Academic journal article Business Law International

US/UK Tax Issues for Internationally Mobile Executives

Academic journal article Business Law International

US/UK Tax Issues for Internationally Mobile Executives

Article excerpt

In an increasingly global marketplace, international assignments have become commonplace and cross-border employment and tax issues have come to the fore. Because of their common language, culture and financial prominence, the links between the United States and the United Kingdom are especially well-developed and, as a result, there is a constant flow of high-level managerial and executive talent between these two countries. This article focuses on some of the most common tax issues that are raised by the assignment or transfer of executives between the US and the UK. Inevitably, it also addresses more general issues applicable to internationally mobile executives working in either the US or the UK as well as specific issues that may impact executives who are leaving their home country of the US or the UK for a temporary international assignment anywhere in the world.

This article does not seek to address any and all of the issues that internationally mobile executives and their employers will need to address in the context of transfers to and from the US and the UK Specifically, it does not deal with the complex issues that may arise from the various forms of employee benefits and incentives often awarded to executives in both the US and the UK.

US tax issues

This section discusses US tax issues that pertain to UK executives working temporarily in the US, including the differing US tax issues faced by UK executives based on their status as US tax residents or non-residents, plus the impact of the tax treaty between the US and the UK1

Unlike most other countries, including the UK, the US taxes citizens and resident aliens on their worldwide income, regardless of source. Because most other countries (including the UK) have a system based primarily on source, foreign -sour ce income earned by US citizens or residents is often taxed in the foreign jurisdiction where the services are provided and then taxed again in the US.

This potential double taxation is mitigated in many cases by treaty arrangements between the US and the other country that could claim the ability to tax income earned within its borders. Most treaties are generally consistent in their pattern and treatment of various key issues, such as the determination of residence and income source and the taxation of earned income and retirement benefits. The US/UK Tax Treaty will be discussed in further detail below.

In addition to the treaty network, the US employs a foreign tax credit system whereby, in general, foreign taxes paid on foreign-source income may be used as credit against US taxes otherwise imposed on such foreign income under the US worldwide system.

Residency

For UK executives employed in the US, a key threshold determination is whether such executive will be treated as a tax resident or non-resident of the US.

Residents and non-residents are taxed in the US according to very different rules regarding income, deductions and tax rates. As discussed below, a non-resident alien is taxed by the US on US source income only. A resident alien, however, is subject to US tax on worldwide income, regardless of the source of payment of the income.2

Residency determination

Under US law, two separate tests are used to determine the tax residency of a foreign individual. If either test is met, the individual is a US tax resident and, subject to the applicable provisions of the US/ UK Tax Treaty, is generally subject to the same tax laws as US citizens.3 The residency tests are:

* the lawful permanent resident, or green-card test; and

* the substantial presence test.

If either test is met for any part of a tax year, the individual is a US resident for that part of the year. Therefore, during the first and last years of a US assignment, the foreign individual may be both a non-resident for part of the year and a resident for part of the year. This situation of a 'dual-status taxpayer' will be discussed further below. …

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