Citizen Based Taxation
Citizen Based Taxation, or CBT, is practiced by the USA. If you are an American living abroad, there could be severe tax consequences you need to be aware of.
Every country in the world taxes its citizens residing within their home country’s borders. It makes sense. If you are a citizen of that country, and are living, working and, most importantly, benefiting from the services of your tax dollars (like policing, road construction, waste treatment facilities, etc.) you should be paying tax.
Only Eritrea and the US have citizenship based tax policies
However, the United States of America – a developed, democratic, first-world country – and Eritrea – a tiny African military state dubbed “the North Korea of Africa” – disagree with the rest of the world. They both implement citizen based taxation. If you’re a citizen of these two countries, you can be taxed no matter where you live on this planet.
Eritrea implemented a flat 2% citizen based taxation policy on its citizens living abroad. So if you’re Eritrean living in, say, Argentina, you will pay Argentine tax and 2% of your salary back to Eritrea.
In 2011 the United Nation Security Council passed Resolution 2023 condemning Eritrea for its “diaspora tax” of 2%. Even though the amount of Eritreans living abroad is quite small and the majority of overseas Eritreans easily avoid this tax, the UN still perceived the government’s policy as unacceptable. Some of the country’s that voted in favor of UNSCR 2023 were Germany, France, Brazil, India, the United Kingdom and even the United States of America.
The United States does the same. Any citizen or green card holder of the US can be taxed no matter where he or she lives. If you’re an American living in Sweden, you may have to pay tax to Stockholm and Washington at the same tax rate you would back in the States.
Your passport could be revoked if you don’t pay your taxes!
Before you jump conclusions and make appointments to relinquish your US citizenship, you may want to keep reading.
Luckily, there are a few reliefs the US government enacted to help lessen the blow. If you make under 100,800 USD per annum, you are exempted due to foreign income exclusion. But remember, you still have to file. If you fail to properly file your taxes, there still may be consequences and fines. And if you refuse to pay taxes, think again: the US government in 2016 announced that it would revoke the passports of Americans abroad who owe money to the IRS!
There are also a few other things your expat CPA can do to help lessen the double tax burden. Even if you make less than 100,800 USD per annum, it’s still a smart idea to have a professional American expat CPA handle your taxes to avoid any critical mishaps, as there are many small factors out there that could affect your tax status.