What Is the Expatriate Tax Regime?

TECHNOLOGICAL advances and rapid globalisation have driven the pace of individual mobilisation between countries. The individual mobilisation has become more massive in line with the increasingly fierce competition between countries in fighting for superior human resources (HR).

The competition for superior human resources has led to competition among many countries to establish various policies to attract highly talented individuals. Human resources with specific skills are expected to support the industry and lead to increased economic activities. One of the policies designed to attract highly talented individuals is the expatriate tax regime. As such, what is the expatriate tax regime?

Expatriates

An expatriate is a person who has left his/her country of origin and lives abroad. The expatriate status does not always imply severing all ties with the country of origin but generally leads to a change of residence for tax purposes (Glabush, 2015).

Residence is a tax base. Residence refers to the country where an individual is responsible for paying taxes, generally, on worldwide income (Glabush, 2015).

For individuals, still based on Gabush, residence is generally determined based on the facts and circumstances of the individual. These facts and circumstances are assessed in particular with reference to the degree or personal attachment to the country concerned.

For example, based on permanent residence, family relationships, citizenship status, physical presence, habitual abode and the centre of vital interests.

Individuals who fulfil a country’s provisions on residence will have the status of a resident. The determination of the status depends on the country’s domestic provisions, thereby, may differ from one country to another.

In the context of cross-border taxation, differences in domestic provisions on residence may lead to a situation where a tax subject is a resident in 2 countries (dual resident).

If a tax subject experiences a dual resident, this may be resolved through the tie breaker rule. Residents (SPDN) will be subject to different tax treatment from non-residents (SPLN).

For example, a country that adopts a worldwide system will impose a tax on residents on their worldwide income. Non-residents, on the other hand, will be taxed only on income sourced from Indonesia.

An expatriate may have the status of a resident and a non-resident depending on his/her residence status. However, there is also special tax treatment for expatriates or known as the expatriate tax regime.

Expatriate Tax Regime

Expatriate rules refer to provisions on expatriates whose residence status has been changed from their country of origin to another country and may continue to be taxed in respect of certain income as if they remain residents in the former country (extended limited tax liability).

The term expatriate rules also refer to all kinds of provisions designed to protect a jurisdiction’s taxing claims of changes of residence by taxpayers, such as the exit tax (Glabush, 2015).

The expatriate tax regime is generally a special regime among the tax treatment of residents and non-residents (Kristiaji, 2019). In practice, the expatriate tax regime is a special regime granted to expatriates with resident status to be taxed with non-resident status (Darussalam, 2020).

This regime provides relief for expatriates in a number of ways. First, limiting the jurisdiction to tax income received or accrued by expatriates, namely by implementing the territorial system.

Second, the granting of tax administration facilities for expatriates. Third, the implementation of special concessions for expatriates who fulfil the qualifications. Usually, the expatriate tax regime is aimed at attracting wealthy, high-income or high-skilled individuals to migrate to a country (Darussalam, 2020).

In addition to attracting individuals to migrate to a country, the expatriate tax regime is also available for individuals who emigrate. The emigration-related expatriate tax regimes include the exit tax, extended income tax liability and clawback of tax deductions.

The exit tax is a tax imposed on companies and individuals deciding to become residents (SPDN) in other countries or emigrate from their jurisdiction of origin.

On the other hand, extended income tax liability may be divided into 2 types, namely unlimited extended income tax liability and limited extended income tax liability (Betten. 1998). According to Betten, in unlimited extended income tax liability, emigrating individuals remain subject to income tax as if they continue to constitute residents in the country of emigration.

On the other hand, in the limited extended income tax liability, income tax is collected on certain income items from sources in the country where the taxpayer has been a resident, in a way that is more onerous than other non-resident taxpayers.

Next, the clawback of tax deductions refers to the revocation of formerly enjoyed tax deductions for emigrating taxpayers or the revocation of formerly permitted tax deferrals when the taxpayers emigrated (Betten, 1998).

The expatriate tax regime is now increasingly widespread in various parts of the world. One example of the application of the expatriate tax regime is the Beckham Law, namely the expatriate tax regime imposed by Spain in 2005.

In this regime, HR with special skills may enjoy flat individual Income Tax rates and tax exemptions on income accrued outside Spain. The application of the Beckham Law resulted in the phenomenon of the migration of world-class football players to Spain at that time. (sap)