U.S. citizen who is a resident of another country must nevertheless pay income tax to the United States. And, of course, the country where the citizen lives will also want to collect income tax.
This is called citizenship-based taxation. The power to tax you is based on your citizenship, rather than your residence.
This blog is all about dispelling hand-wavy knowledge and replacing it with stone-cold fact. It is time to do this with citizenship-based taxation, at least partially.
The hand-wavy answer to the question “Which countries impose income tax on their citizens living abroad?” is usually “The United States, the Philippines, and Eritrea.” That is wrong.
The Philippines taxes its citizens living abroad only on Philippines-sourced income. National Internal Revenue Code Section 23(B) says:
A nonresident citizen is taxable only on income derived from sources within the Philippines[.]
Eritrea is mentioned as a country that taxes its citizens abroad. The tax rate is 2%. In fact, this appears to be an thinly-disguised method of extortion.
I am unable to get any first-hand information from the Ministry of Finance, so you may feel free to treat my conclusion here as entirely hand-wavy. Or, tell me what you know so we can all get smarter.
EDIT: I wanted first-hand information, and thank you to reader “Eritrean” for the comment below:
I hold dual Eritrean/American citizenship. As an Eritrean citizen, whom is entitled to Universal Healthcare as well as other services from the government, I am expected to contribute 2% of my income.
The Development and Rehabilitation tax is meant to serve as restoration of a young African nation that suffered much destruction by Ethiopian forces during Eritrea’s 30 year Struggle for Independence among other things.
There’s no harassment for not contributing towards the progress of the country. Many Eritreans proudly contribute much more while a few others don’t.
That leaves the United States, in all of its glory, as the only country that taxes its citizens no matter where they live.
Somewhere in the Far East or Pacific?
An email from a CPA in New York this morning (I won’t tell you her name but her initials are Susan Brown Otto) triggered this blog post. She mentioned she had heard that there is an island nation in the Far East or the Pacific that also imposes citizenship-based taxation. She was unsure of this. I don’t know of any such country.
Again, if anyone out there can bring us from darkness into light, it would be much appreciated.