What happened:
Shakira’s hips might not lie, but Spanish authorities claim that her tax returns, or lack there-of, don’t follow suit.
Spain has charged the Colombian singer with tax fraud, saying she owes €15 million for unpaid taxes between 2012-2014.
Shakira lived in Barcelona with her Spanish husband and their children during that time. And generally, spending 183 days per year in Spain makes you a Spanish tax resident, meaning you are liable to pay Spanish income taxes.
And despite the singer depositing the amount she is said to owe plus interest to the Spanish authorities, courts have claimed that there is “sufficient evidence of criminality” for the case against her to move forward.
That means she could face eight years in prison, and a €24 million euro fine.
Shakira claims her official residence is the Bahamas, which has no income tax, wealth tax, or capital gains tax.
What this means:
Don’t be like Shakira. There are enough legal ways to reduce your tax liability, that it makes no sense to put yourself in such a position.
If Shakira had spent the majority of each year in the Bahamas, and less than 183 days in Spain, she would likely have owed no income tax anywhere.
Even if you believe taxation is theft, it doesn’t change the fact that you could be thrown in a cage for tax evasion. Think about the situation like this: If you’re mugged in the park, doesn’t it make sense to hand over your wallet rather than risk being stabbed?
Not having to pay taxes gives you a ton of freedom many people understandably want to achieve. But you won’t feel much freedom from inside of a prison cell. So it’s always crucial to follow the law when pursuing your Plan B.
When you’re deciding where to live, work, and spend time, taxation is one of the first things you should plan.
Otherwise, you might end up stuck with a surprise tax bill–or worse–from a country you spent a little too much time in.
What you can do about it:
The first thing to understand is that legal residency is different from tax residency.
You can be a legal resident of a country without being a tax resident, and you can become a tax resident without holding legal residency.
Legal residency (such as temporary or permanent residency in Mexico, or Portugal’s D7 visa) entitles you to live, work, study, and invest in a country. You’re free to come and go as you please.
As for tax residency, most (but not all) countries will consider you a tax resident if you spend more than 183 days a year within its borders.
In this case, they don’t care if you’re a citizen or have legal residency– if you spend the time in the country, you’ll need to file and pay taxes according to that country’s laws.
Of course, some countries don’t have an income tax, such as the Bahamas, UAE, Monaco, Cayman Islands, etc. For most people, residing in one of these countries is the easiest way to legally avoid taxes.
However, this is not the case for American citizens, who are liable for taxation no matter where they live in the world. That is because of the type of taxation the United States practices.
There are four major tax systems across the world that countries follow.
Citizenship based taxation requires citizens of these countries to pay taxes on their worldwide income (some exceptions apply), regardless of where they physically live. Here, the only way to get rid of a tax residency status is to renounce citizenship.
The United States is the only major country with this type of system although Eritrea, Hungary and Myanmar also have elements of citizenship-based taxation.
Residence based taxation requires tax residents to pay taxes based on their worldwide income– including money earned in other countries.
If you move away and cease to be a tax resident, you would no longer owe taxes on your worldwide income. But you would owe taxes on any income produced in that country, say through a rental unit.
The majority of the world’s countries fall under this category, including most of Europe, Canada, the UK, Australia, New Zealand, Germany, France, Mexico, and Chile.
Territorial taxation does not tax residents’ worldwide income. Both tax residents and non-residents pay taxes on their local-sourced income only.
In some cases, residing in a country with a territorial system could help you avoid taxes on dividends or capital gains, depending on how the source country taxes investment income.
Countries practicing territorial taxation include the Republic of Georgia, Belize, Costa Rica, Panama, Singapore, and others.
No income tax is the final category of countries which, as we mentioned, do not charge income tax at all.
The bottom line is that it’s important to invest the time to plan your tax reduction completely legally. There are enough ways to legally structure your affairs to significantly reduce your tax rate, that it doesn’t make any sense to try anything shady.
If you want an overview of some of the most popular ways to legally reduce your tax bill, check out this recent issue of Sunday Intelligence.
Note that we are not tax advisors, and this information is not tax advice. It should be considered for general education only. You should always consult a trusted tax expert while tax planning.
