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Being An Expat In 2012 - A Financial Primer

by the Investors Offshore Editorial Team
20 January, 2012


To believe the surveys, half the world is either already an expat, or planning to become one. Tens of millions of people work abroad, or have retired there, or have property in a foreign country.

Once upon a time, perhaps in the days of the British Raj, expatriates had a financially golden life style in recompense for the perceived horrors of a foreign posting involving endless travel, unpleasant insects and unpronounceable but deadly diseases. Once you had shaken the dust of London or Paris or Philadelphia from your feet, you could forget all about tax inspectors and set about hiring an extensive staff of punkah-wallahs and major-domos to run your immense colonial villa while you drank gin and tonic on the verandah (against malaria, of course).

After your 30 years in the sunshine, with wrinkled skin and full pockets, you could retire to a small country house in the Home Counties, New England or Normandy, to swap travellers' tales with your neighbours.

The reality nowadays is both more mundane and more challenging. Over-crowded airports, intrusive tax inspectors, the Internet and hyper-active investment advisers are just some of the features that are combining to form a new and very different landscape for expats.

But at least today's expat is not short of advice from the banks which offer international financial services.

There are multiple reasons why a person may choose to expatriate. Better weather is often cited as a major reason for leaving home for those living in cold northern climates in Europe and North America. Other frequently given reasons include the more relaxed lifestyle, lower crime and slower pace of life in the destination country, particularly for retirees. Then there are those who may find themselves posted to a foreign city as part of their career, or because their business interests require their presence in a foreign country. Last, but certainly not least, many people choose to move abroad to improve their financial position and to take advantage of higher incomes and lower rates of tax.

Whatever one's reason for expatriating, this is certainly not a decision to be taken lightly however, and many pitfalls await the unwary expat.

As HSBC Bank International's 2010 Expat Experience Survey 2010 observed, emotive worries can cause much greater concern for expats than practical issues.

The most common concern for expats ahead of moving to their new country according to the survey is re-establishing a social life (41%), feeling lonely and missing friends and family (34%), although experience in this regard varies widely from country to country.

Worries about re-establishing a social life caused less of a concern for those heading to the Middle East (Bahrain 28%, Saudi Arabia 27% and Qatar 33% compared to a 41% average).

Missing friends and family is a large concern for expats based in Australia (49%) and Canada (46%) and can probably be accounted for by the distance these expats are moving away from home. As the majority of expats based in Australia and Canada were originally from the UK (70% in Australia and 62% in Canada), time difference and long journeys to see loved ones understandably cause concern.

While language barriers caused worries for just under one third (30%) of expats overall, this figure was greatly increased for those heading to Europe. Expats heading to Germany were particularly worried about language barriers, which was a concern for 59%, as well as 58% in Switzerland, 57% in France, 55% in the Netherlands, 50% in Spain and 46% in Belgium.

Making friends is a key component in helping expats to deal with the challenges of moving to a new country and to settle into their new home, and Europe is the hardest region to make friends according to the report, with European countries dominating the bottom five places in the ease of making friends league table. The Netherlands proved to be the hardest of all with only 36% of expats based here finding it easy to make friends when relocating, alongside 40% in Germany, 42% in UK and Switzerland and 44% in Belgium. This could be largely attributed to the language barriers faced by expats heading to these countries. Spain and France fare better, placed 9th and 12th respectively, while Bermuda (1st) and Bahrain (2nd) hold 
the top spots.

Expats in Qatar (85%) and the UAE (84%) are most likely to only integrate with fellow expats, followed by Bahrain (81%), Hong Kong (79%) and Saudi Arabia (73%). Expats in Canada are most likely to integrate within local society and make friends in their host country. Nearly half (45%) of Canada-based expats go out with local friends as much as fellow expats.

The Middle East, along with the BRICS countries (Brazil, Russia, India, China and Southr Africa), are the most difficult expat locations to set up in. India was the most difficult country for expats overall (25th) with adjustment to the new culture and lifestyle something expats here found particularly challenging. Russia (23rd) and China (20th) also dominated the bottom quartile, with expats having particular trouble when it came to organising their healthcare and travelling around locally.

Then there are the kids to worry about, as countries which provide expats with the greatest benefits in terms of salary and economic rewards don’t always provide the best quality of life for children and families, according to HSBC's 2011 Expat Explorer survey.

The Raising Children Abroad league table ranks countries on three main factors important for expat parents: Childcare, Health and Wellbeing, and Integration. The findings revealed France (1st), the Netherlands (2nd) and Australia (3rd) to be the top places for raising children abroad. Children in these countries appear to lead a much healthier lifestyle: they are more likely to be spending time outdoors (France 53%, Netherlands 53% and Australia 75%) and playing sport (France 47%, Netherlands 56% and Australia 81%) than average (47% and 46% respectively).

The UK comes last in the Raising Children Abroad league table due to expensive childcare costs and poor social integration. Expat parents in the UK spend an average of USD12,790 per child per year on childcare - the highest cost of any country and well above average 
(USD7,535).

Perhaps it's the Internet which has made the biggest difference to the lives of expats in recent times, however. Indeed the worldwide web has revolutionised expats' everyday lives, with the instant communication that it offers helping to shorten the distance with friends and family back home, at least psychologically.

HSBC found that expats are using the latest in social media and communications technology in particular in order to stay in touch with loved ones all over the world. While Facebook tops the list as expats’ social media channel of choice, expats across the globe would be lost without the latest technology such as Skype to keep in touch with their friends and family.

Across the globe, 84% of expats rely on internet voice and video software Skype to stay in touch with friends and family, as traditional communication channels such as the landline telephone (63%) and letters (68%) are relegated in favour of newer forms of communication.

Lisa Wood, Head of Marketing at HSBC Expat, says: “Expats really rely on methods of communication that can easily keep them in touch with friends and family abroad. That’s why social media is a fantastic tool for expats and can be invaluable in keeping up-to-date with what is going on in their local community. It also offers expats additional support when they first relocate, allowing them to easily keep in touch with friends and family back home and find help and advice on settling in from others in their situation."

Optimizing Tax

Expatriates - whether working or retired - may still regard their status as an escape from over-crowded, cold, northern cities, but no longer does the tax inspector forget about them when they leave. Americans have it worse than anyone else, because they continue to be taxed as if they are resident, with a few minor concessions; but everyone else has to think about their residential situation and taxation of current income both while they are overseas and afterwards. Then there is inheritance tax to worry about; and the major problem of how to amass retirement savings that will not be pounced on by one tax authority or another.

Still, it is not all bad news. There are many countries in which expatriates receive complete or partial exemption from local taxation (some of them even with nice climates); and for most nationals it is possible to find sophisticated investment structures which do a good job of preserving wealth during and after expatriation.

If you are expecting to become or remain an expatriate in 2012, the time to consider your financial and tax situation is now. Don't leave it until you have made the move!

For most expats, offshore banking and investment offers opportunities for greater tax efficiency, confidentiality, and the ability to take advantage of an international investing perspective, free of the petty restrictions that often apply in high-tax countries. Continuing globalisation, and the increased use of electronic banking mean that for you as an expatriate, a multitude of opportunities have opened up which would not have been available a few years ago.

These freedoms do of course depend on your residential status and the tax rules in your home country. For many expats a period of non-residence can be just what the bank manager ordered; but for some nationalities, US citizens for instance, mere expatriation isn't enough to escape home taxes.

In this special feature, we will be looking at the different types of offshore investment suitable for expatriates and the business of choosing a place to live - for those that have a choice! But first, a warning: many high-tax countries have been tightening up on residence rules and most definitely have taken a far closer interest in offshore investment structures during the last few years.

The UK Cracks Down On Residence Rules . . . .

For Brits, for instance, a long-running court case has sent an ominous signal of the UK authorities' intent to crack down on Britons who are resident abroad for tax purposes. The initial ruling by the Special Commissioners back in 2006 caught many tax experts by surprise, by upholding an interpretation of tax residency rules by HM Revenue & Customs which runs counter to the tax department's own guidelines.

The case in question involved businessman Robert Gaines-Cooper, a British-born multi-millionaire businessman based in the Seychelles, who has claimed not to be resident in the UK for tax purposes. Under UK tax law, a person is treated as non-resident for tax purposes provided that they spend no more than 90 days in the country per year. This allows wealthy business owners to live in low-tax jurisdictions such as Monaco and Switzerland but jet into the UK for one day per week to do business. But the Special Commissioners ruled that days of arrival and departure were to be counted towards the 90-day allowance.

Gaines-Cooper eventually lost the case after unsucessfully appealing to the High Court, the Court of Appeal and finally to the Supreme Court, leaving him to face a multimillion-pound tax bill. Explaining the reasoning behind its 4-1 majority decision the Supreme Court said that while guidance on how to achieve non-residence "should have been much clearer", the guidance, when taken as a whole informed taxpayers that one would need to leave the UK permanently, indefinitely or for full-time employment, and do more than to take up residence abroad and relinquish ‘usual residence’ in the UK. Information was also provided that subsequent returns to the UK had to be no more than ‘visits’ and that any ‘property’ retained in the UK by the taxpayer for their use could not be used as a place of residence.

Tax experts have said that the Supreme Court's ruling has merely muddied the already murky waters of the UK's archaic and confusing residency laws still further. "Today's judgment was ultimately about whether HMRC guidance can be relied upon by tax payers," observed Alex Henderson, partner at PwC, on the day of the decision. "Gaines-Cooper had followed what he thought were the rules on residency but HMRC had claimed its guidance was not binding. Yet it's always been the case that the underlying law needs to be considered and the revenue's guidance is exactly that: guidance."

A long-awaited statutory residence test has been proposed by the coalition government, and has been welcomed across the board because it will, hopefully, bring much-needed clarity to the law in this area. The test, which was due to be put in place in April 2012 has, however, been postponed by a year.

The government has also tightened up on many aspects of the 'non-dom' status which has been enjoyed for many years by residents of the UK who are not domiciled there. This process began under the previous Labour government, which in 2008 introduced a GBP30,000 annual charge for those non-doms having resided in the country for seven years. The new Con-Lib coalition government however, is taking a slightly more relaxed approach to the issue, having proposed in 2011 to increase the annual charge to GBP50,000 for those non-doms with 12 years' residence, but at the same time encourage investment by removing the charge payable by non-doms for the remittance of foreign income or capital gains to the UK for the purpose of investing in a UK business. In addition, the government has pledged not to introduce any further changes to the non-dom system during the life of the current parliament, due for dissolution in 2015.

Despite howls of anguish that the non-dom charge would lead to an exodus of wealth-creating entrepreneurs and talented professionals from the UK, the increase in the annual charge is not being treated with too much alarm, given the government's overall message, and that non-doms represent a relatively small section of the UK tax-paying population.

Francesca Lagerberg, Partner and Head of Tax at Grant Thornton noted: "While the initial news of a GBP20,000 increase in a remittance charge may be seen as a red flag to those non-doms considering long-term stays in the UK, the government is clearly keen to send out a message that the UK is open for business. Therefore there will be encouragement to bring money into UK for non-doms who are investing in UK businesses".

However, Carolyn Steppler at Ernst and Young suggested that the increase in the remittance basis charge "could result in a leak of talent overseas" and further undermine the UK's economic competitiveness.

"Many more non-doms will have to face the full force of the UK tax rules and may leave the UK as a result. Non-doms are essential to the UK economy and the cost for some of them of remaining in the UK will nearly double overnight," she observed.

Traditionally, those resident but not domiciled in the UK pay full tax on their UK earnings, but only pay tax on their foreign income if it is remitted to the UK (the so-called 'remittance basis' of taxation). Taxpayers have to pay the new annual charge along with any other tax resulting from income declared on their annual tax return, but only if they have been resident in the UK for seven out of the last ten tax years. Non-doms can forgo this charge if their overseas income amounts to less than GBP1,000 per year, or if they opt out of the residence basis of taxation and allow their worldwide income to become taxable in the UK.

. . . . And The US Isn't Any Kinder

US expats also took a blow in 2006 because of the Tax Increase Prevention and Reconciliation Act (TIPRA), signed by President Bush in May of that year. Although this Act increased the amount that can be earned by non-residents free from US taxes to $82,400 from the previous level of $80,000 (now USD91,500) , income earned by expats above this threshold is now typically subject to higher tax rates. Furthermore, high housing costs, much of which previously could be excluded from the computation of US tax, are now treated as a taxable benefit and taxed often at 30% to 35%, making many individuals worse off, or leaving the employer to pick up the extra bill. The legislation was retroactive to January 1, 2006.

According to a survey conducted by the American Chamber of Commerce in Singapore, a substantial number of US expats living in Singapore considered returning home as a result of these changes. The survey polled 585 members, and received 144 responses. It found that almost 40% were thinking about returning home to avoid being hit by increased tax. Half of the sample also believed that the tax changes would prompt employers to hire less US workers abroad.

“These tax changes are disastrous for Americans abroad and for American business. No other developed country imposes such onerous taxation on the earnings of its workers abroad and our members are seriously concerned about the financial impact on them and whether it is worth remaining overseas selling American goods and services," stated AmCham Executive Director, Nicholas de Boursac.

AmCham said at the time that the financial impact will be felt most by those American expatriates who are not tax-equalized and whose employers do not absorb the additional tax impost. 66% of those surveyed were not tax-equalized, and of this group, 30% expected a tax increase of between US$5,000-15,000, while a third expected increases of more than US$15,000.

AmCham warned that even those US expats who are not directly financially impacted by the changes will still be affected because companies will hire less expensive employees.

The situation for US expats hasn't got mush better under the Obama administration, which has made cracking down on international tax evasion one of its highest priorities. Many innocent tax-compliant expats have, as a result of this, found themselves unwittlingly caught in America's ever-increasing web of tax reporting rules.

Indeed, by 2009, the situation had become so “untenable” says American Citizens Abroad (ACA), which represents the interests of US expats, that it felt compelled to send letters to President Obama, Treasury Secretary Tim Geithner and Chairman of the now-defunct President’s Task Force on Tax Reform, Paul Volcker, urging them to rethink the “draconian” policies.

ACA’s letter to the President describes four policies which it considers are “infringing upon the constitutional and economic rights of US citizens overseas” and are causing “severe prejudice” to these citizens and to the nation.

The letter states:

“First, the proposed reinforced Qualified Intermediary regulations are so draconian that banks overseas are getting rid of American clients rather than face the administrative hassle and the perceived legal risks of complying. If Americans overseas cannot even open an ordinary bank account for everyday transactions in their country of residence, how can they live and function in the modern economy?”

“Second, the Patriot Act, in 2001, tightened the Know-Your-Customer regulations. Many US banks have decided that this KYC clause cannot be fulfilled if the customer lives overseas. Consequently, these banks are closing accounts of US citizens on the sole ground of their overseas addresses. This denial of service clearly infringes upon the constitutional and economic rights of US citizens.”

“Third, the new more inclusive Treasury FBAR [Report of Foreign Bank and Financial Accounts] filing requirements for foreign bank accounts are excessive and carry unduly harsh penalties for not filing or incorrect filing, even when this is done unknowingly. Due to the extra-territorial reach of the FBAR to bank accounts where the US citizen has no financial interest, non-US companies and organizations are removing US citizens from positions of responsibility to protect their privacy and strategic interests. FBAR also creates numerous problems in the everyday life of American citizens, and specifically those with foreign spouses.”

“Fourth, US citizenship-based taxation, unique among nations, subjects overseas Americans to double taxation. A flagrant example of recent tax injustice is the 2006 TIPRA act, which opportunistically increased taxes on Americans abroad to compensate for a domestic tax cut. Americans abroad already pay taxes in their country of residence. In fact, they pay more taxes in total than citizens living in the United States, yet they do not benefit from US government domestic services. Residence-based taxation is the only practical tax system that would be fair and allow Americans to be competitive in the global economy.”

“Mr. President, we implore you to stand by the fundamental rights of Americans abroad and we request that your team ensures that equity and constitutional rights are respected for US citizens overseas,” the organization’s letter to Obama concludes.

Following the disclosure in 2011 by the American Embassy in Ottawa that an easing of reporting rules would shortly be announced for United States citizens living in Canada, the Internal Revenue Service (IRS) has issued a fact sheet summarizing information about federal income tax returns and Foreign Bank Account Report (FBAR) filing requirements, and the potential penalties.

Under the IRS's FBAR rules, any US person (not necessarily a US resident) who has a financial interest in or signature authority, or other authority, over any financial account in a foreign country, if the aggregate value of these accounts exceeds USD10,000 at any time during the calendar year, is required to file a return.

However, the IRS says that it knows that some who are dual citizens of the US and a foreign country may have failed to timely file US federal income tax or FBAR returns, despite being required to do so. Furthermore, it is also aware that some are now aware of their filing obligations and seek to come into compliance with the law.

The IRS confirmed in December 2011 that penalties will not be imposed in all cases. Those who owe no US tax (for example, due to the application of the foreign earned income exclusion or foreign tax credits) will owe no 'failure to file' or 'failure to pay' penalties. In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause, and not due to wilful intent to avoid filing.

It is explained that whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when a person demonstrates that he exercised ordinary business care and prudence in meeting his obligations but nevertheless failed to meet them.

Of particular interest to dual citizens living abroad, it is specified that reasonable cause may be established if the citizen shows that he was not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. A person may have reasonable cause for noncompliance due to ignorance of the law if he was unaware of the requirement and could not reasonably be expected to know of the requirement.

The IRS suggests that, on learning of a requirement to file FBARs for earlier years, a dual citizen should file the delinquent FBARs and attach a statement explaining why they are filed late.

The FBAR is considered by the IRS as a tool to help the US government to identify persons who may be using foreign financial accounts to circumvent US law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

However, Canadian Finance Minister Jim Flaherty had, in an open letter to the media written in September last year, pointed out the difficulty which the FBAR rules caused to the many dual US-Canadian citizens and their relatives living in Canada, the majority of whom, he said, hold only distant links with the US and were, therefore, unaware of the disclosure rules.

"Because they work and pay taxes in Canada, they generally do not owe any taxes in the United States in any event. Their only transgression is failing to file the IRS paperwork they were never aware they were required to file," he observed.

Another worry for US expats however, is the the Foreign Account Tax Compliance Act, which went into effect on January 1, 2012, and which has prompted a growing chorus of indignation and concern from banks and financial institutions dealing with Americans all around the world.

Under the law as passed, foreign financial institutions, foreign trusts, and foreign corporations will be forced into providing information about their US account holders, grantors, and owners. FATCA imposes a 30% withholding tax on payments to foreign financial institutions (FFIs) and other entities unless they acknowledge the existence of offshore accounts to the IRS and disclose relevant information including account ownership, balances and amounts moving in and out of the accounts. Among other rules, the legislation requires US individuals and entities to report offshore accounts with values of USD50,000 or more on their tax returns, and mandates electronic filing of information reports about withholding on transfers to foreign accounts. Advisors who help set up offshore accounts have to disclose their activities or pay a penalty.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. The thresholds for taxpayers who reside abroad are higher. For example, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds USD400,000 on the last day of the tax year, or more than USD600,000 at any time during the year.

It is confirmed that Form 8938 is not required of individuals who do not have to file an income tax return, but that the new FATCA filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts).

Failing to file Form 8938 when required could result in a USD10,000 penalty, with an additional penalty up to USD50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.

Where Are The Best Expat Locations?

According to a survey of expatriate hot spots by Mercer, the global consulting firm, the United Arab Emirates (UAE), Russia and Hong Kong are amongst the world's most benign personal tax environments while Belgium, Denmark and Hungary are the least attractive. The data also shows that, in general, married employees are better off than single employees, while married employees with two children fare the best.

Mercer's Worldwide Individual Tax Comparator Report analyses the tax and benefits systems across 32 countries, focusing on personal tax structures, average salaries and marital status. This data is used by multinational companies to structure pay packages for their expatriate and local market employees.

For single managers, the UAE is the most attractive tax environment according to percentage of net income available. The UAE ranks highly, as it does not assess any income tax, and the country's social security contributions amount to only 5% of an employee’s gross salary. Russia, ranked number 2, applies a flat tax of 13% across all income levels, while Hong Kong was placed 3rd, with taxes and social security contributions at 14.2% of gross base salary.

Excluding Russia, in general, European countries have less attractive tax environments and dominate the bottom of the rankings. The UK ranks joint 14th, followed by Ireland (18), Spain (19), and Switzerland (21). France and Germany are ranked 22 and 29 respectively.

At the bottom of the rankings, single managers in Hungary (30), Denmark (31) and Belgium (32) pay, respectively, 48.5%, 48.6% and 50.5% of their gross income in taxes and social security contributions.

Brian Waite, a senior consultant specialising in international issues, commented: "Local taxation is one of several factors that multinationals take account of when deploying staff across the globe. It has an obvious impact on take-home pay, and in some countries with low or zero tax rates it is an important incentive for employees to work abroad. In other high-tax destinations, multinationals need to create compensation packages that at least match their expatriates' purchasing power in the home country."

"Other important considerations for expatriate allowances are housing, private schooling and local cost of living adjustments, and there are additional complications around contributions to the home country pension plan. These factors can all contribute to the high cost of a global expatriate workforce."

Markus Wiesner, Mercer's head of operations in Dubai, added: "We often find that the UAE's zero taxation is a strong draw for expatriates on short-term assignments. For three to five years, young professionals can fast-track their savings to afford a mortgage when they return home, while senior executives can maximise their savings potential ahead of retirement. It's in these particular groups that we get a really good mix of expatriate talent in Dubai."

Asian markets dominate the top end of the rankings with Hong Kong, Taiwan, Singapore, South Korea and China (Beijing) ranked 3, 4, 5, 6 and 7. The lowest ranked Asian market is India at 14 (sharing this position with the UK, Australia, and the United States). In the Americas, Mexico (8), Brazil (9) and Argentina (10) outrank the United States (14) and Canada (20).

According to Niklaus Kobel, researcher at Mercer's Geneva office: "Marital status is still a major factor in determining local tax rates. The data highlights the fluctuation in tax rates applied according to an employee's income level and marital status. It is important to note that high tax rates do not necessarily mean less affluence."

Not all taxation systems vary according to marital status, however. Married employees in Brazil, India and Turkey have similar tax rates to single employees.

Quality Of Life

As has already been mentioned, there are a large number of other factors which may dictate where some choose to expatriate, and if it is overall quality of life that you are looking for, then European cities have tended to come out on top recently.

Mercer's 2011 Worldwide Quality of Living Survey shows that European cities represent over half the cities amongst the top 25 in the ranking because of their modern infrastructure, high-quality medical services, good personal safety records and opportunities for leisure and recreation.

Vienna topped this league table, but German and Swiss cities dominate the top of the ranking, with three cities each in the top 10. Zurich (2) is followed by Munich (4), Düsseldorf (5), Frankfurt (7) and Geneva (8), while Bern shares ninth place with Copenhagen.

In the next tier are Amsterdam (12), Hamburg (16), Berlin (17), Luxembourg (19), Stockholm (20), Brussels (22), Nurnberg (24) and Dublin (26). Paris ranks 30 and is followed by Oslo (33), Helsinki (35) and London (38). Lisbon is number 41, Madrid is at 43 and Rome ranks 52. Prague, Czech Republic (69), is the highest-ranking eastern European city, followed by Budapest, Hungary (73), Ljubljana, Slovenia (75), Vilnius, Lithuania (79), and Warsaw, Poland (84). The lowest-ranking European city is Tbilisi, Georgia (214).

However, Slagin Parakatil, Senior Researcher at Mercer, warns that economic and social factors may reduce quality of life in many parts of Europe in the future.

“European cities in general continue to have high standards of living, because they enjoy advanced and modern city infrastructures combined with high-class medical, recreational and leisure facilities," Parakatil said. "But economic turmoil, high levels of unemployment and lack of confidence in political institutions make their future positions hard to predict. Countries such Austria, Germany and Switzerland still fare particularly well in both the quality of living and personal safety rankings, yet they are not immune from decreases in living standards if this uncertainty persists.”

In Asia Pacific, Australia and New Zealand tend to dominate the region's rankings, with Auckland identified as the best city for quality of life (3rd in the overall ranking) followed by Sydney (11), Wellington (13), Melbourne (18) and Perth (21). The highest-ranking Asian cities are Singapore (25) and Tokyo (46). Hong Kong (70), Kuala Lumpur (76), Seoul (80) and Taipei (85) are other major Asian cities ranked in the top 100. Meanwhile, Dhaka, Bangladesh (204), Bishkek, Kyrgyzstan (206), and Dushanbe, Tajikistan (208), rank lowest in the region.

“As a region, Asia Pacific is highly diverse," says Parakatil. "Countries such as Australia, New Zealand and Singapore dominate the top of both our general and personal safety rankings, in part because they have been continuously investing in infrastructure and public services. In general, the region has seen a greater focus on city planning. Nevertheless, many Asian cities rank at the bottom, mainly due to social instability, political turmoil, natural disasters such as typhoons and tsunamis, and lack of suitable infrastructure for expatriates."

Unsurprisingly perhaps, Dubai, where the expat population has outnumbered the local population for a number of years, is ranked highest for quality of living across the Middle East and Africa, although the city is placed only 74th in the global rankings.

Dubai is followed in the rankings by Abu Dhabi, UAE (78), Port Louis, Mauritius (82), and Cape Town, South Africa (88). Johannesburg ranks 94 and is followed by Victoria, Seychelles (95), Tel Aviv (99), Muscat, Oman (101), and Doha, Qatar (106). Africa has 18 cities in the bottom 25, including Bangui, Central African Republic (220), N’Djamena, Chad (219), Khartoum, Sudan (217), and Brazzaville, Congo (214). Baghdad (221) is the lowest-ranking city both regionally and globally.

“The recent wave of violent protests across North Africa and the Middle East has temporarily lowered living standards in the region," Parakatil notes. "Many countries such as Libya, Egypt, Tunisia and Yemen have seen their quality of living levels drop considerably. Political and economic reconstruction in these countries, combined with funding to serve basic human needs, will undoubtedly boost the region as a key player in the international arena.”

In the Americas, Canadian cities dominate the top of the region's ranking. Vancouver (5) has the best quality of living and is followed by Ottawa (14), Toronto (15) and Montreal (22). Honolulu (29) and San Francisco (30) are the highest-ranking US cities. In Central and South America, Pointe-à-Pitre, Guadeloupe (63), ranks highest, followed by San Juan, Puerto Rico (72), and Montevideo, Uruguay (77). Port-au-Prince, Haiti (218), ranks lowest in the region.

“The disparity in living standards between North and South America is still considerable," Parakatil observes. "Though a number of South and Central American countries have experienced positive change, political and safety issues predominate in the region. In particular, drug trafficking, drugs cartels and high levels of street crime, combined with natural disasters, continue to impair the region’s quality of living.”

The cost of living is also an imporant consideration for expats, and a recent study by ECA International indicates that Japan is the most expensive place to live.

ECA's 2011 Cost of Living Survey found that Tokyo is the world's most expensive city for expat workers for the second consecutive year, with three other Japanese cities also featuring in the top ten of the global index, including Nagoya (4th), Yokohama (6th), and Kobe (10th).

The Norwegian capital Oslo was ranked as the world's second-most expensive city for international assignees, with Geneva in third place. Three other Swiss cities were placed in the global top ten, including Zurich (5th), Bern (7th) and Basel (9th), despite the value of the Swiss franc falling against major currencies in the aftermath of the Swiss National Bank's move to set a minimum exchange rate against the euro.

Despite much turmoil in the eurozone, the euro has strengthened on average against other major currencies over the last year. As a result, locations in the zone have risen in the ranking, while those in the US, for example, and in locations where the currency is pegged to the US dollar, such as Hong Kong, have typically fallen.

Hong Kong has tumbled down the list of most expensive locations as a weaker dollar continues to negate the impact of rising prices. Hong Kong's 26-place drop in the global ranking is the largest fall of any city in Asia and puts the SAR in 58th position globally. Within the region, Hong Kong has slipped from being the 6th to the 9th most expensive location, despite the price of goods there having increased even more than this time last year.

"We are typically seeing higher price levels across the region compared with September 2010, and Hong Kong is no exception: items in ECA's cost of living basket have gone up by more than 7% in the last twelve months," said Lee Quane, Regional Director, Asia for ECA International. "However, when we look at Hong Kong in a regional context, the weak dollar means that the city is now cheaper than a number of other locations including Singapore, Beijing and Shanghai, where there has not only been significant price inflation but also currencies have strengthened. While this is good news for many companies who have international assignees in Hong Kong, sending staff out of Hong Kong could become more expensive for businesses if allowances designed to protect an employee's purchasing power whilst on assignment need to be increased."

"While, in locations like Singapore, price inflation has worked alongside exchange rate movements to push a location up the cost of living ranking, in other cases currency fluctuations are still outweighing the impact of inflation,” explains Quane. “For example, despite dramatic price increases in Vietnam, the devaluation of the dong earlier this year has caused locations there to drop down the ranking. So while locals will see their costs going up, the spending power of assignees will have increased due to the effect of exchange rates."

Caracas (13th) continues to be the most expensive location for international assignees in the Americas. The Venezuelan capital is followed by Rio de Janeiro, placed 22nd globally, and Sao Paolo in 29th position.

Vancouver, placed 43rd globally, is the most costly location in North America. New York's Manhattan is in 46th position, down from last year's 28th place. Locations across the United States have seen some of the biggest falls in the global ranking, largely due to the depreciation of the US dollar against many major currencies.


Offshore Banking

In most offshore jurisdictions, interest earned on bank deposits is free of tax for non-residents. Also of great importance from an expat point of view is the convenience factor associated with offshore, for example the ability to receive and deposit funds remitted from your home country, or income earned from working overseas (for example fees, salary and expenses), in sterling, US dollars, or any one of a number of hard currencies.

Contrary to what most aspiring expats may think, banking in a foreign country is not as dangerous and risky as may first appear, and according to a survey released in Janaury 2012, the majorty of expats continue to have a high level of trust in foreign banks, despite the ongoing financial crisis.

The Expat Banking Poll survey sponsored by Lloyds TSB International and conducted by expat website Just Landed, suggests that expats aren't worried about keeping their money in foreign banks, and as many as 59% of the 1,184 respondents trust their banks abroad. 22% of respondents however do not trust their banks "at all".

"These figures should bring great comfort to expats," said Daniel Tschentscher, managing partner at Just Landed. "In the current climate, one would expect the level of trust to be lower, but that really doesn't seem to be the case at all."

However, the poll shows significant differences between popular expat destinations. Banks in the Middle East seem to enjoy some of the best reputations among expats. In the United Arab Emirates, 74% completely trust local banks, in Kuwait this number is even higher at 83%.

In Europe, German banks receive a similar score, with 68% of expats completely trusting their services. UK banks are completely trusted by only 52% of respondents. And despite uncertainties over the British pound, 36% of expatriates claim they would invest in sterling over any other currency.

On the other extreme, expats in Spain are rapidly losing faith in the national banking system. In Spain, 64% of expatriates do not trust local banks at all, one of the highest levels of distrust worldwide. Some of the most common problems cited by those who distrust banks abroad include unfair charges, trouble with the language barrier and money that was deducted from their account without any explanation.

Tschentscher added: "While the poll demonstrated a lot of positivity, there are also some issues to be addressed. But in general, it seems expats feel quite safe banking abroad."

Many offshore banks offer a range of services and options, including:

  • Instant access accounts with credit card facilities;
  • Fixed term deposit accounts, with the interest rates tiered according to the length of the term, and the size of the deposit, although usually levelling off at around the USD100,000 mark;
  • Conventional variable-interest deposit accounts, which may offer higher rates than fixed-term accounts.

Setting up an offshore bank account or investment portfolio should prove to be no problem once you have decided on the location and type of account. There is generally a minimum amount for offshore deposit accounts, and due to recent legislation designed to prevent money laundering, identification is usually required, despite the claims of some shady service providers to offer 'fully anonymous' offshore banking. Once the account has been established, and if you are depositing a significant sum, a relationship manager will usually be assigned to advise and assist you in the management of your assets.

You will almost certainly need to open a bank account in your country of residence for day to day transactions. If you are spending most of your time there, you will probably have to pay taxes on income paid locally, so it will often be best to have as much as possible of your income paid directly into your offshore account in hard currency. This incidentally protects you against any large fluctuations in the value of the local currency.

However, a recent fly to have taken up residence in the offshore banking ointment is the EU's Savings Tax Directive.

The European Union Savings Tax Directive (STD), which went into effect on 1st July, 2005, in fact forms merely one part of a major tax reform package launched by the European Commission in 1997. As originally drafted, the STD aimed at a uniform 'information exchange' regime to apply across the Union, with all countries agreeing to report interest on savings paid to the citizens of other Member States to those States' tax authorities.

Because of resistance from EU Member States with strong traditions of banking secrecy, the Commission had to allow Austria, Luxembourg and Belgium to apply a withholding tax (at 15%) until 2009, since when they have been applying the information-sharing model. Many of the UK's offshore financial centres have been forced to join the STD, along with the Netherlands Antilles, Aruba and some European centres (Andorra, Monaco, Liechtenstein and San Marino). Most of these places took the withholding tax route, as did Switzerland, which was the hardest nut for the EU to crack; those countries which apply the withholding tax raised it to 20% in 2008, and to 35% in 2011.

The STD applies to many types of return on savings instruments, all loosely described as interest, when received by individuals, but does not affect interest paid to companies. Under the information exchange system, the identity of recipients will be known to their home tax authorities; when tax is withheld, the identity of the recipient will not be reported, thus preserving confidentiality.

Returns from the STD regime, which has now been in place for nearly six years, are way below what had been hoped for in Brussels, reflecting no doubt evasive action taken by savers to remove their deposits from banks in countries which are applying the regime. Other low-tax countries outside the scope of the STD have seen quite large inflows of cash, for the same reason. It is essential to consider the effects of the Directive if you have or are planning to have assets in the countries affected.

Although the Commission's attempts to broaden the scope of the tax to include jurisdictions like Hong Kong have been firmly rejected so far, it certainly hasn't given up. In the case of Hong Kong, signing up to the savings tax directive could mean altering the Basic Law which safeguards the future of its financial centre under Chinese rule. Singapore on the other hand, is known to be staunchly opposed to the idea of sharing bank account information with the EU, and has rejected European overtures to include information exchange provisions within a broader economic agreement.

In 2008, a Commission Review Group which had been working away for three years recommended a major extension of the Directive in the EU itself to close loopholes which have permitted many investors to escape the tax until now, for example by moving assets from bank accounts to vehicles such as companies and trusts - which weren't included in the legislation - or by shifting money to accounts based in territories out of the reach of the directive's information sharing provisions.

In January, 2009, the European Parliament Economic and Monetary Affairs Committee began its consideration of the Commission's proposals. Rapporteur Benoit Hamon, a member of the Party of European Socialists from France, made proposals for some significant changes to the plans already outlined by the European Commission, proposing to end the transitional period with a finite date, rather than by reference to the behaviour of third countries. Under this proposal, the transition period would end three years from the levying of the withholding tax at a rate of 35%, i.e. in 2014.

The Rapporteur proposed to replace the definitions proposed by the Commission, which typically name a country and then set out the type of entity and legal arrangements which would be brought within the Directive, with a list of legal structures and then a list of the countries concerned.

"This could very dramatically expand the number of legal entities caught by the Directive," observed Graham Mather, President of the European Policy Forum. He continued:

"In Switzerland’s case, for example, the Commission proposal mentioned two categories of legal entity, the Trust and the Foundation. Under the new proposal this would be replaced by a list of twenty-four bodies ranging from limited liability companies through international banks, insurance and reinsurance companies, joint-ventures, settlements, funds of all forms etc etc."

"The Parliament Rapporteur says that the legal entities can be brought back out of the Directive if the country of jurisdiction makes an application to the Commission to have them removed on the grounds that they could not have their place of effective management located in the jurisdiction concerned or on the ground that 'appropriate taxation of interest income paid to these legal persons or arrangements is in fact ensured.' "

"The Rapporteur says his proposal is designed to reduce the possible loopholes in the Directive but what it would do if carried into law would be to expand the scope of the Directive enormously and create a massive traffic of applications by third countries to seek exemption from the Commission."

"Other changes would expand the categories of paying agents caught by the Directive and provide for its review from time to time to focus in particular on the appropriateness of extending the scope to all sources of financial income, including dividends and capital gains, as well as to payments made to all legal persons. This, the Rapporteur says, is in order to 'deal with any potential large scale circumvention of the Directive in the future.' "

Mather points out that the amendments would have to go through negotiation with the Commission, which will be aware that a number of member states especially Austria, Belgium and Luxembourg will be uncomfortable with the dramatic expansion proposed.

He turned out to be right; in January 2011 Austria and Luxembourg continued to block attempts to agree on the terms of an extended directive at the month's Ecofin meeting, with the termination of the transition period during which the opt out of information exchange a particular sticking point.

By May 2011 the Hungarian Presidency thought that enough progress had been made on the discussions that it announced ahead of that month's Ecofin meeting that it would seek the Council's support for the idea of launching negotiations with the relevant third countries (Andorra, Liechtenstein, Monaco, San Marino and Switzerland). The Council was also to hold an "orientation" debate on the Savings Taxation Directive with the objective of reaching conclusions regarding the proposal to amend the Directive.

The European Commission then sought authorization from the Council to begin the third country negotiations in July. At the start of 2012 however, there are few signs that Austria and Luxembourg are any nearer to agreeing a compromise.


Offshore Investment

Offshore banking is, of course, not the only option available to you; depending on your situation, financial status, and degree of openness to risk, there are a variety of offshore investment options open to you as well. Funds are the most straightforward and readily available option. These range in risk from low yielding bond funds to highly-geared hedge funds, so there is something for everyone.

Fund investment is especially suitable for the busy expat, because you can choose to invest in a certain class of assets without having to examine the characteristics of individual assets in detail. The tax efficiency of offshore funds often means that they have higher yields than equivalent onshore funds, so it may pay you to transfer existing onshore assets into offshore funds, although you have to be careful about the costs of transfer, and especially capital gains tax. You also have to consider what may happen when, and if, you go back.

As is the case onshore, there are two different types of investment fund available:

  • Private funds. Suitable for those expats with a longer term investment horizon, and more capital (usually not less than USD1,000,000, although individual investments may be as little as USD50,000). These are usually closed-end funds, involving up to 50 investors, and often generate greater returns than public funds. Quite often they would use a structure known as a Limited Partnership which allows residents of higher-taxed countries (eg the US) to repatriate profits to offset against losses or expenses at home. This might be a suitable structure depending on your long-term plans.
  • Public funds. These are usually open-ended, i.e. you can sell out at any time, which gives investors more flexibility. More and more public funds are based in offshore jurisdictions even though their investment targets may be in high-tax areas. If they have invested in capital assets (eg capital growth funds or real estate) then gains will be tax-free. As is the case onshore, there is a wide range of portfolio management tools available from offshore fund management groups.

Offshore equity investment is another rapidly developing investment sector, which may also be of interest to you as an expatriate. Equity investment used to mean investing in securities listed on your local stock exchange to the exclusion of foreign stocks, but of recent years, all this has changed. There is a growing number of stocks that are listed offshore - dividends and capital gains will of course be tax-free and they can be bought through local brokerages. As long as you have a satisfactory non-resident tax situation, you can also buy onshore equities without risking capital gains tax, but you will find that dividends have usually been subject to withholding tax, which you may not be able to reclaim.

This is an area in which the Internet has opened up new possibilities for investors, as online brokerages and some investment sites and exchanges allow you to manage your portfolio quickly and easily wherever you are in the world. The physical barriers to international investing of a few years ago simply do not exist for today's expatriate investors. Expatriate investment is therefore not limited to funds and equities, but can also include other types of onshore investment activity such as derivatives trading (futures and options), and their cousins spread-betting and contracts for differences. But it must be said that risk doesn't diminish with distance: arguably, if you are away from a particular market-place, with even the best on-line information sources you are somehow missing knowledge you might have had if you were present. These more exotic types of investment are not for the faint-hearted!


Pensions Investment

Whilst you are thinking about offshore investment, it may be worth giving some thought to your pension. Although pensions investment is usually tax-privileged in high-tax countries, as an expat, you face additional problems, namely that while non-resident, you will probably not be able to continue taking advantage of the tax incentives 'at home', even if you want to retire there.

Pensions investment is a tricky area for expatriates, and more than ever you will need to consult with an independent professional. However, you can consider your basic options prior to doing so, and these will depend greatly on the circumstances surrounding your expatriation.

If you are employed by a company in your home country (and are part of an in-house pension scheme), and you are moving abroad to work for that same company, then in some countries you may be able to continue contributing to that plan; in the UK for instance you can continue to contribute for a maximum of 10 years.

If you are moving abroad to work for a company with no ties to your home country, then you may be allowed to join their local pension scheme. Only in a few cases will you be able to transfer the pension rights back to your country of residence when you return, unless you continue to work for the same company; and usually the terms of transfer are highly unattractive.

If you have been contributing to a personal pension scheme, however, the news is usually worse, as in certain countries, for example the UK, you are only allowed to contribute to your pension plan for as long as you are taxable there.

The right decision will obviously depend on your personal circumstances. If however you are going abroad for an extended period, and especially if there is a good chance that you will retire to some other part of the world, there may be an argument for transferring your home pension assets offshore straightaway, even though that may (probably will) entail a tax penalty if your contributions have been tax-privileged. On the other hand, the tax penalty of transfer taken together with the exit penalty from your scheme may combine to make a transfer very costly. If you are lucky, you may find that your pensions provider has an offshore branch, and you may be able to induce them to make the transfer on favourable terms in order to keep your business.

Some countries, including the UK, will only allow the transfer of an existing tax-privileged pension fund to another country if it applies similar rules, ie restricting investment options and limiting cash-outs to 25% of the fund. To some extent the QROPS mechanism (Qualified Recognized Offshore Pension Schemes) permits bona-fide long-term non-residents to bypass the restrictions, but you need highly qualified professional advice before undertaking this route.

Whatever you decide to do about your existing pensions arrangements, once you have established non-residence (and non-tax-paying) in your home country, you will have many options open to you to make retirement provision offshore, in order to take advantage of the peace of mind of knowing that your assets are secure however your circumstances change, and the greater flexibility over retirement date, payments, etc, which could be so important to you as an expat.

These options can't be examined in this brief primer; however, there are two broad categories of pensions provision to choose between:

  • Designated pension or retirement schemes. There are many of these available now, and they usually accept payment in a wider range of currencies, and generally require less maintenance on your part. However, they do require a longer term commitment (not ideal if your personal circumstances are uncertain), and the penalties for early withdrawal can be punitive. Although they may appear to offer less generous rates of return than on-shore schemes, remember that this is because they don't assume tax relief on contributions. Instead, you will receive the benefits tax-free if you remain offshore.
  • The DIY approach. You can opt for a more diverse portfolio made up of different types of investment. This is obviously less of a safe bet, but it does mean that you can retain greater control over your assets, and there are no penalties should you need to withdraw for any reason.


Offshore companies

If you are going to work in a country which wants to tax your world-wide income, or are going to return to your home country to a world-wide taxation regime, then you may want to consider establishing an offshore company.

This is another complex area in which professional help is needed, but the interpolation of a company can sometimes distance you from your income sufficiently to avoid taxation. In some countries there are plenty of rules to prevent this; but not in all, by any means.

The following may be of especial interest if you are providing a personal service (for example in the finance or engineering industry), or if you have a substantial investment portfolio.

  • Holding Company. This can be used to hold investment portfolios, and is useful in providing enhanced privacy. It can be particularly useful in some offshore jurisdictions if you want to become locally resident, and need not to receive income yourself, although you may have a problem with ownership restrictions on residents. (This leads people to set up strings of holding companies in different jurisdictions). If the income of a holding company is used to make further investments, it may be that you won't be taxed on it even when you return to a high-tax domicile.
  • Personal Service Company. If you are engaged in providing a personal or professional service, you may be able to achieve considerable tax savings, as you can contract to supply the service regardless of residence, and the fees earned can accumulate offshore while you work for a low salary in the country where you are taxed. It only works in some countries, and you may have to do something more complicated than just owning the company yourself, if it is not to be 'looked through' by the taxman.

There are, of course, many other types of offshore company that can be formed to deal with the needs of large corporations, or expats with very specific needs, eg globetrotting entertainers or sportsmen.


Offshore Trusts

An offshore trust can be set up by an expat to serve the same basic purposes as an offshore company, namely confidentiality, tax minimisation, asset protection, and estate planning.

The principal difference between the two structures is that with an offshore company, ownership is maintained, whereas with an offshore trust, ownership is transferred. This has the effect of creating more distance between you and your wealth, so that it's harder for creditors, the taxman or your ex-spouse to get at it!

Trusts used to be primarily aimed at tax avoidance, but in recent years the tax authorities in many high-tax countries have passed 'anti-avoidance' legislation that lets them attack trust assets while you are alive, although they are still effective against inheritance taxes. Trust assets won't be taken into account during the probate process, so that the death of the settlor does not affect the administration of the trust, which still remains under the custodianship of the trustees. This also allows a settlor to maintain confidentiality over the size of the estate, and avoid the delays and possible publicity which would come as the result of a lengthy probate procedure, not to mention the saving on inheritance tax.

Trust assets will remain in the trust for as long as the original Trust Deed prescribed (in perpetuity, if necessary, or for lesser periods), or until the terms of the trust permit or require the Trustees to distribute them.

Another area in which the use of trusts is growing is asset protection, so if you have a fairly substantial liquid net worth that you would like to protect, before, during, and after your expatriation, an offshore trust may be the way to go.

A basic trust structure consists of three entities; the settlor, who sets up the trust, the trustee, who acts as custodian, and the beneficiary/ies, who can receive income from it.

Trusts originated in England, and most of the ex-British offshore islands have trust legislation. Civil law countries on the other hand tend not to have trust laws, although some of them have copied the concept of a trust in order to compete effectively.


Choosing Your Jurisdiction

There are several factors to consider when choosing an offshore jurisdiction from which to bank, invest, or trade as an expatriate. The following are areas that you will need to look at in order to make a considered and profitable decision:

  • Political and economic stablity. This is a basic, but important concern.
  • Legislature. The situation with regard to banking secrecy, for example, is undergoing changes at present, and it is worth keeping abreast of any issues which may impact on your investment, before, during, and after expatriation.
  • Professional infrastructure. This will need to be up to a good standard, in order for you to receive the support and services that you require, so you will need to check the banking, professional and advisory services available, whether the jurisdiction is well equipped to deal with the particular offshore structure that you wish to set up, and the general standard of the business infrastructure in the jurisdiction. For a comprehensive guide to the relative strengths and weaknesses of jurisdictions, and contact details for service providers in each, please click here to visit the Lowtax jurisdictions guide. 
  • Communications network. This is an obvious concern, but needs addressing. As an expat, you will presumably not be resident in the offshore jurisdiction itself, and may be moving around on a regular basis. You therefore need to check that effective communication between yourself and your advisor, bank, or custodian will always be possible (and preferably that you all speak the same language with at least a reasonable degree of proficiency!)
  • Geographical location. This needs looking at carefully, as it is of especial concern to expatriates. Assuming that your expatriation is of fixed duration, you do not want to have to move your money from jurisdiction to jurisdiction as you move around, or repatriate. The idea of investing it offshore is that it is safe, and easily accessible from anywhere in the world, in keeping with your global lifestyle. It is therefore important that you consider the time zone in which your offshore structure is based. For example, an expatriate based in Australia would find a relationship with a Hong Kong bank very easy to maintain, but an offshore structure established in Jersey or Ireland virtually inaccessible, during normal business hours at least. Online banking makes this a little less of a concern, but it still needs to be looked at.

As you can see, even from this basic guide, the offshore options for you as an expatriate are many and varied, and there is something for any situation and pocket. However, it is always advisable to seek one-to-one financial advice before making a decision about the type of investment that is right for you. 



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