[ HTJ Podcast ] Portugal vs USA – which tax return to file first?

DERREN JOSEPH:
I’m a US citizen with residency in Portugal. I would like to know the procedure of which tax return I should file? First, If I understand correctly, I should file my Portugal taxes first because it’s my country of residence and then find my US taxes. Is that correct? There are many Portuguese accountants that say you need to file the US returns first, which is correct. And Augusto you and I have a spirited discussion on this earlier, please, over to you.

AUGUSTO PAULINO:
I don’t know if I have the correct answer. Well, in terms of timing, the statutory deadline, I would say to file tax returns is more or less than the time. So in Portugal, the tax return needs to be filed between April and June. Usually, it’s more or less the same timeline that in the US. The fact that would be important to confirm in each specific situation is if, for any type of income, there would be a tax credit. Because for instance, there is an income that these techs in Portugal, and you can claim a tax credit in the US for such taxes paid in Portugal. It would make sense to file the Portuguese tax return before the US tax return and the other way around. It’s also true. If although according to our experience, it would be the situations that where we can claim a tax credit in Portugal for taxpayers abroad would be residual in comparison with the other way around.
So I would say that it would make sense to follow the Portuguese tax return. First, if we can claim any tax credit in the US. Derren please correct me.

DERREN JOSEPH:
That is a very powerful question. And it’s one that everyone asks. So you’re definitely not alone. So, essentially as Augusto said, both as you know are due around the same time, because you’re outside the US you get that automatic two-month extension to file your tax returns. Do note that from a US perspective, your payments are still due on April 15. So even though you may get an automatic two months extension to file to mid-June, or even if you file a Form 4868, you get an extension to mid-October payments is still due by April. Otherwise, you may be hit by interest and underpayment penalties, right? So I know it seems kind of weird. So technically in a way, we should be doing it at the same time, but depending on your situation, it really depends. Everyone’s situation is different if it is, most of your income is subject, as Augusta has just gone through quite a bit of detail. If it is that you are subject to tax at source in Portugal first, then chances are we need to get the Portugal taxes, so we can offset them with the foreign tax credits and form 1116 against you, US tax liability. So, yes, the confusing answer I know is that you want to start both at the same time, but if it is, most of your income is going to be taxed here because it’s derived from Portugal. Then we need we as the US tax team or whoever it may be for you would need to get the Portugal tax position first. And if it’s the opposite of most of your stuff being derived from the US and because of a treaty position or NHR, whatever is going to be taxed in the US first, then Portugal will need to see that first. So I know that is not the answer you’re hoping for, but it is the answer. It really depends.

AUGUSTO PAULINO:
Derren, just for completeness because there is a practical issue here. That, of course, when we file the Portuguese tax return, as I mentioned, we need to report the worldwide income, and to file the Portuguese tax return in an accurate manner, even considering an income that is exempt, we should present the income that was by the broad for any reason. So there is also this discussion that we took to file accurately, the Portuguese tax return. We should have the information of the taxes paid abroad, but well, this is sometimes difficult to manage.

DERREN JOSEPH:
Exactly. So it becomes a way like a chicken and an egg, you know, which comes first, right? So that’s why we’re saying both.

AUGUSTO PAULINO:
And in some when we can claim a tax credit in Portugal, we can also ask for the post more postponement of the filing. But the only reason to ask for that is when we actually have a tax credit in Portugal. And to determine the amount of the tax credit, of course, we need to file previously the tax return.

DERREN JOSEPH:
Okay. All right. And similarly with the US, as you guys know, you can file for an extension. So that’s why it’s important that your US tax team, and your Portugal tax team that they work constantly with each other. So, you know, just as you can tell from just all brief exchange, there’s a lot of interdependencies and more importantly, then you have one team taking a higher view to make sure that you’re not taxed twice in the same income because that’s one thing that nobody wants, double taxation, right?

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