Steps Gilberto Vargas Could Take To Limit His Personal Income Taxation in the UK - Essay Example

?Gilberto Vargas is an affluent Brazilian citizen who has lived in Rio since 1965. He is the controlling shareholder of a multinational enterprise based in Brazil which holds investments in the real property market in Brazil, China and India. Gilberto is considering moving to London with his family for seven years. Please suggest steps he could take to limit his personal income taxation in the UK. Assume that there are OECD Model-based tax treaties between the relevant countries. The tax laws of the United Kingdom are a complex field of study. The residential status plays an important role in the taxation decisions. The test of connection that decides whether the person comes under the jurisdiction of UK taxation is primarily the test of residence (Baistrocchi, 2013, p. 2).The network that exists amongst the scores of double tax treaties (DTTs) forms an important part of the international law. The existing DTTs are all bilateral and based on two existing models; the OECD model and the UN Model. All the DTTs have stark similarities in terms of the topics covered, the order in which the topics are presented and the language in which the articles are described. This makes the DTT network such an important element in the tax regime, that the general rules have become a feature of the international law and might become binding in situations of governing taxation of income in cases of cross border transaction. This paper deals with the case of a Mr. Vargas who is a businessman and considers moving base to London for seven years. The OECD Model of DTT The DTT that follows the OECD Model is particularly applicable for the developed countries. It “reduces tax on royalties to zero but has a positive rate on interest and dividends” (Avi-Yonah, 2007, p. 3). There is harmful tax competition in which two issues are identifiable. Firstly, tax havens have been identified “as jurisdictions with no or nominal income taxes and also one or more of lack of effective exchange of information, lack of transparency, and lack of substantial activities by tax payers”. Secondly, preferential tax regimes have been identified as regimes that offer “no or low effective tax rate and one or more of ring fencing, lack of transparency, and lack of effective exchange of information” (Baistrocchi, n.d.). The prevalence of tax havens and preferential regimes has been condemned by the OECD which has stated it to be a harmful tax competition. The basis of taxation applicable for Mr. Gilberto Vargas: Arising basis or Remittance basis In the given case study, there is OECD Model based tax treaties between the relevant countries. Gilberto Vargas is the controlling shareholder of a multinational enterprise which is based in Brazil and holds investments in the real property market in Brazil, China and India. He is a citizen of Brazil and is considering a migration to the United Kingdom, along with family, for seven years. He is then a foreign national to the UK and his income is liable to taxation for only that amount that arises to him in the UK. The status of becoming a “resident in the UK” (Judgement, 2010, p.6) creates the platform for UK tax under the provisions of “Income Tax (Earning and Pensions) Act 2003” (Judgement, 2010, p.6). He is to be considered as a resident of the United Kingdom under the 183-day rule which states that if any person stays in the UK for one hundred and eighty three days, which is approximately half of a tax year (starting form 6th April of any year and continuing till 5th April of the next year) he is considered a “resident in the United Kingdom” (BN1-British Citizenship, n.d., p. 5) for tax purposes occurring in that tax year. For the citizens of UK, unless a person spends the entire tax year outside the UK with no return visits to the UK, he would be treated as a resident of UK “for the tax years in which” (You are a UK resident taking a holiday or working holiday abroad, 2010) a citizen of the UK spends any time in the United Kingdom. But when the person is a non-UK domiciled, ie, his or her homeland is not the United Kingdom, the rule undergoes certain modifications. The HM Revenue and Customs looks for the average presence of the person “in the UK over a period of less than four years” (Some Basic rules, 2010). For a not ordinarily resident, although a person is resident in the UK in a particular tax year for more than one hundred and eighty three days, he or she normally lives somewhere else. It is possible to consider a person a resident of UK, and categorize him or her as a not ordinarily resident of the UK “and/or not domiciled” (Residence, domicile and the remittance basis, 2012, p. 5), which is the case in which the person has a “’real’ or permanent home” (Meaning of 'domicile' and how it affects your tax, n.d.) in some other country that he or she has left and intends to returned to. Here one must understand that domicile is a general concept of the law and has not been defined specifically by the tax laws. If any one of these two conditions applies to a person, he or she can make a choice for the basis of taxation from the two bases of taxation; such as the arising basis and the remittance basis. Mr. Vargas in our case study, can opt for the remittance basis of taxation since he would be a resident but not domiciled as well as not ordinarily resident in the UK, while his stay in London. His domicile status is important for both Income tax and Capital Gains Tax purposes as well as for Inheritance Tax Purposes since he plans to stay for a period of as long as seven years. The Inheritance Tax applies with “reference to the concept of domicile” itself (Campbell, 2005, p. 235). The Remittance basis of Taxation The remittance basis of taxation is an alternative option besides the “arising basis of taxation” (UK taxation issues for non-dom divorces, 2013). Originally, remittance was concerned with the delay of “the timing of taxation until the goods were turned into cash in Great Britain” (Tiley, 2004, p. 42). The tax is levied upon the income generated “in the tax year” (Great Britain, 2007, p. 70) rather than that arising in the current year. The arising basis is applicable for taxing a person who is a resident in the UK. The residents of the UK require paying tax to the government of the United Kingdom “on all of their income as it arises and on their gains as they accrue, wherever that income and those gains are in the world” (Residence, domicile and the remittance basis, 2012, p. 75). Under this basis of taxation, the concerned individual has to declare all of his foreign incomes and profits including those that might have been taxed at their source country. These incomes and profits are provided with relief under the double Taxation agreements or through unilateral relief. The remittance basis of taxation can be opted for by a person if he or she is “resident in the UK during a tax year and” (Residence, domicile and the remittance basis, 2012, p. 81) and either “not ordinarily resident in the UK or not domiciled in the UK” (Residence, domicile and the remittance basis, 2012, p. 81). This is applicable to a person who has “foreign income and/or gains during a tax year” (Residence, domicile and the remittance basis, 2012, p. 81) during which he or she is a resident in the United Kingdom. This is relevant to Mr. Vargas since the multinational enterprise of which he possesses shares holds investments in the real property market of the countries like Brazil, China and India. Under the remittance basis, one has to pay tax in UK on the UK source income as well as gains as and when they arise. The “receipt of a capital payment” or “some other form of benefit” (Finney, 2010, p. 304) of the person is subjected to taxation in the UK only when the person brings or remits them in the UK. Thus it puts a limit to the UK tax jurisdiction. In the case of Mr. Vargas, since he would be staying in the UK for seven years at a stretch, he would have to pay a remittance basis charge of ?30,000 per year (Baistrocchi, n.d.). However, in the remittance basis the person loses claim over the personal allowances and annual exempt amount (Baistrocchi, n.d.). Although the remittance basis is available to a person who is a not domiciled and not ordinarily “resident in the United Kingdom” (BN1-British Citizenship, n.d., p.5), the person might opt for the taxation basis of “arising basis of taxation” (UK taxation issues for non-dom divorces, 2013). Mr. Vargas might decide to be taxed under the “arising basis of taxation” (UK taxation issues for non-dom divorces, 2013). In that case he would have to pay tax to the UK government on his “non-UK income and gains” (Income from abroad: arising basis vs. remittance basis, 2010) in compliance to the “arising basis of taxation” (UK taxation issues for non-dom divorces, 2013) and then “claim relief from UK tax from foreign tax” (Residence, domicile and the remittance basis, 2012, p. 81) that he would already have paid at the source of the worldwide incomes and gains. Choosing between the arising basis of taxation and the remittance basis of taxation An individual who is not a domiciliary of the United Kingdom has the option of choosing to have his or her income and gains, that have been generated in some country other than the United Kingdom, taxed in the boundaries of the United Kingdom only when these amounts are brought into the boundaries of the UK or are enjoyed or spend within the UK. The person might also leave some or whole of that income outside the UK. The money when brought within the UK are called “’remitted’ income and gains” (Income from abroad: arising basis vs. remittance basis, 2010). Income and gains that are made abroad and left abroad are known as “’unremitted’ income and gains” (Income from abroad: arising basis vs. remittance basis, 2010). The circumstances mentioned below explain the conditions for application of the remittance basis of taxation. If, at the tax year end, the unremitted foreign income of an individual is smaller than ?2000, the remittance basis applies automatically without making any formal claim and without costing any amount of tax to the individual. The UK tax would be charged on the amount of foreign income that is “remitted to the United Kingdom” (United Kingdom – Income Tax, 2013). The point to be considered here is that it can even be applied in a case where the total income made abroad is more than ?2000 and the balance has been “remitted to the United Kingdom” (United Kingdom – Income Tax, 2013). If the unremitted foreign income measures to an amount of greater than ?2000 the remittance basis can be claimed at a cost. The person would be subjected to lose “the use of their UK tax free personal allowances and capital gains tax exemption” (Income from abroad: arising basis vs. remittance basis, 2010), or as already mentioned above, ?30,000 has to be paid as Remittance basis Charge. This Charge is aimed at the exclusively rich residents that stay in the UK for a very long term. If the individual stays in the UK for “at least 12 of the previous 14 tax years” (Income from abroad: arising basis vs. remittance basis, 2010), a Remittance Basis charge of ?50,000 is decided for them. Conclusion If any amount of benefit derived by an individual outside UK is received by him or anyone related to him in the UK a charge applies under remittance basis (Prosser & Murray, 2012, p. 46). The changes brought under in tax rules since April 2008 has led to removal of “personal allowances form remittance basis users” (Great Britain, 2008, p. 116). Mr. Vargas should calculate and compare the tax liability under both the taxation schemes and take into consideration the following factors while choosing a taxation scheme. It depends whether he plans to remit his income in the future, or whether the income has been taxed in the country of origin. The capital and the money earned before he reaches London would not be taxed if he remits them to the UK. But he has to ensure that the money is properly segregated from the “unremitted income and gains” (Income from abroad: arising basis vs. remittance basis, 2010). This is a complex process and Mr. Vargas has to consider all the above mentioned factors while deciding the way to reduce tax charges upon his income while his stay in London. References Avi-Yonah, R S 2007, Double Tax Treaties: An Introduction, viewed January 20, 2013: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1048441 Bilateral Convention on Avoidance of Double Taxation between India and UK. 2012, viewed January 20, 2013: http://www.pib.nic.in/newsite/erelease.aspx?relid=90129 Baistrocchi, E. 2013, Taxation: LSE 2012-2013. Baistrocchi, E. n.d., International Taxation. 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