Does the United States stand alone?


Posted by:
Phil Hodgen

Written on:
May 15, 2012

Posted in:
Americans abroad

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.

Philippines

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

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.

United States

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.

 

 

Comments

Reuven says:

Israel taxes worldwide income.

Reuven says:

Never mind above comment. Israel only taxes non-residents on Israel source income. oops

Phil says:

Thanks Reuven. So Israel’s tax system is one of the sane ones. :-)

Phil Hodgen says:

@Reuven,

So a citizen of Israel who is not a “resident” of Israel will pay income tax in Israel on worldwide income earned while not a “resident”?

(I put “resident” in quotation marks because that word usually has a very technical definition that varies from country to country).

Phil

Ben says:

Israel taxes its residents for worldwide income, and non-residents (citizens outside israel), for Israeli sourced income only. The tax authority here is draconian in some ways. If you run a business, you have to declare your assets (think of it is as Israeli DATCA/FATCA) every 5 years or so–so they can compare your wealth to where you were a few years back to make sure that new yacht matches your income tax records. The chance of self-employed getting audited is about 18% per year, and they basically assume you’re guilty if the thugs who inspect a business assume otherwise. I once knew a woman who ran a cash business selling gifts/clothes. The tax police did a random inspection of her store and the clerk the night before forgot to mark all the cash in her till in the books, so when they looked at her books, they showed less and they thought she was skimming and charged her the difference they thought she was skimming by x number of days/months/years—big nasty fine, etc.

On the other hand, if you work for an employer and don’t have any other significant income, you don’t have to fill out a tax return every year. They also have a version of FBAR, but the threshold is around $400,000–not the US $10,000. Travellers have to declare cash above 80,000 NIS (around $23,000) when entering the country as well. If you’re poor, they leave you alone, in general.

Don says:

Investment firm Blackrock has its Global Tax guy testify at the IRS hearings today and he eludes that Blackrock may set up funds overseas without US securities to avoid FATCA and be able to deal with foreign investors that do not comply.

Harry Horowitz also said FATCA risks changing investor behaviour away from US securities.

Will Congress listen? Judging from past behaviour, the answer probably is NO.

http://www.businessweek.com/news/2012-05-15/tax-evasion-law-will-harm-u-dot-s-dot-asset-managers-blackrock-says

Phil says:

@Don,

Based on my visits in Washington DC last week, I’d guess that the government treats this as entirely expected. I say that because the people I met with talked about this very eventuality.

Because they talk about it and because they do nothing, I assume they think this acceptable collateral damage.

Of course, when the U.S. capital markets take a hit, the extremely well-predicted consequences of FATCA will be “unexpected” to the politicians.

FromTheWilderness says:

Phil,

Do you know if North Korea is in the US / Eritrea club regarding citizenship-based taxation?

Phil says:

@FromTheWilderness,

Oh, good guess. That is a very plausible candidate. The problem of course is getting reliable information. :-) So I’m going to leave North Korea in the “hand-wavy” category of countries.

Just Me says:

In the handwavy category… assuming that North Korea allows any of it citizens to work overseas, I did hear a story about a bunch of North Koreans running a restaurant in Africa. All most all of their personal earnings were sent to the North Korean government, so I guess you could call that a Citizenship taxation of sorts. I will try to find the story… Here is a similar story in the Atlantic on waitresses in Asia. http://bit.ly/JbVPLI This is akin to slavery, but isn’t that what Citizenship taxation is, a form of financial slavery?

Don says:

I wonder if the IRS expects James Dresnok to file 1040s and the FBAR non-sense. He’s a US serviceman who defected from the US in 1962 who crossed the border into North Korea and still lives there.

It’s almost certain that North Korea is engaged in inter-governmental talks with the US so they can comply with FATCA!! I afraid that’s a hole between South Korea and China the IRS won’t be filling soon.

It’s a good documentary on YouTube in six parts –

Eritrean says:

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.

Phil Hodgen says:

@Eritrean,

Thanks for this comment. It is good to hear a first-hand report like this after reading the other stuff on the internet.

Todundsteuer says:

Phil,

In a press release dated 5 December 2011, Susan Rice, US Permanent Representative to the United Nations explained why the US supported UN Resolution 2023 condemning Eritrea for, among other things, using its 2% “diaspora tax” on Eritrean citizens living abroad to fund various nefarious activities in and around Africa.

It is followed by the text of paragraphs 10. and 11. of the UN resolution that relate to Eritrea’s “diaspora tax”.

Also included for your delectation is the reaction of the Eritrean government accusing the US of gross hyprocrisy for having the audacity to accuse Eritrea of extortionate conduct in enforcing citizenship based taxation on its citizens residing abroad.

It would appear that although the Eritreans have not yet heard of OVDI (I, II, III, etc.) or FBARs, they nevertheless have a solid grasp of the fundamentals of revenue raising by extortion.

Could anything be more embarrassing than being lectured to by the Eritrean government on the hypocrisy of American’s brain-dead system of citizenship-based taxation?

Here are texts:

Susan E. Rice
U.S. Permanent Representative to the United Nations
U.S. Mission to the United Nations
New York, NY
December 5, 2011

FOR IMMEDIATE RELEASE
Thank you, Mr. President.
The United States welcomes the Council’s decision to impose new sanctions on Eritrea. Today we have sent a clear message to the Government of Eritrea that it must cease all illegal actions threatening international peace and stability in the Horn of Africa.
As we adopt this resolution, we should recall the events that led us to this decision. Exactly two years ago this month, the Council adopted Resolution 1907 in response to a disturbing pattern of behavior: Eritrea was not engaging constructively in resolving its border dispute with Djibouti, and, most alarmingly, it was providing political, financial and logistical support to armed groups seeking to undermine peace in Somalia. The Council imposed targeted sanctions on Eritrea to demonstrate that Eritrea’s actions were unacceptable and would have negative consequences.
Mr. President, that was two years ago. What has happened since? As we heard again this morning, we have continually received evidence of Eritrean support for extremist groups in the region. Eritrea still has not resolved its border dispute with Djibouti. The UN’s Somalia and Eritrea Monitoring Group has documented Eritrea’s support for terrorism, including an appalling, planned attack on the January 2011 African Union Summit in Addis Ababa. According to the monitoring group, Eritrea is financing all of these activities through illicit means, including threats and the extortion of a “diaspora tax” from people of Eritrean descent living overseas.
In direct response, this Council has today imposed tougher sanctions.Our goal is to show Eritrea that it will pay an ever higher price for its actions. Building on Resolution 1907, this resolution imposes new obligations on Eritrea, including to cease illicit practices to extort funds from its diaspora.
We particularly welcome the Council’s expression of concern over the potential use of mining revenues to fund violations of Security Council resolutions. The United States will work with Somalia, the Somalia and Eritrea Monitoring Group, and the Somalia and Eritrea Sanctions Committee to develop voluntary guidelines for companies from the United States and other Member States. Such guidelines can provide useful advice, best practices and information to help companies protect themselves from inadvertently contributing to Eritrea’s violations. We intend to draw on this work in advising our own companies.
In addition to the obligations set forth in this and previous UN resolutions, today’s resolution, 2023, provides further opportunities for Eritrea to show its good faith, including through releasing information on the status of Djiboutian combatants missing in action
since June 2008. Eritrea must cease all direct and indirect efforts to destabilize States, particularly through support for armed opposition and terrorist groups, and it should cooperate fully with the Somalia and Eritrea Monitoring Group.
Mr. President, we hope this tightening of sanctions will finally convince the Government of Eritrea to reorder its priorities. The United States believes that the international community’s concerns can and should be resolved through political engagement and dialogue. But Eritrea must clearly and affirmatively prove-not through its words but through its actions-that it is ready to reemerge as a law-abiding state. Until that time, the Council and UN Member States are committed to enforcing robustly the sanctions we have applied. We hope that Eritrea does not squander this second chance to change course.
Thank you, Mr. President.

The text of Articles 10. and 11. of UN Resolution 2023:

10. Condemns the use of the ‘Diaspora tax’ on Eritrean diaspora by the Eritrean Government to destabilize the Horn of Africa region or violate relevant resolutions, including 1844 (2008), 1862 (2009) and 1907 (2009), including for purposes such as procuring arms and related materiel for transfer to armed opposition groups or providing any services or financial transfers provided directly or indirectly to such groups, as outlined in the findings of the Somalia/Eritrea Monitoring Group in its 18 July 2011 report (S/2011/433), and decides that Eritrea shall cease these practices;

11. Decides that Eritrea shall cease using extortion, threats of violence, fraud and other illicit means to collect taxes outside of Eritrea from its nationals or other individuals of Eritrean descent, decides further that States shall undertake appropriate measures to hold accountable, consistent with international law, those individuals on their territory who are acting, officially or unofficially, on behalf of the Eritrean Government or the PFDJ contrary to the prohibitions imposed in this paragraph and the laws of the States concerned, and calls upon States to take such action as may be appropriate consistent with their domestic law and international relevant instruments, including the 1961 Vienna Convention on Diplomatic Relations and the 1963 Vienna Convention on Consular Relations, to prevent such individuals from facilitating further violations;

Paragraph 4. of the Eritrean Foreign Ministry response on 19 December 2011 (from its website):

Minister of Foreign Affairs
19 December 2011

On the 5th of this month, the UN Security Council adopted Resolution 2023 (2011) to impose expanded and intrusive sanctions against Eritrea. Through its most recent communications to the United Nations Security Council, Eritrea has underlined that this resolution is totally unfounded and has no legal basis.

[. .. . . . .blah, blah, blah, . . . . . ]

4. Prevention of Diaspora Tax
The levying of various taxes is surely the prerogative and sovereign right of any country and an exclusive matter that concerns its citizens alone. Ops. 10 and 11 of Resolution 2023 do not only contravene these norms but are replete with such offensive language and gross factual errors that Eritrea is dumbfounded to figure out why this rather ordinary and innocuous practice is seen as an object of hate and fear by the United States and Ethiopia in the first place. In this regard, it is interesting to note that the Clinton Administration was seriously exploring ways and means of curbing the Diaspora tax and remittances through unilateral measures as early as 1999 during the border war between Eritrea and Ethiopia.
Eritrea has never used the Diaspora tax to “destabilize the Horn of Africa region or …. for purposes such as procuring arms and related material for transfer to armed opposition groups … “etc. as Op. 10 of Resolution 2023 presumes. Curiously enough, the limited revenues that accrue from this provision have been mystified and exaggerated beyond proportion. But irrespective of the actual amount, it must be underlined that the legality of the tax is robust and beyond any reproach. The domestic legislation that created the tax is noncontroversial; the social objective noble; and, standing at 2%, the amount is not onerous by any standards. As the proceeds of this tax are funneled towards providing social cushion for the dependents of martyrs of war and/or for national reconstruction and development, the individual contributions ought to be eligible for tax-deduction in the host countries that allow similar provisions for charitable purposes. In any case, it should not constitute a cause for official scorn or witch-hunting. And least of all, the United States cannot be hypocritical to cry foul and prevent Eritrea from collecting any tax from its citizens. The United States in fact levies full income tax from its citizens abroad. To this end, it routinely utilizes unorthodox means including divulgence by foreign banks of accounts held by US nationals via the Qualified Intermediary Programme; court summons issued by the US Department of Justice to foreign banks; international conventions that support the issuance of administrative subpoenas upon wealthy Americans; and, bilateral agreements with individual countries to solicit their assistance in both criminal and civil tax investigations by the IRS, to assess and ascertain the amount of collectable individual income tax.
Eritrea does not use “extortion, threats of violence, fraud and other illicit means to collect taxes” from the Diaspora as Op. 11 asserts mendaciously on the basis of the false report of the “Somalia Eritrea Monitoring Group”. All Governments pursue appropriate and legally specified enforcement measures to regulate tax evasion. By the same token, Eritrea has put in place explicit enforcement measures relating to domestic legal services such as real estate property entitlements, etc. that are withheld from those who fail to meet their fiscal obligations. These measures cannot be misconstrued as extra-judicial by any stretch of imagination, and Eritrea has never tried to implement them extra-territorially. It is therefore sad that the Security Council credulously accepts the distorted version of the Monitoring Group without a modicum of validation.
Op. 11 further threatens law-abiding Eritrean citizens who reside in various countries with arbitrary legal action by the host countries “for acting, officially or unofficially, on behalf of the Eritrean government or the PFDJ contrary to the prohibitions imposed in this paragraph and the laws of the States concerned”. This is witch-hunting in its crudest form. Eritrean nationals residing abroad are not involved in collecting the Diaspora tax as agents of the Eritrean Government. The PFDJ has no statutory authority and has never collected Diaspora tax on behalf of the Government. The Report of the “Somalia Eritrea Monitoring Group” that speculates on these alleged practices has based its conclusions on innuendos and false information deliberately peddled by Eritrea’s arch-enemies. The US and Eritrea’s other detractors know full well that this is not the case. But all their efforts to drive a political wedge between the Government of Eritrea and the Diaspora; all their relentless attempts in the past to wean them over and recruit them as “opposition” have failed miserably. They are now resorting to this witch-hunting as a tool of retribution; to intimidate them into submission.
The United States has in fact started to introduce, through the backdoor, illegal restrictions on Eritreans to obstruct remittances. Under instructions from the State Department, certain banks in the US have severed their correspondent banking ties with Eritrean banks. These actions cannot be rationalized by Resolution 2023 and constitute gross violations of the rights of these citizens in disposing their income freely without official encumbrance of any sort. Almost all domestic investment laws as well as international investment protection agreements and conventions allow the unrestricted repatriation of profits for corporate bodies and remittances for foreign workers for investment purposes in their home country and/or to support their dependents. US emerging practices thus constitute a gross violation of these universal rights and practices.

Lori says:

I did chat with a taxi driver from Eritrea here in Calgary. I explained to him that I was aware of his country because it was the only other country that had this citizenship taxation issue other than the US.

He was very proud to explain to me that yes Eritrea taxed it citizens it was put in place to pay for all of the orphans after the war (not sure which war sadly and didn’t ask). He mentioned it was a small sum to pay and it really wasn’t enforced. He said that if you were Eritrea and were in need of medical attention they asked you if you paid your taxes and if you did jump right on in and get free medical help. I failed to mention to him that the airfare cost might be an issue.

But I got the sense he was very proud of this tax.

Eritrean says:

In the same letter of response from the Eritrean Ministry of Foreign Affairs that Todundsteuer quoted:

“Eritrea has repeatedly highlighted the political and vindictive motives of the United States in ramming through this Resolution by ignoring all normative procedures and rules of the UN body”

This type of tax system should only be temporarily used for the prevention of the exploitation of impoverished third world countries and/or for the reconstruction of war torn nations.

But it seems as if though, by “ramming through this Resolution by ignoring all normative procedures and rules of the UN body,” according to the MoFA of Eritrea, the US is making a huge effort to ensure that it is the only state in the world that is allowed to use this type of what Ms Rice opportunistically labeled “extortion.”

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