Guide to Paying Taxes Abroad

What is a Foreign Tax Credit

Some countries, including the United States, the U.K. and Australia, have foreign tax treaties in place. These treaties usually offer foreign tax credits when you are able to prove that you’ve paid tax elsewhere. These credits help to prevent double taxation, and they may apply to income taxes (including pension payments), inheritance taxes, gift tax and/or and some interest payments. Speak to a qualified tax professional about your unique situation.

In order to be eligible for a foreign tax credit or offset:

• You must have a tax imposed on you.

• You must have paid that tax in a foreign country.

• The tax must be a legal and actual liability.

• The tax is on income, in lieu of income tax, or must otherwise be included in assessable income.

What is a Foreign Tax Treaty?

A foreign tax treaty is an agreement between two countries to prevent double taxation. Residents may have access to tax credits, deductions, exemptions or reductions based on taxes paid to a foreign government. Benefits of a foreign tax treaty are dependent on a taxpayer paying taxes in a foreign country then submitting documentation of those tax payment when filing elsewhere.

What Types of Benefits are Part of Foreign Tax Treaties?

Benefits under foreign tax treaties vary by country, but you may have benefits waiting for you if you meet certain criteria. Here are a few categories that may have special tax treaty credits:

• If you are a professor or teacher doing research in a foreign treaty country

• If you are a student, trainee or apprentice and receive funds for study, research, business, professional or technical training

• If you receive some grants, allowances or awards associated with a non-profit organization

• If you have a non-government pension or annuities

• If you have investment income like interest or dividends

• If you have received capital gains other than sales of real property

Consult a tax professional to help you reduce your international tax burden.

What Records Do I Need to Keep to Claim a Foreign Tax Benefit or Offset?

You will need written evidence that you have paid a foreign tax. This documentation should be retained for at least five years after all filings have taken place. In the United States and the U.K., this information is provided at the time of filing and specific forms must be completed when tax documents are remitted. In Australia, the Taxation Office advises that you keep evidence of foreign income tax offset, so it can be provided upon request. If they require information that is held overseas, they will provide time for it to be acquired and remitted.

The written evidence should include the following information:

• Amount of foreign income or gains in the foreign currency

• The foreign tax year (may be different than home country tax year)

• The nature and amount of the foreign tax levied

• The date of payment of the foreign tax

• Any balance due on the tax

Australian Exchange Rate for Tax Purposes

If you are in Australia and need to convert foreign income for tax purposes you have two options for this calculation:

First, you can use an exchange rate from a specific time period as determined by Australian tax law. A table of specific times is available on the Australian Taxation Office website for ordinary income, expenses, obligations, liabilities, receipts, payments, and other values that apply to revenue accounts, capital accounts or otherwise.  

Second, you can use the average exchange rate. This means you can use average, daily or rates consistent with those used in an audited financial report. The goal of using average exchange rates is to find a rate that would be considered a “reasonable approximation” of an exchange rate if you had used spot rates.

An example of using average exchange rate is such: Say you are receiving a foreign pension. Instead of calculating the exchange rate at each and every payment, the average exchange rate can be applied to the entire yearly amount.

US Dollar Exchange Rate for Tax Purposes

All items on a U.S. tax return must be reported in U.S. dollars. In general, the Internal Revenue Service advises that payer use a spot rate, or the prevailing rate when an item is received, paid or accrued. Some qualified business units (QBUs) can use a foreign currency. The IRS has no official exchange rate and generally accepts posted exchange rates that are consistent.

Note: When the IRS receives a tax payment in a foreign currency, the exchange rate of the date  the currency is converted to U.S. dollars by the bank processing the payment will be used. To keep control of the exchange rate you get when paying taxes abroad, use OFX to lock in an exchange rate for up to 12 months.

U.K. Exchange Rate for Tax Purposes

The United Kingdom provides a list of monthly exchange rates as guidance for remitting payments or calculations. These exchange rates should be used to convert any foreign currency.