China Taxes Citizens Living Abroad

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Lots of people in the offshore world are talking about China finally enforcing its global taxation rules, which call for Chinese citizens abroad to be taxed in China.

For years, I and other offshore editors have shamed the United States by making the point that it is the only country other than Eritrea that taxes its citizens on their income no matter where they live. However, since 1993, we’ve all been mistaken, for, in 1993, China wrote global income taxation of its citizens into its tax code. They made the law but chose not to enforce it. Now they’re reaching the point that all governments reach sooner or later. They need more cash. Infrastructure projects and other spending are motivating China to start chasing down revenues in the form of tax from Chinese citizens living outside the country.

The offshore world is abuzz with speculation that China’s decision to collect tax from citizens not living in the country will affect the rest of the world’s views on taxation. Many pundits are saying this is the beginning of a trend that will see every nation start taxing its citizens on worldwide income even if they live in another country. While this might be seen as a positive thing and is maybe even an objective of those complaining about the distribution of global wealth (also in the news is the fact that the “top 1%” now holds 50% of total global wealth), the complexities of taxation make it an unlikely scenario.Furthermore, the extra tax revenue the United States garners from taxing its citizens who don’t live in America is effectively a rounding error in the U.S. government’s budget. Americans living and working outside the United States can avail of the Foreign Earned Income Exclusion (FEIE). If they qualify, the FEIE allows them to exclude from taxation their first US$100,800 of income earned outside the United States in 2015 (the amount is adjusted upward annually). Furthermore, if he is working in a country that taxes his income (most countries tax the income of their residents), a qualifying American can take a credit on his U.S. tax return for taxes paid to his country of residence beyond the FEIE amount each year.

That leaves the majority of Americans working overseas owing the IRS nothing.

It’s the fat-cat industrialists the Chinese are concerned about. The Chinese government, like all governments, wants as much tax in Chinese coffers as possible and believes that the upper echelon of expat Chinese businessmen should be paying tax in China. The question is whether they are paying taxes already in their countries of residence. If they are, is China going to double tax them?

As governments need more money to fund their inefficient and ineffective policies, wars, and, in the case of China, unwarranted infrastructure programs, those governments get more creative in how to tax their citizens and residents. In the name of equitable distribution of incomes and wealth, they target the “top 1%.”

The practical effect is large movements of capital to where it is treated better. Those of us who aren’t part of the “top 1%” are collateral damage, including the millions (I’d estimate) of Americans who have the privilege of paying thousands of dollars to file tax returns to the IRS each year stating they owe no tax. The cost in compliance outweighs the added tax base… all in the name of equality.

Will Germany, France, the U.K., Italy, Spain, and the rest of Europe start taxing their citizens on worldwide income? How will that work for people who hold two or three passports? Which country has priority for someone who holds British, Italian, and French passports (we know people for whom this is the case… it’s not at all uncommon in Europe to be a citizen of more than one and maybe of more than two countries) living and working in Dubai?

Again, I just don’t see this happening. I don’t see all countries deciding to begin taxing all their citizens on their worldwide income, if only for practical reasons. Many countries simply don’t have the budgets or the infrastructure to try to collect tax from citizens living in other countries.

If, though, my offshore editor colleagues are correct and many more countries start taxing all their citizens regardless of where they reside, the next development, again, will be massive movements of the world’s tax bases, big jumps in the numbers of expatriations. We’re seeing this already in the United States thanks to the administrative burden of FATCA.

The big winners? Economic citizenship programs in countries that (maybe because they’re too little or too poor) can’t embark on a cross-border chase for tax revenues from their globetrotting citizenry.

Lief Simon offers offshore advice in his free twice-weekly Offshore Living Letter and the monthly Simon Letter.

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Lief Simon

Lief Simon has lived and worked on five continents and traveled to more than 60 countries. In his long career as a global property investor, Lief has also managed multimillion-dollar portfolios of rental properties, for others and for himself. He offers advice on international diversification in his twice-weekly Offshore Living Letter and monthly Simon Letter dispatches.