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Citizenship based taxation - International comparison

Citizenship based taxation - International comparison

Systems of personal income tax vary enormously around the world. The differences are big and small, simple and complex. Some countries' personal income tax code consists of one word - "none" - while other countries' consist of volumes and volumes of intricate details.

However, almost all nations are unified on one point: a country only taxes non-residents on, at most, income earned within the country. Residents are fully taxed by the country according to its tax code. But if you don't live there, then your personal income tax obligation to that country is limited to, at most, tax on only the income earned within that country. This is the essence of what is called "territorial taxation".

The United States is an exception.

"The USA is one of the few countries of the world which levies personal income tax on all its citizens: not only on its residents - citizens or non-citizens - but also on its citizens who do not live in the country. All citizens of the United States are taxed under the same personal income tax system, regardless of whether they live in the country or abroad."

This citizenship-based taxation is very unique. How unique?

Only the U.S. and eritrea

Several countries tax non-residents for a short period after they move abroad. For example, an individual who leaves a country may continue to be taxed until he has been a non-resident for at least 6 months or a year.

But permanent, lifelong taxation regardless of residency is extremely rare. In 1995, the U.S. Congress took (yet another) look at the situation and found that only 3 countries in the world taxed based on citizenship rather than residency: Phillipines, Eritrea, and the United States.

A year later, the Phillipines ended its citizenship-based tax regime.

As for Eritrea, it imposes a special 2% tax on all Eritreans abroad - dual-nationals included - in order to fund the dictatorial one-party government which has ruled since independence in 1993. This is a special tax on citizens abroad, as opposed to the U.S., which imposes the same tax regime on citizens regardless of where they reside.

Eritrea does not allow renunciation of citizenship, so anyone who ever was a citizen carries this tax burden his whole life.

The enforcement mechanism for the citizenship-abroad tax is simple: if you are an Eritrean citizen abroad and don't pay the special tax, then your relatives in Eritrea will be severely harassed, beaten and imprisoned. Additionally, the Eritreans abroad who don't pay the special tax are not allowed to cross the Eritrean border or are arrested when they attempt to leave Eritrea.

Interestingly, a Canadian court in Toronto ruled in 2007 that the imposition of the 2% tax on its citizens abroad was illegal and that a dual Canadian-Eritrean citizen should be paid back the money he had given.

Which leaves the United States as the only country in the world which applies the same tax regime to all its citizens, regardless of where they live.