If you are sending money to your child for studies, transferring a part of your income to your family or transferring money internationally for any other purpose, you should know everything about taxes before transferring your money and how to handle these taxes.
Some frequently asked questions on the topic that we will discuss in this article are what taxes apply to your foreign exchange, whether you should pay your tax in your own country when sending or the recipient has to pay the tax when they receive the money, what are the factors that might affect taxes on your international money transfer and lastly what are the implications of not filing your taxes?
What taxes apply to your foreign exchange?
The taxes applicable on your foreign exchange depend on a variety of factors:
The foremost determinant is the source of your funds. Where your money comes from determines whether your money will be taxed or not? For example, you are not liable to pay taxes on gifts in most countries around the world. So if you are sending inheritance money, a money gift to your immediate family, proceeds from the sales of your own house to your daughter, paying for the tuition of your child or paying for medical expenses of your mother; you are not liable to pay taxes on this amount as you are transferring money to dependents. HOWEVER, you do need to inform the local tax collecting body (like the IRS in USA) of your transactions.
So let’s say you sold your property in the UK and wanted to transfer this money to your wife in Nepal, you don’t have to pay any taxes on your foreign exchange. Although there is no tax, in most cases you will be required to inform the centralized tax collecting body of your country that you have received this gift, depending on where you are sending the gift. For example in the US you have to file IRS Form 3520 if your gift amount exceeds $100,000. For partnerships and corporations in the US, the threshold for receiving gifts is $13,258. The paperwork and the threshold amount varies for each specific country and you must check with your lawyer or the tax collecting body in your country before you receive expensive gifts from abroad.
You are liable to pay taxes on foreign exchange that count as income or capital gains. Capital gains are money gains on the investments you sell in other countries. An investment is anything that appreciates in value from when they were bought. So let’s say if you bought stocks on the NYSE from Nepal, you will need to pay tax on the profit amount of the stocks when you sell them. Same goes for properties or any other investment that appreciates in value over time. Please keep in mind that if your stocks or property appreciates in value when they are unsold, you do not need to pay taxes on them.
You are also liable to pay taxes on income generated in other countries. Let’s say you offer freelance content writing services to international clients then this money will count as your income and you will be liable to pay tax on it. Foreign wages, interests and dividends on shares also count as income and are taxed at the domestic rate of the recipient’s residence.
Some other factors influencing taxes on foreign exchange are the tax laws of both countries for example Pakistan does not charge taxes on income created from freelance services so you are not liable to pay taxes on freelance income if you live in Pakistan.
The amount of money you’re transferring and your residency status can also influence the amount of taxes you need to pay on your foreign exchange for example UK expatriates are exempt from taxes and only nationals have to pay taxes. Since the tax rates vary for each specific country, it is best for you to consult a lawyer or do some research on your tax liabilities before making your international money transfer.
Who should pay the tax?
The next question is do you need to pay the tax after receiving the money or should the sender pay the liable taxes? The answer to this question again depends on your source of funds and the local laws of the receiving and sending country.
In the case of gifts for example, the person giving the gift is obliged to pay the tax and there are no taxes on you for receiving it. Similarly, capital gains tax and income tax is usually paid locally in the country where your investment is and in most cases, you are exempt from taxes when you bring that money to your home country.
What are the implications of not filing your taxes?
Banks are required to report all big money transactions (whether within a country or received from abroad) to the government. What counts as a big money transaction really depends on where you are sending your money to for example the United States has a threshold of $10,000 whereas places like Panama have very loose tax laws that might not even tax millions of dollars of incoming money. So the implications of not filing your taxes vary from country to country. 99% of the times, the centralized tax collecting body in your country have the right and the required procedures in place to catch you if they find you evading taxes (regardless of the amount of transaction) and you could end up in jail or with a heavy fine for not paying your taxes. Governments are especially wary of overseas transactions and can even dig smaller transactions of as low as $1000.
All in all, it is highly advised that you take your taxes seriously and pay them periodically in order to avoid any displeasing outcomes. If you wish to find the best exchange rates for your foreign exchange, make sure to visit Rapid Remit that lets you comprehensively compare money transfer services in your area free of charge.