We are somewhat responsible for our own security.
We have a volunteer fire dept. where we live, and it is amazing that the commitment of volunteers rivals that of the paid depts. elsewhere. I don’t think it works that way everywhere, but it is nice to know it can.
We can’t rely on government to supply “womb to the tomb” services to us. Look what they’ve done with Social Security and Medicare. The new Medicare prescription plan is already in trouble. The Social security system was supposed to be a trust fund. When they raided it, and put it into the general fund, it became an IOU funded by younger workers, who may never even see benefits by the time they retire. Birthrates are down in the US, and we need more taxpayers into the system. Hence the need for mass immigration. They do not run large programs well. They need new ideas.
I guess what I’m trying to say is, there is a perception we are overtaxed and under-served in the US. Some countries like Norway feel they are getting a good bang for their buck with their socialized system. The problem here is, we can’t make up our minds. We want capitalism with socialized benefits. It just ain’t gonna work.
You also can’t have government, which adds nothing to the GDP, be one of the largest employers in a country either. The burden gets harder and harder for business and the middle class to bear.
As far as any answers to the dilema….I haven’t a clue. Just some suggestions. A flat tax based on all income in that year. No deductions, no loophole, no nothing. A citizens review board made up of people from every walk of life, not just the academics. All government programs, and pork barrel spending should come under their review. It will take decades to perform this, but it is a start. Fix the programs that are in place, like SS and Medicare. Make sure we can fund these promises that were made to us. Take a look at our foreign policy and see if it benefiting us, or if it is just another boondoggle of wasted spending on client nations. While we’re at it, look at the benefit, if any, of sticking our nose everywhere around the planet to nation build and spread Democracy. It may be a noble cause, but should we really be doing it.
We have to take care of our own first, with as little money from us as possible, so we can have a better life. The above suggestions, are only that. They may be a little simplistic and maybe a little crazy. They are just my thoughts. And like most thoughts, they are subject to change.
I’m sure this will endear me to everyone. As a future expat in CR, I believe we should pay our fair share. We were not born there, did not contribute all our lives to the country’s GDP, and we will receive some subsidized government benefits. The CAJA, for example. A simple tax on our SS payments, or an alternative minimum tax should be imposed. We can’t expect a free ride just because we have relocated. I think it is the responsible thing to do.
David, I hope you don’t think I was picking on you in this response. I was just doing, as usual, a little venting.
Valid arguments all, Alfred. To them I’d just like to add that, while government certainly does have its inefficiencies, so does the private sector. After I retired from the State of Michigan (having first done a stint in the U.S. Navy), I worked for, among others, Home Depot, Circuit City and Art Van Furniture (the U.S.’ eighth-largest furniture retailer). Don’t ever make the mistake of thinking that waste and inefficiency don’t equally characterize those places, too. And I could tell you reliable anecdotes about K-Mart, the auto industry and others, as well.
The raiding of the public treasury in the guise of pork barrel spending by Congress is nothing less than criminal. There’s no question about it. But it goes on in the private sector as well. Neither justifies the other.
The regressivity inherent in any proposal of a flat tax will always bear most heavily on the least able to pay. That’s why I’m so comfortable with the notion of taxation of current or most-recent year income. It can be levied so as to make it variably bearable by those variably able to pay it. Somewhere in the equation, we have to take human needs into account.
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