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The Asia Chronicles: Basic US Tax Issues in Asia, Middle East and Russia

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EvanHK Kinney ed.JPG[Ed. note: This post is authored by the Asia Recruiting Team at Kinney Recruiting–sponsor of the Asia Chronicles, and an ATL advertiser. Kinney has made more placements of U.S. associates and partners in Asia than any other firm in the past two years. You can reach them by email: asia at kinneyrecruiting dot com.]

We’re writing from Hong Kong, where we just made two more US associate placements last week and expect another one this week. I just arrived back in Hong Kong late last night, after a family holiday in Bali, and planned to return to US today, but a couple of pending partner level placements in Asia by our team has caused a stay in Hong Kong for another 10 days. Robert is heading back here on Friday. Before Bali, Robert and / or I had been in Tokyo and Hong Kong all of November, for the usual meetings with firms and candidates. Actually, you can catch a photo during my last week in Hong Kong in Sunday’s NY Times: Lawyers Wanted, Abroad That Is

As Robert explained in yesterday’s post, I was unable to post Monday as I had planned. A client is in our HK apartment this week, so while I was in route from Bali yesterday, I relied on admin to get a HK hotel and things did not work out too well with that. Today, I am back in normal hotel digs and am back up and running, with internet and all. Last week we discussed expat allowances in Asia and Middle East. This week we deal with basic expat tax issues. The next post will be on additional expat allowances for associates with children, something firms ask me for advice on routinely.

As always, please feel free to ask any questions in the comments area. Please note that I am writing off the top of my head and am not preparing a tax memo for you (as I would in my days as a biglaw tax associate years ago), so also please feel free to give more details and correct me where need be in the comments area. It would be great for US associates in Asia, Russia and Middle East to join the discussion, as you have experiences filing such taxes after all. This is very basic information, so let’s feel free to get into more detail in the comments.

You probably are well aware and recall from Federal Income Tax back in law school, US citizens and green card holders (both groups, combined, referred to as “US persons”) are liable for US income taxes while abroad, although with a credit given for any income taxes paid to the foreign jurisdiction they are residing. However, US persons do not have US tax liability on their first $87,600 earned abroad (this is the number for 2008, but rises a little bit each year it seems). Of course, this advantage is nullified if the jurisdiction you are working in has higher income tax rates than the US.

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So it can be a great situation in places like Hong Kong, Singapore, Russia and the UAE, where you will be paying much lower income taxes to those tax authorities than your US income tax rate.

US persons abroad are able to earn most of their income that is spent on housing free of US tax. Here are the amounts you can spend on housing almost US tax free (I say almost because I understand from associates I have placed that there is some minor amount that ends up being taxed) in relevant

overseas markets:

Hong Kong – $114,300

Tokyo – $85,700

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Moscow – $75,720

Singapore – $42,900

Beijing – $48,000

Shanghai – $54,000

Dubai – $42,452

Abu Dhabi – $29,973

Doha – $34,786

Riyadh – $30,677

The above numbers do not necessarily match up with the cost of living differences in the above markets.

In Singapore, the income tax rate at the highest bracket (over approx. $212,000 US annually) is 20%. It is a progressive tax bracket, with the first $20,000 not taxed.

In Hong Kong, an expat will pay approximately 15%, minus some minor deductions available. One interesting deduction available in Hong Kong is for amounts spent on trips outside the SAR, including vacations, so plan to keep those receipts when you go to Phuket!

In Russia, there is 13% income tax rate (although until you reside in Russia 183 days, your firm may withhold 30%, the tax rate in Russia for foreigners working there less than 183 days). Russia will consider just about any expat benefit, such as housing, taxable income.

In the UAE there is 0% income tax rate!!

In mainland China the income tax rate at highest bracket (over approx. $14,650 monthly) is a whopping 45%. However, it is a progressive tax rate, from 5% to 45% and expats get an approx. $700 per month tax deduction. Further, when firms pay directly for housing, educational expenses for employees’ children, home leave travel, moving costs, and other benefits, China does not consider such benefits to be income for tax purposes. Basically, in China you will be paying higher income taxes to China than you would pay the US if you were in US (if your firm does not have tax equalization), but your effectivetax rate in China will be only marginally higher than U.S. rate, at the end of the day. Also, you don’t have to pay state or local income taxes of course, so that is a substantial tax savings and thus you will not pay all that much more in total income taxes in China

than you would in US.

In Japan, the high end bracket rate is 40%, for those making over approx. $188,000 US. It is a progressive rate from 5% to 40%, with a deduction of around $30,000 US (for the top bracket). Unfortunately, Japan taxes most expat benefits, such as housing and children’s school tuition. Thus it is not as easy as in China to bring down the effective tax rate, but keep in mind that Japan’s top end bracket is much higher than in China, so a much higher portion of your income will be taxed below 40% than in China.

Keep in mind that overseas offices will typically provide US associates with tax preparers, to handle the somewhat complicated (relative to living in US) income tax filings.

Also, keep in mind that a minority of top firms have tax equalization, which can negate tax windfalls as well as higher tax burdens, relative to US.

Of course, a US associate who is not a US citizen or green card holder does not have any US income tax liability while working and residing outside the US. Thus, there can be substantial windfalls for such persons in places like UAE, Singapore and Hong Kong.

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