Despite the complexity of tax rules, taxpayers may still engage in certain strategies to reduce their tax liability. Thus, engaging in tax planning to evaluate several tax options regarding someone’s business or personal transactions make good sense. Yet, tax authorities will quickly disregard strategies that seem to be abusive tax shelters. This could be the case of Latin pop singer Shakira, who despite being a tax resident of Bahamas, a country that offers significantly low tax rates, would have become a tax resident of Spain as well.
Recently, Spanish authorities indicted the artist for tax fraud. The indictment comes as no surprise when we look at tax evasion criminal charges filed against Leonardo Messi, Cristiano Ronaldo, and other soccer stars during the last couple of years. In Shakira’s case, Spanish authorities argue that, based on the number of days she spent in the country, Shakira had become a Spanish tax resident for the years 2012 through 2014. It seems that Spanish authorities decided to take a closer look at Shakira’s international tax planning arrangements after she was named in the “Paradise Papers” leaks. The documents leaked showed that she had transferred £30 million in musical rights, intellectual property, and trademarks to an entity in Malta. Spanish authorities are challenging that fact that Shakira had a tax residency in the Bahamas, as she is trying to prove with her Bahamian certification of residency.
As U.S. citizens know, the United States taxes their citizens and residents on their worldwide income, and the U.S. has established rules for determining tax residency based on someone’s physical presence in the country. In fact, most countries in the world, including Spain, have similar tax rules. Under Spanish rules, a foreign individual becomes a tax resident by spending more than 183 days in the country. In Shakira’s case, Spanish tax authorities argued that she had become a tax resident for the years 2011 through 2014, and as a result, she has become subject to Spanish income tax on her worldwide income. Shakira settled the issue regarding her 2011 tax obligations early this year. However, the dispute regarding her tax residency for the years 2012 through 2014 continues. Spanish authorities claim that as a result of the alleged tax residency in the Bahamas, Shakira has evaded €14.5 million in tax.
We should wait for the decision of a Judge regarding the criminal charges. However, despite the results, Shakira’s case leaves us a few lessons to learn. Some tax authorities may view her case as a tax shelter arrangement, a Colombian citizen, arguably living in Spain for the years at issue, established a Bahamian tax residency, and owned her most valuable assets—musical rights—through a Maltese company. But some individuals may find themselves in her situation; many people must live in different countries because of their professional engagements. But, most importantly, Shakira’s case is an example of how onerous, time consuming and serious establishing someone’s tax residency may become.
The determination of someone’ tax residency is fundamental in determining someone’s tax obligations with a specific country. It often involves checking the individual’s physical presence, verifying family ties, investigating personal affiliations, reviewing applicable treaty provisions, etc. Thus, individuals that travel and live in several places should become familiar with the laws of those jurisdictions to avoid unintended tax consequences.