A reader wrote this week to say, “Lief, whenever you mention the countries that tax their citizens’ worldwide income you never mention Canada, which does tax its residents on worldwide income.”
Indeed, Canada, like the majority of countries around the world, taxes residents on their worldwide income. I don’t see this as newsworthy, as, again, it’s how most countries operate.
Broadly speaking, countries approach income tax in one of four ways. One is not to tax income at all. Resident in a country that takes this approach, you’d pay no income tax…period. While that may sound like heaven, many of these countries aren’t places you’re likely to want to reside.
A handful of the world’s no-tax countries are in the Middle East, including Kuwait, the UAE, Qatar, and Oman. These are not high on my Places I’d Like To Live list. On the other hand, spending your working years in one of these zero-tax jurisdictions would allow you to grow your retirement nest egg faster.
Other countries that take a zero-tax approach are islands, including Bermuda in the Atlantic, the Bahamas, the British Virgin Islands, the Caymans, the Turks and Caicos, and Anguilla in the Caribbean, Vanuatu in the South Pacific, and the Maldives in the Indian Ocean. You may be up for the island life, but the cost of living in these places isn’t low and could dilute the zero-tax benefits.
The cost of living definitely would outweigh the lack of income tax in Monaco. Andorra is so remote that you might rather pay taxes than live there, and residents will start paying income tax in Andorra in 2015 anyway. The no-tax jurisdiction of Brunei is tucked away on the island of Borneo in Southeast Asia, another location so remote as to have limited appeal.
The next best thing to a zero-tax country is a country that imposes tax on a jurisdictional basis. Countries in this category tax residents on income earned in the country only and not on income earned outside the country. This allows you to live tax free in one country while working or earning an income somewhere else. You might owe tax in the country where you earn the income, but, if you don’t, this is a strategy for earning fully tax-free income. The further good news is that, unlike the zero-tax countries, some countries on this list do make great places to live, as I point out regularly.
Specifically, Panama, Belize, and Uruguay all take a jurisdictional approach to taxation (now you know why we’re in Panama). These three countries are also good banking choices, which is one reason I focus on them more than other countries that also take a jurisdictional approach to taxation, such as Costa Rica, Nicaragua, Malaysia, and Paraguay.
A subset of the jurisdictional approach to taxation is what’s referred to as remittance-based taxation. Countries on this list (there aren’t many) tax income earned in or remitted to the country. You can earn money anywhere else and owe no tax on it in your country of residence as long as you don’t bring it into your country of residence. Ireland and Thailand fall into this category.
Of course, you’re going to have to bring some money into the country to live on, so, living in a remittance-based jurisdiction, you manage your finances to minimize the tax impact. This system works well for consultants who have both in-country and out-of country clients.
Note that in Ireland this system works only if you’re resident but not domiciled in Ireland. In other words, if you were born in Ireland, you’ll be taxed on your worldwide income whether you bring it into the country or not.
The third approach, the one that most countries (including Canada) take, is to tax residents on their worldwide income. Under this approach, if you live in a country, you pay taxes in that country on everything you earn no matter where you earn it. If you move from the country and are no longer considered resident, your tax obligation goes away, with the exception in some cases of tax on investment income earned in the country (from rental real estate, for example).
At the far end of the taxation spectrum are the United States of America and Eritrea, which charge their citizens tax on their worldwide income no matter where they reside. Eritrea keeps it simple. They charge their nonresident citizens a flat tax on their worldwide income. The United States, on the other hand, makes it much more complicated for its nonresident citizens to calculate and file their tax returns…so complicated that an entire industry has developed around tax preparers and remaining IRS-compliant.
An American can be fined for not filing the proper forms to report a bank account or financial asset he holds offshore. An American can be fined for not filing the proper forms if he operates a business offshore. Under any of these circumstances, the American in question may or may not owe any taxes associated with his offshore activity, but the fines for not sending in the forms can add up quickly.
Bottom line, we Americans living and doing business overseas carry a bigger tax burden than anyone else in the world.
My new Canadian friend who wrote to me this week (like most of the rest of the world) can leave his Canadian tax burden behind simply by moving to any other country.