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Considerations for Oil & Gas Expats in Brazil

Several regions in Latin America have been either temporary or longer-term homes for expatriates in the oil and gas industry, for example, Rio de Janeiro, Ciudad del Carmen and Maracaibo.  Given the mobile lifestyle of the typical O&G Expat (let’s abbreviate to OGE), we believe they would reap the benefits of taking independent financial advice.  

Whether a seasoned senior management OGE who has lived in multiple locations or a younger executive on a first overseas assignment, we discuss some of the financial considerations affecting OGEs along their careers. 

1. Currency of package 

Several countries in Latin America have experienced macroeconomic volatility and rapid political change which have affected their exchange rate stability.  Some OGEs earn their salaries and bonuses entirely in hard currency and receive some benefits in local currency e.g. accommodation, health plans and meal allowances.  In some cases, although less common, OGEs receive their salaries in two currencies, which we believe is a ‘safer’ package but it depends on the policy of their employer. 

This graph below shows the British Pound against the Brazilian Real since 2005.  Imagine the case of an OGE who accepted a contract weighted towards GBP at the beginning of 2008. Apart from a few months following the Great Financial Crisis (Q4, 2008), their purchasing power in Brazil would have been significantly weaker over a 3 to 5 year period given that £1 could buy 3.40 BRL in Q1, 2008 and only 2.50 BRL in Q1.2011).  Such a salary contract (in GBP) would have been desirable if it were signed in 2013 until the end of 2015.   

GBP BRL currency chart, 2005-2022

2. Switching from international to local contracts

During the oil price decline from 2014 to 2016, many OGEs were offered an opportunity to retain their employment and location if they switched to a local contract.  A local contract means the employee would receive their salary and bonus in the currency of the country of assignment and may lose some benefits like an accommodation allowance and school fees for children.  

In the case of a middle-aged primary breadwinner and non-working spouse with two or more children, the switch to a local contract would, in most cases, have been too much to absorb. It would depend on other opportunities in the market elsewhere, especially during a recession, but the additional costs of taking out private health insurance, renting an apartment of a similar standard and paying for school fees at an international school would be a game-changer for most families.  Often, the expat benefits package (excluding salary) has a much higher monetary value than the salary itself.

An unmarried employee (with no dependents) would enjoy more flexibility and may choose to accept the switch although as mentioned in point 1, they would be facing higher currency risk if their reference currency were USD, GBP or EUR.   We observed cases of single expats who chose to stay in Brazil purely for social and lifestyle reasons whilst some others were willing to accept a redundancy package and procure a higher paying job in a new country or return to their base country.

Assume the case of switching from a GBP-denominated contract to BRL from 2019 to 2021 or a USD contract to COP (Colombian Peso) in the same period, when several emerging market currencies fell sharply against hard currencies.  In practical terms, the ‘switched OGE’ would still, most likely, enjoy a reasonable income and lifestyle domestically but it would reduce the potential to accumulate wealth in hard currency. 

Any such offer to switch to a local contract should be critically assessed and modelled with all additional costs, the total effect on net income and at least a 20% exchange rate swing.  

USD COP currency chart, 2018-2022

3. Asset consolidation

After several assignments, usually a combination of expat and domestic, we find that many senior managers and directors have been so busy working, travelling and attending to family needs, that their personal financial planning has taken a backseat. 

This brings back memories of meeting financial executives at energy companies who could model an investment payback on a multi-million-dollar oilfield project yet remain distant and disorganised about their personal finances which were scattered in various accounts across countries in which they had worked.  In many cases, they had entrusted their savings to unscrupulous salespeople who abandoned the promise of periodic service; a familiar and unfortunate story on the expat circuit.  

We have discussed consolidation in previous articles and videos. It is important to streamline your personal finances and benefit from lower administrative costs and a more strategic approach to wealth management.  Consider the hurdle rate to generate a real return when inflation and fees are aggregated.  Read about the benefits of consolidation in point 9 here. 

4. Too much dependence on company shares

We should all take a lesson on prioritising our personal long-term financial stability ahead of excessive loyalty to our employers.  Many employees of companies have been hardwired to believe that their companies’ share prices will always follow an upward trajectory.  Employee incentive schemes are usually favourable and it is generally wise to participate in profit-sharing and share option schemes. 

However, with your additional savings, please focus on diversifying into other sectors and asset classes and be fully aware that your company’s stock market performance could affect a large percentage of your wealth.  

If you are working in the oil and gas or mining sectors, you will be aware of commodity price volatility which inevitably leads to cyclical swings in the share price of your company.  

Let’s take BP (London-listed) which was trading at 586 pence in Jan 2010, 466p in Jan 2013 and 376p in Jan 2016.  On 19 Sept 2022 (date of this article), BP trades at 452p.  Have a look at other companies across all categories of energy and I am sure you will conclude that it is indeed cyclical and that you cannot rely on allocating a large percentage of your wealth to just one sector to provide a retirement income for 20-30 years or to meet other lifestyle goals. 

5. Becoming a contractor

Given the cull of expat jobs across the oil and gas sector in Latam, many consultants and engineers have resorted to becoming contractors.  Contractors generally earn higher daily rates but face the risk of empty unremunerated periods and do not receive the long-term benefits applicable to payroll employees. 

Depending on the jurisdiction and payment currency of their clients, contractors may be required to set up an offshore company and/or a local company in their country of residence which requires specific knowledge and administration time to manage company accounting and periodic filings.  

When choosing an offshore jurisdiction for your invoicing company, it must satisfy several criteria such as being tax-compliant in your country of residence, cost-effective in terms of annual fees and acceptable for your principle clients because some large companies prohibit payments to certain jurisdictions.  

Many company formation agents will happily offer you a cheap offshore company with low set-up and annual fees. Remember, you get what you pay for. We strongly recommend that you make this decision in conjunction with tax advice. You should know how to declare the new entity, the income tax implications and how to structure the company for succession planning.

Disclaimer:  We are providing guidance and personal opinions which should not be interpreted as specific investment advice.  

If you work in the oil and gas sector and would like to discuss any of the above topics, please contact us here.  

Many thanks to Rawpixel.com for the image and cover photo and to Yahoo Finance for the currency charts. 

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Declaration of Brazilian Capital Overseas (DCBE)

Foreign capital owned by Brazilian residents must be registered with the Central Bank of Brazil – Banco Central do Brasil – in a form known as the Declaração de Capitais Brasileiros no Exterior (DCBE).

*  * UPDATE re. declaration limit * * 

Registration is via self-declaration for all overseas assets above the equivalent of USD 100K in value on 31 December 2019.   Due to the coronavirus lockdown, the DCBE deadline has been extended from 5 April to 1 June.  Assets include financial instruments, cash in foreign currencies, real estate, shares and property.  The DCBE data is used to measure the degree of ‘internationalization’ of the Brazilian economy.   For amounts above USD 100M, the DCBE must be filed on a quarterly basis (outside the scope of this article).

More information at the Banco Central website.

Disclaimer:  We are providing guidance and personal opinions which should not be interpreted as formal legal or tax advice.  We recommend that you consult your accountant or contact us if you would like to be referred to a suitable accountant, based on your needs.

The DCBE requirement often catches out many expatriates and foreign residents in Brazil.  The DCBE is not to be confused with the asset declaration (declaração de bens e direitos) within the annual tax return – IRPF.   It is a separate declaration – yes, more form-filling – so take a deep breath and organise yourself in advance.

Fines for non-declaration or providing false information range from R$2.500 to a limit of R$250.000.

Follow these steps below to complete the DCBE: 

Step 1:   Register here at the BCB

Step 2:  Complete the following fields:

Step 3:  Note the following categories:

Ações negociados na bolsa – Listed shares.  Shares held directly or via a trading account or international fund platform.  State the investment currency, market value, acquisition value, acquisition date, income value and issuing country.

Depósito no exterior – Overseas bank account.  Current and deposit accounts held onshore and in OFCs (offshore financial centres).  State the currency, value, interest received and country.

Empresas – Participação no capital – Companies – Share capital.   This applies to operating and holding companies.  State the amount of share capital and percentage held.  State the currency, value of assets and equity, as well as the profit or dividends distributed by it in the year.  The advantage of a holding company is that assets within do not have to be individually listed, hence simplifying the process.

Fundos de investimento – Investment funds.  As per listed shares (above).

Imóvel – Property.  Declare the book value of property.

Outros ativos – Other assets.  Trusts and offshore portfolio bonds can be entered in this category. 

As mentioned above, this article is for guidance only, and should be used in conjunction with professional advice.  For specific queries on expat taxation or financial planning, please contact us here.

Read our Coronavirus article about decision-making in times of uncertainty.

Credits:  Many thanks to rawpixel.com for their selection of photos and graphics, including a wide range of free Coronavirus design resources.

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Reminders for Expats filing Brazilian Tax Returns (IRPF 2020)

The deadline for the Brazilian tax return (IRPF) has been extended from 30 April to 30 June.  Nevertheless, we recommend that you prepare your tax return as soon as possible and not leave it to the final week!  If you are filing for the first time in Brazil, we recommend that you seek the help of a professional.

We have selected some relevant questions for expats and long-term foreign residents.

Disclaimer:  We are providing guidance and personal opinions which should not be interpreted as formal tax advice.  We recommend that you consult your accountant or contact us if you would like to be referred to a suitable accountant, based on your needs. 

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Which individuals are required to file IRPF?

Residency status applies to expatriates who have recently entered Brazil with a work/residency visa or foreign nationals who have stayed for more than 183 days in a 12-month period.  

  • Residents of Brazil with taxable income above R$28.123 in 2019.   Includes rent, salary and other income categories – but excludes dividends.
  • Residents of Brazil with exempt income, non-taxable income or income taxed-at-source above R$40.000 in 2019.
  • Anyone who realised a capital gain and/or has traded shares on the stock market (Bovespa).
  • Anyone who sold a property whereby the capital gain was exempt due to acquiring another property within 180 days.  This still needs to be declared regardless of the exemption.
  • Owners of assets above R$300.000.

The IRPF software can be downloaded at the Receita Federal website.

What information needs to be included in my IRPF?

The tax return has two sections; income and assets which apply to Brazil and overseas. 

  • Income (rendimentos):  Include all taxable income e.g salary and rental income and non-taxable income e.g. company dividends. 
  • Assets (declaração de bens e direitos):  Include all properties, bank accounts, investments and other assets e.g. a car.  

What’s the difference between a simplified and complete return?

You have the option to choose either a simplificada or completa declaration model.  A complete declaration allows you to partially offset your taxable income with expenses such as medical costs, private school fees and private pension contributions (previdência privada).  Each category has a percentage or nominal limit to reduce your taxable income.  The software allows you to test both models and decide which is more favourable.  

 For example, a private pension may be used to offset up to 12% of your taxable income. If your taxable income was R$100K,  you could have contributed R$12K (by 31-12-2019) and be taxed on R$88K.  More information here in point 3.

How do I declare assets?

The asset statement should include the following items in Brazil and overseas.  *Please note, this is not an exhaustive list*.

Property (residential, commercial) and land; bank accounts, treasury (tesouro nacional) and CDBs;  investment funds and private pensions;  any assets valued over R$5.000 (e.g. crypto or a small plot of land).

Investment funds in a portfolio should be listed separately with their CNPJs – not in a single line e.g. ‘Trading account X’.    Investment funds, fixed income, shares and other financial assets all have different asset codes.

When declaring overseas investments, ensure you select the correct country and asset codes.  For example,  a bank account (Conta Corrente: 62) in the UK (Reino Unido: 628).  Remember to include overseas property and former employment pensions (e.g. 401Ks for US nationals) , which are often omitted unintentionally.

In 2018, Brazil joined the Common Reporting Standard (CRS), an international agreement to automatically exchange information with 100+ countries.  Hence, undeclared overseas assets are more likely to be cross-referenced and flagged.

Currency variation (variação cambial) tends to generates some confusion.  If the source of an international investment was BRL, and the investment is in say, EUR, then this item would need to be adjusted for market value and currency variation, based on the official Central Bank exchange rate on 31 Dec 2019.   If no chargeable event has occurred, then no gains tax would be payable on the investment growth or the currency variation.  If a partial or full withdrawal is taken from the investment, gains tax (15%) will be applied to the joint increase of investment growth and currency variation.

Note, the Central Bank return (DCBE) is a separate declaration.  Due to lockdown, the DCBE deadline has been extended from 5 April to 1 June.  This is a mandatory declaration for individuals with assets above USD 100K in value (or currency equivalent) at 31 Dec 2019.  These include financial instruments, cash in foreign currencies, real estate, shares etc. The DCBE data is used to measure the degree of ‘internationalization’ of the Brazilian economy.   More information here at the Banco Central website.

How do I declare overseas income?

Overseas income, rent and dividends are subject to Brazilian tax via a Carnê–Leão (DARF) payment on a subsequent-monthly basis.  Hence, if you receive rent from an overseas property or an income payment as a pessoa física on 15 April, the tax payment deadline is 31 May.   The tax rate (alíquota) is based on the progressive table for monthly income (tabela progressiva):

Brazil has several agreements in place with other countries to prevent double-taxation.  In any case, reporting requirements still exist in Brazil for the receipt of overseas income even if such receipts will be taxed overseas or are taxed at source.

There are several ways in which you can reduce or defer taxation on overseas income by changing your holding and/or operating structures.

How and when should I pay capital gains tax in Brazil?

For overseas assets (property and investments),  capital gains tax is payable at a rate of 15% on the amount of the gain. As per overseas income, it is payable on a subsequent-monthly basis.

I am a director of an offshore company; how should this be declared?

Shareholdings in trading and holding companies can be declared in almost a similar way as a local company.  Provide details of the company in the description (discriminação) with the number of shares and value of capital social at the time of inception.  Ensure you enter the correct country code and note that some smaller countries (offshore financial centres – OFCs) are not available in the drop-down menu.

Dividends from offshore companies are subject to Brazilian income tax at 27,5%.   Double-taxation agreements generally apply and will become more important as some OFCs are starting to introduce or increase company taxation for non-resident directors.

I left Brazil earlier this year and I’m not planning to return for the foreseeable future.  

You would need to file a Comunicação de Saída Definitiva  (permanent departure) to inform Receita Federal of your non-resident status and be exempt from paying tax on overseas income.  You would still be liable for tax on Brazil-source income and asset transactions.  You need to inform all of your financial institutions of your non-resident status for them to deduct tax at source at the non-resident rate.

Problems arise when people file the Comunicação de Saída Definitiva – yet fail to inform their bank manager or broker – which means the financial institution shares information (interest, earnings, gains) with Receita as if the individual were still tax resident.  This could lead to their CPF being suspended.

I received an inheritance from a family member, based overseas, in 2019.  Is any tax payable in Brazil?

In Brazil, death and donations taxes are imposed at state level.  ITCMD (Imposto sobre a Transmissão Causa Mortis e Doação) in the state of Rio de Janeiro (RJ) is set at 4% for amounts between R$39.993 and R$248.850.  This tax rate (alíquota) increases on a tiered scale (4.5% – 5% – 6% – 7%) with an upper limit of 8% on amounts above R$1.422.000.   There is significant ambiguity concerning Brazilian taxation on overseas inheritances which have already suffered estate taxes in the individual’s country of domicile.  We recommend taking professional advice which covers Brazil and your country of domicile.

For specific queries on expat taxation or financial planning, please contact us here.

Read our Coronavirus article about decision-making in times of uncertainty.

Credits:  Many thanks to rawpixel.com for their selection of photos and graphics, including a wide range of free Coronavirus design resources.

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Financial Decisions in Times of Coronavirus

 

Let’s discuss how to structure our decision-making during this coronavirus uncertainty.

In our monthly breakfast seminars – Financial Markets Café – we often ask our guests to highlight what they consider to be potential geopolitical risks and triggers of market volatility.  This became increasingly important in 2018/2019 during the late stage of one of the longest bull markets in history.  We discussed the usual suspects such as Brexit, EU fragmentation, North Korea tensions and US-China trade wars.  However, a global pandemic in the foreseeable future was hardly a key talking point!

Disclaimer:  We provide guidance and personal opinions which should not be interpreted as specific investment advice!  Figures quoted up to 30 March 2020.

FINANCIAL MARKETS

March 2020 will be remembered as one of the most turbulent months in the history of global financial markets.  The rapid spread of coronavirus and governments’ actions, such as monetary stimulus and travel bans, have prompted the natural instinct of many investors to reduce their exposure to equities and other risk assets.  The oil price war between Saudi and Russia, resulting in the price per barrel reaching its 18-year low point, was a major factor in the market sell-off.

A lot depends on the strategies of governments and the ability of their health services to cope with the volume of cases.  Investors – individual and institutional – are trying to make decisions based on multiple factors and a plethora of asymmetric information hitting our news channels and social media in real time.  In times of extreme uncertainty, we are observing panic-selling and opportunistic buying which result in high price volatility.

The financial shock is comparable to the 2008 financial crisis although we still have a long way to go before we are able to interpret the ongoing impact of coronavirus and the lockdowns.

The rapid movement of capital has generated extreme currency swings, whereby hard currencies, especially the USD have strengthened against emerging markets.

VOLATILITY

The VIX index measures expectations of volatility 30 days out.  The average daily closing price in 2019 was 15.4.   So far, in 2020, the average is 31.2 and in the second half of March, it fluctuated between 80 and 50.

1 year VIX chart. Source: CNBC

Normally, a daily swing of 4% to 5% would be considered extreme but such swings have been recorded on a near-daily basis over the last month.  The S&P 500 recorded its worst quarter since 1987, down 20% from its peak, and last week, the S&P 500 increased by 20% from its recent low point on Mon (23/03) to Thur (30/03).

REVIEW YOUR PORTFOLIOS AND DO NOT PANIC-SELL

Higher risk, equity-heavy portfolios will have felt the full brunt of the recent crash.  Even low and medium risk portfolios will have felt the impact as they hold a variety of ‘risk assets’ such which were affected by the sell off.

Financial loss (and gain) often create emotional reactions.  Imagine how first-time stock market investors in Brazil would be feeling after entering the stock market for the first time in 2018/2019. The interest rate (Selic) has fallen steadily from 14% (2016) to 3.75% (March 2020) whilst the hope of reforms (pension, taxation etc) encouraged many individuals to move away from fixed income and into equities.  After reaching a record high on Bovespa, Brazil being the top emerging market equity performer in 2019, investors subsequently endured a sharp decline with Brazil falling by a much greater percentage than the global average.

Ask yourself whether you really need to withdraw money from your investments in the short-term if this means crystallising losses.  Preferably, draw cash from your bank account or a near-cash source such as a money market fund.

Ensure you set aside an emergency fund.  This applies even more to self-employed individuals and those facing less job security.

Review your portfolio, line by line, preferably with an experienced professional, and decide how to rebalance strategically.  If you are approaching retirement or in pension drawdown, then your advisor will need to rebalance your portfolio and recalculate your cash flow – and potentially, recommend adjustments to your personal spending, at least in the short term.

Some investors may prefer to wait for a recovery outright without adjusting their portfolios.  Others may decide that it is worth crystallising certain losses and using the available cash to purchase other funds which they believe have a higher upside.  After the 2008 crash, many banks share prices declined and flatlined for years while many large tech companies grew above the market average over a decade long bull market.

Global equities and corporate bonds. Source: Quilter

The above graph shows the benefit of having a greater share of equities in your portfolio if you are investing for the long-term.  In theory, you should de-risk the portfolio accordingly as you approach retirement or another target date such as paying for children’s education costs.

We have all read the disclaimers about past performance being no guide to the future . However, financial markets are always volatile in the short term and have grown in a more steady manner over longer periods despite geopolitical shocks e.g. surprise election results and regional conflicts.

IS THIS A BUYING OPPORTUNITY?

Theoretically, yes, if you have the appetite for more fluctuations over the coming weeks and months.  You may have heard analysts discussing V, U and L shaped recoveries:

V – sharp fall followed by a rapid recovery

U – a period of market plateau followed by eventual recovery

L – not really a recovery, just a long-term plateau or slow growth

Some analysts believe that markets have undershot reality, due to mass panic-selling, whilst others believe there is more downside on the horizon.  As per the introduction, with so much information flying around, we are bound to hear conflicting opinions (even in periods of stability!) and many ‘expert commentators’ are basing their views on their own emotions or their biases to certain fund managers or investment banks.  A US equity fund manager making an appearance on CNN is hardly going to discuss the potential of  emerging market bonds, right?  And I wonder what asset class a property fund manager will tell you is the best investment whether we’re in the middle of a credit crunch or a boom…

A common and safer strategy is to phase your money into equities and other risk assets over time; buying a selection of funds at regular intervals at different price points and taking a long-term view.

FTSE 100 chart

The FTSE 100 is truly a global index with some of the world’s largest banking, energy,  mining and pharmaceutical multinationals.  It reached 7,778 points, its record high on 18 May 2018 and suffered a sharp fall to reach 5,563 on 30 March, partly due to panic-selling.  Step back from the numbers and consider the operations and scale of the constituent companies like  BHP, HSBC, Shell and Unilever.

Demand will eventually return and stabilise slowly once lockdowns come to an end. We expect many companies to undertake restructuring having learnt valuable lessons from this crisis. Only time will tell how effective the stimulus packages are on consumer demand and company balance sheets.

There may be a lot more bad news to come and indeed, it could fall below 5,000 again (it did temporarily in the 3rd week of March) but consider the strategy of phasing money into the market over time – whether you buy ETF trackers, investment funds or direct shares.

The same advice applies to Brazil and the potential buying opportunities of shares and funds.  Current accounts and CDBs are paying less interest than ever and therefore you would benefit from a diversified portfolio and phasing some of your cash into the market with a long-term view.  There are other interesting asset classes in the fixed income and multiasset categories.  On a final note, I mentioned the concept of portabilidade for private pensions (previdência privada).  Now would be a good time to review your previdênciaprivada and potentially migrate to another provider whilst adjusting the asset allocation.

WHAT ABOUT CURRENCY?

Two questions which I’m hearing more frequently:

  • “Is it a good time to send money to Brazil?”
  • “Shall we get our cash out of Brazil as the Real (BRL) is tanking?”

Answer in most cases:  “It depends on your needs, the urgency and purpose of the transfer”.

If you have cash in USD and want to build up cash in BRL or buy a property – yes, absolutely transfer money into Brazil.  Could USD/BRL go from 5,2 to 6,0?  Possibly, who knows?  It depends on many factors like interest rates, government policy, speculation, coronavirus data etc.  Trying to time the exact moment is a risky game.   The property you want to purchase in Brazil has became at least 25% cheaper over the last year in USD terms.  You would have gladly taken 5,2 when it was 4,0 last year, right?

USD/BRL chart. Source:  Bloomberg

Fact – the Real is a volatile currency.  As per the graph, USD/BRL was 3,1 in 2017 with less volatility then 2019/2020.  In times of crisis, emerging market currencies tend to weaken given the flight of capital to safety, notably US treasuries.

A client decided to transfer his BRL to Sterling (GBP), taking a painful hit on the exchange rate.  In the last 12 months, BRL has fallen 20% against GBP – but he wanted to invest in a pension and start a business in the UK.  There was urgency and purpose.  If BRL were to flatline or weaken over the next 12 months, he would simply be waiting without putting the capital to use.

TALK ABOUT TAX.  PREPARE YOUR TAXES!

What could be more exciting than using quarantine to bring your tax admin up to date?  In Brazil, key deadlines have been extended, namely:

  • Tax return (IRPF-2020).  Deadline moved from 30 April to 30 June
  • Central Bank overseas asset declaration (DCBE). Deadline moved from 5 April to 1 June.

For US persons – the IRS filing date has been extended to 15 July.  Remember to declare foreign accounts on your FBAR form.

Now that many families are under one roof, it may be an appropriate time to enjoy a detailed discussion about family finances.  How about starting with the potentially not-so-comfortable topic of inheritance and succession planning? How much money would families save in tax if they didn’t perceive it as being taboo and confronted reality well in advance of the inevitable?

Inheritance tax planning in the UK and Brazil requires careful professional guidance especially if families and assets are divided between both countries. In Brazil, death taxes are applied at state level and vary significantly between different states.  Double taxation is an undesirable outcome which can be mitigated by taking action in advance.  I reiterate, seek independent advice rather than a tied product-salesperson otherwise, you may end up paying high annual fees and eventually, more than 40% tax on assets which you inherit.

Consider which tax-efficient savings vehicles you wish to increase, hold or surrender and whether the tax benefits are recognised by the tax authorities in your country of residence e.g. ISAs and private pensions (UK), previdência privada (BR) and 401K (US).

For example, if a US person, resident in Brazil, were to sell her primary residence, Brazilian capital gains tax of 15% is waived if the proprietor purchases a new property within 180 days of the original sale.  However, this Brazilian exemption is not recognised by the US and the individual would be taxed on the gain. Uncle Sam… c’est la vie!

COULD YOUR RESIDENCY STATUS BE AFFECTED BY LOCKDOWN?

Many expats and geographically-mobile executives manage the number of days spent in certain jurisdictions to optimise their tax position.  Travel restrictions and lockdowns may create undesirable residency scenarios with harsh tax implications including double taxation on income and gains.

The UK taxman allows 60 additional days for extraordinary circumstances.  There is no precedent of a global epidemic of this nature with quarantines and international border closures.  Will HMRC extend the day count if lockdowns last longer than expected?  Check in advance whether you need to file more than one declaration.

There are further tips in our two articles about organising your financial planning in 2020.  All 10 points are important and relevant, regardless of the current scenario:

Tips 1-5   Budgeting – Saving – Private pensions – Banking costs – Money transfers

Tips 6-10  Tax return – Central Bank declaration – Fund platforms – International asset consolidation – Insurance

For specific queries, please contact us here.

Stay safe and please look after yourselves and your families!

Amit

Photos:   Many thanks to rawpixel.com for offering a wide selection of timely images for this article.  We strongly recommend rawpixel.com to content producers and web designers.

 

 

 

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2020 Financial Tips for Expats in Brazil – Part 1

Welcome to the first part of our early Christmas present for our readers.  We have compiled some practical and actionable tips for expats and long-term foreign residents in Brazil which are all based on a variety of client cases and feedback.   Much of the content also applies to Brazilian nationals.

Feel free to comment below or write to me directly.  We cover all of these topics and more in our monthly breakfast and networking events – ‘Financial Markets Café’ – in Rio de Janeiro.

Thanks for your support in 2019.

Amit

Disclaimer:  We are providing guidance and personal opinions which should not be interpreted as specific investment advice!

  1. Prepare an effective budget

  2. Aim to save more

  3. Use available Private Pension benefits

  4. Review your banking costs

  5. Use a specialist International Money Transfer company

 

  1. Prepare an effective budget

Many of us make a New Year’s resolution to be more organised with our personal finances.  Just like old favourites such as promising to visit the gym more often, these new-found habits mysteriously fade away before the end of January!

Have you ever drawn up a budget with your expected income and expenses?  If so, what usually happens is that you prepare a complex spreadsheet with multiple categories.  This will only serve its purpose if you review it at the beginning of every month.  If you are new to this, I recommend you set your primary objectives as keeping costs under control and ensuring that you are saving in a more structured manner for the future e.g. to build up emergency savings, a retirement fund and if you have children or other dependents, a fund to cover education and/or care costs.

I will address the technical aspects of preparing spreadsheets in a future article.  Believe me, I regularly meet accountants and CFOs who manage complex, multi-currency corporate budgets but some of them have never reviewed their own family finances which tend to remain on the back-burner.  Some expats receive their salary in two currencies and have a disorganised trail of accounts in different countries from previous assignments.  People tend to get busy and defer their financial housekeeping.  Get into the habit, set aside some time every month and it will become second nature just like going for a run or taking up yoga!

  • Break down all income (salary, expected bonus, rent…) and costs (mortgage rent, utility bills, entertainment…). To start with, the more sub-categories, the better.
  • Make conscious decisions e.g. which costs can be reduced or reallocated? If you can save $1,000, would you invest it into a pension or redirect it into leisure or education?  
  • Separate out the currencies and make allowances for fluctuations especially given the volatility of the Brazilian Real which we have observed over the last two decades. If you receive an income stream in USD, for planning purposes, it may be safer to assume a USD/BRL rate of 3.8 than the current position of 4.21 (as per 21/11/2019) which could be a short-term spike. 
  • Discuss the figures and spending priorities with your family and agree what you can afford to spend on necessities and other items like leisure and travel. Discussing family finances should never be awkward. It will be more awkward if expectations are not managed and  financial difficulties arise in the future. 
  • Set aside 30 minutes on the first Monday of every month with a checklist and work through your finances to have an approximate idea of how much you have spent – no need to tally up the smaller receipts once you have more practice. Log into pension accounts and long-term deposits on a less frequent basis, say quarterly, otherwise this exercise can become more tedious.

As an advisor, I find it refreshing when clients have a fairly accurate idea about the balances of their accounts and investments and how much they are earning and spending.  Based on our experience, such individuals are likelier to define and achieve their longer-term financial goals.

  1. Aim to save more

I cannot emphasise how important this is.  Regular saving is important to build up a pension fund or target level of capital in the future.  Life goals such as a comfortable retirement and providing for children’s education require long-term planning.  Many people with well-paying jobs still incur financial hardship later in life due to the lack of long-term planning. Reconsider how much you are able to save from your salary and bonuses and take financial advice regarding the most suitable investment plans.

We tend to think of retirement as being distant, but it does eventually creep up on us.  Personally, I cannot believe how time has flown by since my university days, graduating from Bristol when I was 23.  Now, in my early forties, I am half-way to my likely retirement age.  Let’s use the term ‘financial independence‘ instead of retirement given that many people are eternal entrepreneurs or simply enjoy practising their vocation for as long as possible.  Imagine that you are financially independent and have the luxury of deciding when to stop without depleting your capital over the next 10-20-30 years of retirement, a phase during which, your healthcare costs and desired leisure/travel costs may increase significantly. 

Remember, you’re doing this for your future self.  Will your future self be grateful to your present self?

If you are a freelancer with irregular income, set a quarterly savings target otherwise it simply will not happen if you rely on investing the annual equivalent at year-end.  How many people ensure there is a significant amount left over at year-end to invest especially when most self-employed individuals are focused on the daily pressures and unexpected costs of running a business?  Hence the years roll by without building up a nest egg and then people end up working into old age or facing financial hardship.

It’s human nature to keep deferring it, but we need to take some advice from our friend, Mr. Einstein, about the importance of starting our retirement planning earlier in life.

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”

Let’s work with this example here to reinforce the importance of compound interest. 6% p.a. is a reasonable proxy for growth, net of investment fees, for a 60/40 equity-bond portfolio based on the past 50+ years of stock/bond market data.

Let’s assume a single contribution of $10K at the beginning of each year; after 10 years, your investment will reach $139K and after 20 years, it will reach $388K. Keep doing that for another 5 years, your investment will be worth $579K after 25 years.  The investment in year 25 is about 49% higher than in year 20.

A sum of $579K can provide an inflation adjusted income of $23K for 19 years as per the calculations here.  More examples are discussed in our article here about an executive pension decision

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  1. Use available Private Pension (Previdência Privada) benefits

In Brazil, the private pension is a popular method of saving in a tax-efficient manner.  There are two types of personal tax-return (IRPF) – the declaração completa and declaração simplificada.  The complete declaration allows for deductibles such as school fees and health costs up to 20% of taxable income with a limit of R$16.754.

You may also take advantage of a private pension – PGBL (Plano Gerador de Beneficio Livre) whereby you can contribute up to 12% of your taxable income

If your taxable income is R$100K, you may contribute R$12K and be taxed on R$88K, as long as R$12K is contributed before 31 December, 2019.

If you already have a PGBL, it is worth considering portabilidade (portability) – meaning that plans can be easily migrated to alternative providers without cashing out, incurring penalties and reinvesting. Portabilidade is a simply transfer of custody with minimal paperwork and it is becoming popular in Brazil as plan holders are increasingly aware of better options, seeking enhanced performance.

The rules changed recently allowing a higher limit of equity funds within private pensions. This equity limit was raised from 50% to 70%.  Up to 100% may be held in fixed income funds but we recommend plan holders to review their objectives and the available options, which have expanded in recent years. This is even more timely in a period of economic reforms, a more buoyant stock market and a lower Central bank base rate (Selic) hence lower returns across most fixed income funds.

Some of our expat clients have migrated their PGBLs from traditional banks to alternative providers, advised by consultants who provide greater expertise and bespoke portfolios.  I have seen cases of younger investors, with a more adventurous risk profile, being placed in conservative portfolios because they were offered a standard over-the-counter product by their bank.  With alternative providers and tailor-made recommendations, you can expect lower charges and higher long-term returns *for your investor profile*.

Consider the effect of compounding these differences in annual gains.  For example, a mere 3% p.a. enhancement over 10 years will compound to 34.4% total.  On R$500K, that is R$172K extra for taking these efficient steps to review your private pension provider and the funds.

Previdência Privada also offers estate planning benefits – let’s discuss that in a future article… 

  1. Review your banking costs

I always take a few deep breaths before visiting my bank.  Firstly you get stuck in the revolving door for having your phone in your pocket as they are screening you for weapons.  That’s why the 007 classic, Moonraker never had a scene with Jaws visiting the bank when he was in Rio – in fact it was more viable for Jaws to travel to a space station hassle-free.

Then after walking past armed security, you end up wasting precious time in a long queue only to face sub-standard customer service and inefficient procedures.  This is generally not the staff’s fault, who in my experience, are exceptionally polite and try hard within their limitations. For this joyous experience, banks charge exorbitant fees and it is no wonder that even during the recession, the top five Brazilian banks were highly profitable, mainly due to the sheer lack of competition.  Lending rates continue to be amongst the highest in the world and have not decreased in line with the falling Selic base rate.  I’ll stop my rant here and focus on the monthly banking fees.

Standard current accounts have a monthly fee of R$20-30 (R$360 p.a.) while premium accounts run at about R$80-100 per month (R$1,200 p.a.).  When I speak to foreigners in Brazil, most of them hold premium accounts when in fact, they don’t actually have any requirement whatsoever for the so-called benefits like frequent domestic money transfers, unlimited paper statements and ‘cheque especial’.  Would you pay R$1,200 p.a. ($300 or £250) in the US or UK?  Some expats have premium accounts in several different banks; surely worth streamlining here?  There are a number of online banks which have arrived on the scene in recent years, without the physical branch network and revolving door drama, which offer free banking or at least, a lower monthly fee.

When your bank manager tells you that monthly fees are waived if you invest R$100K in one of their funds, the annual management charge (taxa de administração) will be at least 1% p.a. (R$1,000) and in most cases, you will find a better fund in the given risk category via a fund platform with more options.

One of my favourite words in Portuguese is desbancarização and I try and use it at dinner parties to mask over my shortcomings in Portuguese grammar (especially the subjunctive!). Desbancarização (‘de-banking’) is the growing trend of people using alternative financial service providers such as digital banks, fund platforms, insurance providers and money transfer companies which offer better value for money and more efficient service.  Which brings us on to the final part of this article…

  1. Use a specialist International Money Transfer company

If I had a Pound or Real for every time someone has asked me whether it’s the “right time” to transfer funds from the UK/US/Europe to Brazil or vice versa…

See the graphs below which show the volatility in the USD/BRL and GBP/BRL pairings from 2009 to 2019.

USD/BRL is at a record high of R$4.21 (21/11/19) – few predicted this at the beginning of 2019.

GBP/BRL is near its record high, currently at R$5.44 (21/11/19) – what impact will Brexit have on this pairing?

Based on the above data, it would appear to be a good time to bring money into Brazil i.e. converting hard currency into Reals for foreign investors and expats purchasing a property in Brazil or boosting cashflow to cover expenses.  This could all change in a matter of days and depends on multiple global financial and geopolitical factors, for example:

  • The economic outlook in Brazil and how foreign investors perceive the momentum of the recovery after the pension and tax reforms
  • The outcome of the UK General Election and its impact on Brexit and GBP.
  • The ongoing US impeachment case and its impact on the presidency and 2020 elections.
  • Tensions in the Middle-East and the price of oil.

We recommend international money transfer companies who provide a more favourable exchange rate, often a few percentage points better, than traditional banks.  Based on client feedback, the levels of service and efficiency are much better.  If you can provide the required documents (ID, proof of address, tax return receipt), it is straightforward to open a money transfer account which you can use for the immediate transfer and leave open for future foreign exchange transactions.

I hope that was a useful read.  Please contact us if you have any queries.

More tips to follow shortly in Part 2 which will cover the following:

  1. Receita Federal declaration
  2. Banco Central declaration
  3. Brazilian investment platforms
  4. International account consolidation
  5. Insurance

Image credits

Image by mohamed Hassan from Pixabay.com

Cashflow image by rawpixel.com 

Business meeting and presentation by rawpixel.com

You can buy Einstein if you pay for it,  by Ugur Peker on Unsplash

Away from the crowded beach by Nad Hemnani at Unsplash.com 

New Year post art – artistic celebration from Pixabay.com 

 

 

 

andrew-neel-S2Umwf6Lsuk-unsplash

US Expat Tax Planning: FATCA, PFIC and Year-end planning

FATCA – Foreign Account Tax Compliance Act

Many Americans living overseas are unaware of the potential tax liabilities they could be facing in near future. US citizens have a permanent obligation with the IRS to file an annual tax return and a foreign asset statement (FBAR), above a certain threshold).

FATCA regulations have resulted in many financial institutions closing their doors to US citizens due to concerns about increased reporting to the US tax authorities, even though many such institutions do not operate on US soil.

Therefore US citizens find themselves in an unsettling situation when trying to open accounts overseas.  US citizens also include Green Card holders and ‘Accidental Americans’ – either born in the US or born to a parent who was naturalized in the US.

Many US citizens, seeking global investment exposure, innocently invest in mutual funds and pension plans outside the US.  However, such assets may be subject to unfavourable taxation, based on PFIC rules whereby the capital gains could be taxed at the highest rate of US income tax.

We recommend that US citizens seek financial and tax advice together rather than risk making a careless investment decision and facing the potential tax implications in the future.

We offer a select few overseas solutions, suitable for US expatriates, which offer US-compliant reporting, global investment exposure and secure asset protection.  Our recommendation of investment vehicle and underlying asset strategy is tailored to the profile and objectives of each client

PFIC – Passive Foreign Investment Company

US expats often find themselves in confusing and costly situations when trying to hold non-US collective or pooled funds, known as PFICs.

You can fall into the PFIC trap if you invest in a fund which has been recommended by your overseas bank manager or decide to start an offshore savings plan.  These innocent actions will result in a higher tax charge.

The holder of a US-incorporated fund pays the low long‐term capital gains rate of 15% if held for more than a year.  Buying a virtually identical fund listed outside the US will result in both income and capital gains being classified as ordinary income and automatically taxed at the top rate of 39.6%. In some cases, the total tax on a PFIC investment may rise to above 50%.

While most US advisors prefer to recommend US-based solutions, there are more dynamic solutions available outside the US which offer significant investment and currency diversification.

Certain jurisdictions offer IRS-compliant fund platforms and if investors focus on ETFs, direct assets and other recognized assets, they will not have PFIC issues.

Such fund platforms offer an IRS-compliant reporting format to ensure a smoother dialogue with your accountant when preparing your tax return. Bear in mind that your US accountant may still be learning how to apply FATCA rules for international clients. Sometimes paying for additional support is worth it for a lower tax bill and greater peace of mind.

Year-end planning 2019/2020

US citizens who are resident in Brazil face demanding reporting requirements as they have to file income and asset declarations with both the IRS and Receita Federal.

Employees may wish to defer the receipt of a 2019 year-end bonus to 2020 if they believe their tax liability may be lower next year. In the same way, self-employed people may choose to delay collection of payment and debts.

Conversely, if one predicts their income and tax liability as being higher in 2020, then consider accelerating income into 2019, which may include the sale of an asset which may result in a large gain.

The same concept applies to expenses, such as mortgage interest and medical expenses, which can be accelerated into 2019 or deferred into 2020.

We encourage my clients to carry out an annual review, including budgets for retirement, children’s education planning and medical cover to take advantage of tax incentives.  Remember that certain tax incentives in Brazil are not recognised by the IRS, so be sure to take professional advice.

Disclaimer: Ipanema Wealth provides an advisory service and does not engage in capital markets or the selection of financial instruments.

 

Image credits:

US Flag by Andrew Neel at Unsplash

US Flag on Boat by Ipanema Wealth (in-house, 2015)

2020 sign by Stuart Miles at Stockvault