How tax residency is complicated by international tax years
ProACT Sam considers how tax residency is complicated by international tax years, for anyone who lives abroad, or who splits their time working and living between two or more countries around the world.
Time waits for no man, and we must adapt around time-based rules.
International tax law defines a period of tax residency in any one country as 183 days in a year.
This rule is simple when a person relocates and is based in one country.
However, it becomes complicated when a person is Living and Working Abroad in different locations and travelling for different reasons.
Why do some countries use different tax years?
To understand why some countries use different tax years, we first need to understand how the history of the calendar year plays its part.
Most countries around the world use the Gregorian Calendar as their calendar year.
What is the Gregorian Calendar?
The 500-year old Gregorian Calendar has 3 standard years of 365 days, and then a 366-day leap year every fourth year. The year starts in January and finishes in December.
The Gregorian Calendar is a solar calendar which starts in January and it was preceded by the Julian Calendar.
What was the Julian Calendar?
The Julian Calendar was introduced in 45AD by Julius Caesar. Like the Gregorian calendar, the Julian Calendar was based on a ‘3+1’ principle of 3 standard years plus a leap year. It assumed a solar year to be 365.5 days, hence the need for an extra day every 4 years to keep the solar alignment and years together.
However, the solar year is 365.24 days and the Julian calendar gained a day every 128 years.
The Gregorian calendar is adapted to fix this.
Persian thinking
The Julian Calendar had replaced the earlier Roman Calendar based on 355 days with regular, confusing adjustments.
The Persian Hijri Calendar uses the 365/6 days methodology, but resets the calendar each year based upon the most accurate day of the year, with the year starting at the spring equinox (around 13 weeks into a solar calendar), on approximately 25th March.
The equinox dates accurately measure the relationship of earth and sun in the solar system.
Previously, the spring equinox was the new year in the UK under the Julian Calendar and right through to the 17th century, when adopting the Gregorian calendar.
Why does the UK tax year start on 5th April?
Any government can make laws to define its tax year.
Under the earlier Julian Calendar, the UK tax year started on New Year’s Day, which would then have been the 25th March.
When the UK transferred from the Julian Calendar to the Gregorian Calendar, 13 days were wiped off the year. This was to reset and align the calendar to the solar reality, allowing spring to start on time.
During the calendar change and the ensuing public uproar, the UK government adjusted the tax year by 13 days to 5th April. The UK never switched back.
Tax year start dates in countries around the world
Countries with tax years starting 1st January
Throughout the world, a country’s tax year is usually based on a Gregorian Calendar year, starting January 1st. This includes the USA, Ireland, Germany, Cyprus and Portugal.
Countries with tax years based around the spring equinox
Some countries base their tax year in line with the spring equinox, towards the end of March. This includes the UK, New Zealand, Hong Kong, South Africa and India.
Iran is 21st March, at the start of the spring equinox.
Countries with tax years starting 1st July
The half-year mark as the start of a tax year offers some logic to avoid Christmas and Easter Spring holiday periods.
Tax years starting 1st July include Australia, Pakistan, Egypt.
‘Independence Day’ for Expats living in countries with January to December tax years
3rd July is 183 days into a calendar tax year (in terms of residency, give or take a day here or there, depending on whether the day of arrival or departure is counted as a resident day).
Expats living in a country with a January to December tax year, who have been Living and Working Abroad in that same country since 1st January, will technically now be tax resident for this year.
Expats relocating in the second half of the year cannot get tax residency for the current year.
Tax residency for Expats leaving the UK
UK Expats should leave the UK before the end of September to avoid a current-year tax residence.
This is particularly important this year as it includes UK Expats looking to relocate to the EU under Brexit Transition rules in 2020.
Tax residency, the split-year rule and big tax savings
Sometimes Expats can use split-year rule to make tax savings when relocating to and from a country. This can offer big tax savings if timed right, using allowances in both countries for a double relief. For more information on whether you can use this to your advantage, contact us at www.proactpartnership.com/contact-us
Exceptional times
Expats locked down in the UK during 2020 due to the Coronavirus could claim an additional exceptional allowance of days in UK. We await finalisation of these rules in the coming months.
Generally, staying in the UK for more than 183 days (including day or arrival and departure) will create a tax residence and a liability to submit a return for this and any other year.
Tax-saving Expat experts
ProACT are Tax Saving Expat Experts for Family and Business Living and Working Abroad.
We offer free online reviews to Expats relocating overseas and investing offshore in property and business.
The ProACT team can guide you on tax residence days, tax ties to UK, double taxation treaty options and uses.
Contact us for a Free Review.