In response to some feedback received from readers over the last few weeks, I wanted to clarify what I mean when I talk about taxation on worldwide income.
I’ve often written that the United States is the only country that taxes its citizens on their worldwide income, by virtue of their citizenship. Then people write to me saying “Canada does too” or “New Zealand now taxes citizens on their worldwide income too” to quote a couple of examples.
The fact is that most developed countries tax residents on their worldwide income. That means that for example a Canadian living in Canada, or a New Zealander living in New Zealand, is indeed subject to taxation on worldwide income.
The big difference is that a Canadian living outside Canada (a Canadian expat) is no longer subject to Canadian taxes on income from other parts of the world. To give you a practical example, a Canadian who escapes the frozen north to live in tropical Belize under the Belize Qualified Retired persons program and invests his money through a Panama Foundation, brokerage and bank accounts in Panama, will not be subject to Canadian taxes any more. The same applies even if he runs an active business somewhere outside Belize – he could be in consulting, e-commerce or a host of other businesses that don’t require his physical presence.
In this example, our Canadian will be in the enviable position of having avoided almost all taxes completely legally at a stroke. As a non-resident of Canada, he is no longer subject to the claws of Revenue Canada. Belize only taxes local income, while Panama does not tax non-resident investments. As such, our Canadian doesn’t have to pay any taxes. He doesn’t even have to go to the hassle of filing tax returns.
The same applies to Brits and other Europeans, to Aussies, to Kiwis… in fact to absolutely anyone who is not a US citizen or green card holder. These people do not have to pay tax on their worldwide income to the countries from which they hold passports, provided they don’t live there. To avoid tax legally, all they have to do is move to one of the many countries in the world that either has no taxes (like Andorra or Monaco) or that does not tax even residents on worldwide income (for example Belize, Panama, Dominican Republic, Singapore, certain cantons of Switzerland…)
This situation is only fair I think. If you don’t live in a country, why should you be expected to pay for it? The US government, however, doesn’t share my opinion. They think that if you hold a US passport, you should pay up no matter what.
So if in our example above, the retiree was American rather than Canadian, he would still be taxable on his worldwide income. Poor American.
There is of course one legal way that Americans can, again at a stroke, avoid this worldwide tax obligation. That is by giving up US citizenship. Although this may seem like a drastic action to some, it’s a course of action that more and more wealthy Americans are taking each year. And in fact it’s a relatively straightforward procedure. It used to be free, but US consultates have recently introduced a $450 charge for handling the paperwork.
US citizens who do decide the renounce citizenship have two other important considerations:
- Before you can give up US citizenship, you must acquire a foreign citizenship, otherwise you would be left stateless, like a refugee who is unable to travel. Acquiring a second foreign passport, however, is relatively simple. For details click here: How to Acquire a Second Passport Legally
- You must also take into consideration the so-called ‘departure tax’ instituted by Congress in 2008. In our view, this exit tax is more bark than bite. However it’s definitely an indication of things to come.
In my view, therefore, any US citizens who have a reasonable amount of disposable assets – or those who believe they can acquire wealth faster by working in an offshore, tax-free environment – should seriously consider expatriation. The grass often is greener on the other side. And even this loophole is likely to be tightened sooner, rather than later. Acquiring a second passport in a hurry via en economic citizenship program is many, many times more expensive than acquiring one over a few years via a residence program.
If you would like to know more about this topic, sign up now for our free five-part ‘Secrets of the Super Rich’ course now. Say no to unjust taxation on worldwide income!