Sports and creative people have talent that is in demand all over the world. It’s exciting to be able to compete, act or play right across the globe, but it presents unique challenges, particularly when it comes to taxes and accounting, especially if you’re paid in local currencies.
Earning in different currencies introduces an element of volatility. The exchange rate between your earning currency and your home currency can fluctuate significantly, impacting your tax liability. It gets tricky:
Many tax authorities require you to declare income in a single “functional currency.” This could be your home currency or the currency you primarily use for business expenses. You’ll therefore need to convert your income from each currency into your functional currency for tax purposes. The question then arises: what exchange rate do you use?
There are two main approaches:
- Transaction Date: You convert income on the day you receive it. This method offers simplicity but exposes you to potential tax losses if the exchange rate weakens later.
- Year-End Rate: You convert all income using the exchange rate on the last day of the tax year. This approach can average out fluctuations but might lead to higher tax bills if the exchange rate strengthens over the year.
Keeping accurate records in a multi-currency environment becomes paramount. You’ll need to track:
- Income: Record all income received in its original currency, including the date and exchange rate at the time of receipt.
- Expenses: Track all business expenses in their original currency, again with the relevant date and exchange rate.
Whether you track via software or do it manually, the key is to have a consistent system that allows you to easily reconcile your accounts and generate reports for tax purposes.
If you’re earning income from multiple countries, you might face tax filing obligations in both your home country and the countries where you earn income. This can involve:
- Double Taxation Treaties: These treaties aim to prevent you from being taxed twice on the same income. Understanding any relevant treaties between your home country and the countries you work in is crucial.
- Foreign Tax Credits: Some countries allow you to claim a credit for taxes already paid on foreign income, reducing your overall tax burden.
Navigating these complexities can be overwhelming. It’s certainly something we can help with and can advise on any number of specifics, including:
- Fixed-Rate Contracts: Negotiate contracts with fixed rates in your preferred currency to avoid exchange rate fluctuations.
- Currency Hedging: Explore hedging options with your bank to lock in exchange rates and minimise risk.
- Invoicing in Your Functional Currency: Whenever possible, consider invoicing clients in your functional currency to simplify record-keeping.
To get the full picture as to how you can maximise your earnings, and keep more of them, in this tricky landscape, just drop us a line.
