Friday, March 21, 2014

2013 US and Spain tax surprises for expats

If you have to file taxes in the US, and you had a big capital gain this year, you are in for a bit of a surprise. As part of the Obama-care deal, there’s a new tax called the “Net Investment Income Tax”. This is a 3.8% tax on unearned (eg interest, dividends, capital gains) over a certain threshold depending on your income.

The particularly nasty thing about this tax is that you cannot reduce it via foreign tax credits (it gets added to your taxes after the credits are applied), so you may face a situation where you are taxed twice.

However, all is not lost. If you are a Spanish tax resident, you may be able to apply the taxes you pay to the US as a tax credit in Spain.

The general rule for Spain is that your foreign tax credit is equal to the lesser of:

1) Taxes paid on foreign income because of a tax similar to IRPF

2) The Spanish taxes you would owe on the fraction of your income that is foreign.

What this means is that you should definitely not hold your investments in Spain, otherwise you will have no foreign income, and thus can take no credits. Of course, this only works if your Spanish tax rate is higher than the US one would be.

Unfortunately the Spanish tax law forces you to apply the income and savings baskets separately, so in most cases you’re screwed, except for short term capital gains, where as of 2013 you integrate short term capital gains into your general income (and thus taxed up to 42%).

Monday, January 13, 2014

The right to remain silent in Spain (and Europe in general)

With the case of the daughter of the king of Spain going to court, something I found interesting was the fact that anyone in Spain would choose to testify at their own trial.

Both Spain and the US have the right to remain silent explicitly stated in their constitution. As usually happens over time, these rights slows erode away as courts find ways to weasel their way around the plain meaning in the constitution.

In the US, the courts have several strategies to compel testimony:

  • Granting immunity. Once you have been granted immunity, you are compelled to testify, and if you refuse can go to jail for contempt of court.
  • You can’t stop half way: Once you start answering questions, you lose the right for your silence to mean nothing.
  • Act of Production doctrine: you can be compelled to produce documents, evidence, etc if the government can prove they exist, even if they incriminate you

For this reason, the best strategy in the US is generally to keep your mouth shut. Of course, then the prosecutor will threaten to go to trail asking for 30 years in prison unless you agree to plead guilty and accept a plea bargain.

The Europeans have taken a different tact. Generally you can’t be compelled to testify, but the court can consider this as sort-of evidence of your guilt. .

In a pivotal case (John Murry vs the UK), the European Court of Human Rights, while ruling in favor the defendant with respect to the fact that he was not allowed access to a lawyer, allowed for this loophole:

On the one hand, it is self-evident that it is incompatible with the immunities under consideration to base a conviction solely or mainly on the accused’s silence or on a refusal to answer questions or to give evidence himself.  On the other hand, the Court deems it equally obvious that these immunities cannot and should not prevent that the accused’s silence, in situations which clearly call for an explanation from him, be taken into account in assessing the persuasiveness of the evidence adduced by the prosecution.

The problem with this “obvious” ruling is that it only would apply in the case where the prosecution isn’t able to prove their case without taking into account the silence of the defendant. If the prosecution could prove their case without it, then there’s obviously no need for the defendant to testify. This effectively creates an assumption of guilt, unless the defendant can prove otherwise.

For this reason it can make sense in Europe to testify in your own trial, since there’s no hard line about how much your silence can be used against you.

Monday, December 16, 2013

Independence referendum trick question

Is there anyone dumb enough to think that you can win independence by tricking your population into voting yes? (in this case, not voting no)

Apparently that’s the idea, since only about 40% of people living in Catalonia support being an independent country vs a federal arrangement or the status quo.

By structuring the referendum as:

  • Do you want Catalonia to be a State? (capital letters on State)
  • If yes, do you want that State to be an independent State?

the ERC claims that if someone answered “no” to both questions, it would be an invalid vote and not count.

I have an even better idea for a question referendum:

If you don’t want Catalonia to be an independent country, please write the current president of Spain’s second last name in the space provided: ______________

Guaranteed win! Worst case, you can count all the blank votes as pro-independence!

Torre Negra is saved from development

There’s been a long running court case in Sant Cugat where a developer has been trying to get approval to build 2800 homes on the edge of the Parc de Collserola. The developer had bought the land fifteen years ago when the status of the land had not yet been decided.

In 2012, Sant Cugat declared the land as “undeveloped”, which would shield it from further development. The developer appealed and finally lost at the Catalan supreme court in November.

Thursday, December 12, 2013

Spanish taxation on foreign retirement accounts

Here’s a very good link describing the consequences of contributing and withdrawing from a foreign retirement savings account.

In this case, the author refers specifically to the UK QROP scheme, but this is similar to an IRA in the US or and RRSP in Canada.

The gist of the article is this: Spain doesn’t recognize these accounts as anything other than a foreign investment account. You don’t get to deduct any contributions and when you withdraw your money, you’d be expected to pay taxes on any gains made in the account.

QROPS are more restricted in terms of withdrawal date, so the income can grow tax free until you withdraw it. This does not appear to apply to an IRA or RRSP (since you can withdraw these at any time), so you’d have to pay Spanish taxes on any dividends, interest or capital gains received from account, just as you would for any other investment account.

Of course, you would still owe US or Canadian taxes on your withdrawals.

For US citizens, if you’ve been working in Spain and pay higher taxes here than you would in the US, you probably have some excess foreign tax credits you could apply to reduce the amount of money you’d pay to the IRS.

For Canadians, you are stuck with paying the 25% withholding tax on your RRSP when you withdraw it (still better than what you’d pay in Canada!). I haven’t looked into how foreign tax credits work here in Spain, but I’d imagine that if you have non-Spanish income, you could use the 25% you paid as a tax credit against Spanish taxes you would owe on your world income.

Thursday, December 5, 2013

Investing in stupidity

My best performing “investments” this year:
Bankia +65%
Bitcoin +500%
Welcome to the post-modern bubble investment, where people actually know that they are investing in a bubble and don’t even bother to try to find some valuation justification.
I’m pretty sure the long term value of both of these investments is zero. My strategy is that as soon as I manage to convince myself to buy more, I’ll do the opposite and sell.
Not like this guy:

Friday, October 25, 2013

Felipe Gonzales creates foundation to study himself

The Spanish ex-president (1982-1996) perhaps decided that his image needed a bit of whitewashing, since his claim to fame is having been the mysterious “Mr X”" who ran the GAL deathsquads in the 80s.

He will be the president of the foundation, along with one of his ex-ministers and his daughter as secretary.

Foundations in Spain are supposed to have some kind of social benefit in order to justify their tax advantages, one commentator:

Le ley solo debería permitir la creación de fundaciones y sus correspondientes beneficios fiscales, a las fundaciones que realmente tengan una finalidad social, es decir que el fin último de su función sea el beneficio de el pueblo. Y estos beneficios solamente les serán aplicables una vez hayan demostrado su utilidad. Si no debería plantearme crear una para el estudio y documentación de los horarios de las deposiciones de mi perro. Vergüenza ajena.

Well said.