Expatriate Taxation

Tax systems vary widely among countries, and few general rules exist, especially for expatriates. Major differences exist in how tax is determined and collected; sanctions for violations; and more. Tax treaties may also apply. For example, the U.S. has treaties with about 70 nations.

Most countries use either territorial, residence-based, or exclusionary systems to limit the scope of their tax system on expatriates. They also often provide offsets for overseas income to prevent income being taxed twice. Generally, countries taxing worldwide income also grant credits for taxes paid to other countries. However, some use hybrid systems and some tax local income only, while others tax worldwide income.

Tax Systems

In territorial systems, only income originating inside that country is taxed. In residence-based systems, residents of a particular country are taxed on worldwide income, while non-residents are taxed on local income only. Only the United States and Eritrea tax non-resident citizens on worldwide income.

Residency

Most tax systems are residency-based with specific rules for defining a “resident”. While definitions vary, they usually involve the location of a person’s main home and the number of days a person is physically present in the country.

Territorial

These systems usually tax only local income regardless of the taxpayer’s residence. A key problem with territorial systems is the ability to avoid tax on income by moving it outside of the country, which leads some countries to enact hybrid systems.

U.S. System

The U.S. uses a hybrid system that taxes all foreign and U.S. income worldwide at the same rates. To eliminate double-taxation, U.S. citizens may exclude some foreign income from U.S. taxation and take a credit for income tax paid to other countries on foreign income if they meet certain tests. But, they must timely file a U.S. tax return claiming the exclusion and/or credit—even if they have no tax liability.

U.S. enforcement tactics also include denial of passports to delinquent taxpayers and seizure of local accounts and/or assets. That’s why it’s important to seek a professional’s help on reporting your accounts—and quickly!

Download the spreadsheet below which contains with tables (compiled from outside sources) summarize how local and foreign income is taxed in other countries, certain dependent territories, and certain countries with limited international recognition. E&A has served clients in/from those countries listed in bold italics.

Download Territorial Taxation Changes (spreadsheet)