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Wednesday, August 15, 2012

Diaspora Taxes: Some Basic Questions

Almost every discussion I've seen about diaspora taxes tends to get bogged down by the details:  citizenship- based taxation versus territorial,  exit taxes, efforts to combat tax evasion and the like.  These are all appropriate subjects for debate but sometimes it helps to simplify things as much as possible in order to get some clarity.

A diaspora is not a monolithic bloc.  When it comes to taxation opinions vary.  Some firmly believe that any attempt to tax the diaspora by the home country is not only unreasonable but downright immoral.  Others have a more nuanced view and might be willing to pay something provided that compliance is simple and that the sums demanded are not so onerous as to destroy them financially.

Homelander's opinions are just as diverse. Their overall perception seems to be that the diaspora is removing something from the home country that homelanders feel  a) should remain in the home country or b) the home country should be compensated in some way for the loss of that capital (be it financial or human).   But they do not necessarily agree on how to go about it and opinions change depending on the situation.

Let's take three, very basic, very simple situations where taxes are or could be levied according to different tax schemes:

1.  Taxes on assets and income earned in the country of residence
2.  Taxes on assets and income earned in the country of residence and invested in another country
3.  Taxes on assets and income earned by a national of one country in another country

Case 1 is a good starting point because it is one that generally all people agree on.  If you live, work, invest and save money in a country it is generally accepted that you should pay taxes to that country.   How much you pay varies depending on the local tax system but just about everyone agrees that your local government can and will levy taxes on you according to the local legislation.  If you are a citizen of that country and you don't care for the tax rates you can vote to change them.  If you are a legal resident but not a citizen you have less leverage to effect change.  (Yes, taxation without representation is alive and well even in modern democratic nation-states.)  But the basic principle, Territorial-based taxation, is there - most people agree that wherever you live you should pay something to that country in taxes.

It's with Case 2 that things begin to get complicated.  Let's say someone lives, works and pays taxes in Country A and then wants to invest in a Bed and Breakfast in Country B.  The source of the money for the investment was Country A but the investment itself is located somewhere else.  If that investment turns out to be a good one and the B & B is a success (makes money) then who has the right to tax it?      I think most people would agree that Country B certainly does - after all the investment is located there and one would assume that the investors knew the tax implications and were prepared to pay them before they decided to set up shop. It may even be true that the tax rates in Country B are substantially lower than Country A which may have been one of the reasons for choosing to invest in that country in the first place. But what about Country A where the money originally came from?  Assuming that the investor paid all applicable local taxes before taking the money out of that country, does Country A still have a right to levy a tax on the gains or profit made with that money even though it has a new home?

Case 3 is the most interesting because it involves human capital more than financial capital.  As an example, let's take a young national of Country A who, thanks to his country's superb public school system, is accepted at a prestigious university or is offered a really good job in Country B.  After getting his degree (or after a few years developing his professional career) he decides to settle down permanently in Country B.  When he left Country A he was poor in financial capital but rich in human capital since his country of origin invested a substantial amount of money in his training.  Clearly since he is living and working in Country B he will pay taxes there, but Country A could make the argument that it is owed something as well.  Does Country A have a right to tax the money and assets that are the realization of that individual's potential?  If so, for how long?   Is Country A's argument even stronger if the young national in question continues to hold citizenship in that country?

What do you think?

15 comments:

A broken man on a Halifax pier said...

Hi, Victoria -

I think the American example shows that citizenship-based extraterritorial taxation isn't cost-effective, and isn't likely to be cost-effective at any point in the future. (This is separate from the effects on the extraterritorial citizens, which have been discussed at enormous length.)

The practice can only really be justified for emotional/political/symbolic reasons; I'd like to see (but don't expect to see) a debate on a cost-benefit analysis of the practice itself. Somebody had to process the 274,766 2010 (paper) returns which showed no tax due because of the FEIE - those costs can be quantified.

Anonymous said...

Hi Victoria
A very complicated subject. As you know, a law was proposed earlier this year in France to tax French citizens who have expatriated.
I am not a proponent of citzenship based taxation because of the numerous complications. What if every country in the world did the same? Those folks who have two, three, four nationalities would be really busy filling out tax returns.
I found the text of the proposed French citzenship based taxation law interesting. (http://www.assemblee-nationale.fr/13/propositions/pion4492.asp)

Essentially, French tax is calculated on one's income less ALL taxes paid in one's country of residence. No fiddling around with we tax that but they don't and vice-versa. The real purpose of the law is to prevent tax arbitration and from the frequent references to sportsman in the text of the law, I guess it is easy to see who is targeted!

The legislator has included a very interesting exception in Article 5 which offers an exclusion for family or marriage reasons.
"Ne sont pas concernées par la présente loi les personnes qui apportent la preuve soit que leur domiciliation fiscale est conforme aux dispositions de l’article 1er de la présente loi, soit que cette domiciliation répond à des considérations visées par la Convention de sauvegarde des droits de l’homme et des libertés fondamentales telles que la vie familiale ou le droit au mariage. Ne sont pas concernées, non plus, par la présente loi les personnes de nationalité étrangère."

I would hope that individuals will increasingly become world nomads. Not to escape or lessen their tax burdens, but because that would make the world a better place. More sharing, more understanding, better communications.

So, I would be a proponent of territorial based taxation. You pay where you use the government provided services. If it is property only (without residency) then you pay to the country where the property is located because that is where the benefit of government provided services lie.

I'm sure it is much more complicated than my simplistic view and of course in hard times everyone wants a piece of the pie.

I'll look forward to your further tax "editorials" - very thought provoking.


Victoria FERAUGE said...

@A broken man, Oh I agree that the way it's being implemented now citizenship-based taxation is not at all cost effective. But it could be tweaked to generate more revenue. I think that's what they will try to do. As those 1040's roll in with all zero's, the U.S. gov will nonetheless get a much better idea of what is out there and then they can adjust things to ensure a net gain for the US. Lower the FEIE for example or raise the tax rate on investment income. I suspect that what's happening now is just a fishing expedition with adjustments to be made later when they have more info. Perhaps I'm being paranoid here. What do you think?

Hi anonymous, Thanks so much for the link. You are absolutely right that this is a very complicated subject that is fraught with all kinds of emotional/patriotic undertones. What scares me the most about citizenship-based taxation is how it could be used to discourage emigration or to rollback the progress that has been made in allowing dual citizenship. I'm going to look over the French proposal and I've got some info about the existing U.S. implementation and what it does and does not do. That will be the next post, I think. I'm really trying to start from zero here without any a priori judgments in the hopes of trying to understand better where everyone is coming from in this debate. And I really appreciate your comments on this because I'm sure you and others will see things that I don't.

Victoria

A broken man on a Halifax pier said...

@Victoria -

It's a frustrating problem in many ways. Basically the US discourages long-term residence abroad through tax policy, but as far as I can tell *not deliberately*, but through a series of unintended effects. I would far prefer it if it was a deliberate policy - it would be much easier to debate.

Since Congress requires US citizens abroad to file tax returns, the IRS can present increased compliance as a success, but it's a paper exercise.

A broken man on a Halifax pier said...

Wendell Berry wrote about "a mechanical indifference, the indifference of a grinder to what it grinds," which captures something of the whole situation.

Tim said...

Here is the problem with the different French proposals. All of the Tax Treaties France has signed with other countries Canada included specifically block France from imposing non source based taxation on any Canadian resident including French citizens resident in Canada. France could "override" the treaty using the last in time rule but that would unprecedented for France to do that and would risk Canada simply terminating the tax treaty(Canada has treaties with over 90 other countries)which would cause French companies to be highly disadvantaged in terms of Foreign Direct Investment into Canada and terminate any cooperation between the French Tax Authorities and CRA.

What is more likely is France would and I believe is in the process of imposing an "exit tax" on departing residents akin to what Canada, Australia, and Denmark do(and the US for renouncing citizens). This would be allowed in accordance with the standard model OECD treaties France has signed over the years. The French Ministry of Finance on the East side of Paris is not the US Congress they aren't going to try to break all of France's treaty commitments no matter what Sarkozy says on the campaign trail.

CarnetsSeattle said...

Case A is pretty much a no brainer, just because I don't see countries cooperating at that level anyway. Also, one example: one of my friends spent a year in thailand, getting paid a thailand wage. Getting taxed at the french level wouldn't have worked.

Case B is kinda interesting... How many expats are in that case, do you think? Is it even worth the oranizationnal nightmare between nations to handle that case? The guy was probably taxed already when earning the investment money in country A, he will then pay taxes on what he earns in country B, I don't really see a problem.

Case C is somewhat more interesting, but as you said being taxed in both countries (or more) could cripple somebody financially. I get the argument that people leaving the country take some value with them, in a way, but the country also receives expatriates from other countries. It probably balances out. In the US's case, it has probably a "positive cash flow" due to the fact that there is probably more exats living in the US than US citizens living abroad. For me it is also a question of democracy. We should be allowed to live where we want, wherever we have been raised. And also our parents paid taxes during our childhood, to pay our share of our education, so the point is a bit moot.

All in all, the topic kinda irritates me. I just watched "Inside Job" and the story of credit default swaps. Why the XXXX are we even talking about taxing expats and stuff when bankers just do as they please with our money and create a huge crisis just because they are comitting ernomous financial crimes each and everyday?

It should be denounced as such, all this taxes thing is a masquerade, distracting us from where the real problems are. Watch this movie. If even half of it is true, then the scandal is mind boggling and all this talk about taxes in nonsense until the financial sector is regulated. Darn, even it a percent of what is in this movie is true, I would think the same.

take care,

Victoria FERAUGE said...

@Tim, Looking at the whole business it sounds like some sort of Exit Tax would be much simpler to implement. In the US however, most folks were not even aware that there was one until Schumer tried to get his ex_Patriot Act considered. Overall I don't think it went over very well domestically - lots of comparisons to the former USSR. I suspect that it would be easier to implement in France but I could be wrong.

@Loic, Quite an interesting business, isn't it? And yet people get very worked up about it. I was shopping with my daughter one day and the shopkeeper just flipped out when she heard that I had a daughter in Canada. In her opinion it was a TERRIBLE thing to see bright young French running off to foreign places.

I'm going to watch "Inside Job" - thanks for the recommendation. Michael Lewis' The Big Short is also pretty good.

Victoria

CarnetsdeSeattle said...

@victoria

the shopkeeper was kinda right: it is an horrible thing.

What she doesn't get, is that the horrible thing is that they have no incentive to COME BACK, because there is less opportunities in France than in the US or Canada. We certainly don't want to come back anytime soon, even though we love our country very much.

Otherwise it would be an awesome thing, because the young would bring back knowledge, money, ideas....

Also, I think expats are a different breed, in the thing that they have a wanderlust in them. We are a small part of the population and always will be, so she should be more concerned about the crimes... of bankers, once again (this is going to be my default argumentation from now on, so you know. All this talk is nonsense until the guys that invented credit default swaps is tried and put in a cell for about 254 years).

Ah, the simplistic views of the non expat...

Tim said...

Essentially under an exit tax you are deemed to have sold all of your property(short of some basic exemptions) and thus would have to pay capital gains tax on the difference in value from when you bought the asset to when you moved out of the country. This is the system when you leave Australia, Canada, and Denmark(and when you renounce your US citizenship).

Victoria FERAUGE said...

@Time, I think the next post will be about Exit taxes (and I would include inheritance taxes as just another kind of exit tax). It's not been clear to me exactly how they work and I'd like to look at the differences between the countries you mentioned. Besides those 4 you mentioned are there others?

Tim said...

I'll have to think some more if there are any others. Another post idea that would be really informative is something on what is going on in the right flank of French politics. I used to be quite informed about French politics when I used to travel their more frequently and when it was Chirac, De Villepin, Pasqua, Juppe and co in charge. Those were the days when it was really bad ass to travel to France and Rush Limbaugh used to rant and rave about the French Assembly and German Bundestag having a joint session as the Versailles Palace. Canada of course was anti war too but never seemed to have a been considered a full blown member of the axis of weasels. Is there any chance of the Chirac/De Villipen old school crowd coming back to take over the UMP from Sarkozy's crowd. (My sense is Sarkozy was a bit of a one man band who is done for good with politics).

Victoria FERAUGE said...

@Tim, I'll look into it. The most fun we're having right now was Brice Hortefeux criticizing the socialist government after the Amiens riots saying that there were no such riots under Sarkozy. Huh?

http://artgoldhammer.blogspot.fr/2012/08/hortefeux-steps-on-his-tongue.html

If you're interested in French politics the above blog is one of the best.

I wouldn't count Sarko out. French politicians are quite accustomed to falling out of favor and going into exile for long periods only to return triumphantly years later. Look at De Gaulle...

Victoria

Tim said...

On the subject of government by "user fee" here is a video by "conservative" Reason Magazine praising their Air Traffic Control Reforms in Canada in the 1990s.

http://www.youtube.com/watch?v=KaPvJlPnc6E

Victoria FERAUGE said...

@Tim, Oh my! Their description of the US system is quite frightening. What is really interesting to me is how Americans seem to have no clue how many services are run by the U.S. government. Nor do they seem to realize that many "socialist" countries are quite advanced when it comes to privatization. It's not always a success mind you but it's certainly not unusual.

One area where the US has gone private that would be more controversial of Americans were more aware of it is the outsourcing of war. I just finished Corporate Warriors by Singer and then followed that up with another book by Robert Pelton just to get two different takes on it. It's a growing industry and seems to have moved (at least as far as the US is concerned) from basic support services to actual military operations. Are we looking at a future world where it's not about "supporting the troops" but rather "supporting the contractors."

The Europeans have taken note of all this. Here is an article from Slate about the French army:
http://www.slate.fr/story/15253/armee-francaise-la-tentation-des-mercenaires

I look around the Net and many of these stories very clearly use the word "mercenary" something that these private companies prefer to avoid.

I really have to wonder what my father-in-law would have thought of this....