Eritrea is one of only two countries in the world that applies citizenship-based taxation in addition to residence-based taxation.
The other? The United States of America.
In fact, the US is the ONLY industrialized country in the world to impose taxation on the basis of citizenship—even if the American is working overseas.
The immediate result for Americans employed overseas is a nightmare of confusing and complex filing and reporting requirements. When I worked abroad, my U.S. tax return could easily come to fifty pages—requiring the expense of a paid tax accountant to do the job.
Consequently, a business must offer a higher gross pay an American working overseas than to a non-American. Unfortunately for Americans, not all companies are going to offer an American a higher salary over and equally qualified non-American.
In fact, over a 20 year period, the number of Americans employed by foreign subsidiaries of US firms fell by a staggering 50%—even as those firms continued to expand their overseas hiring.
In addition, the complex U.S. reporting requirements for the income of American workers abroad, and their bank accounts, are so onerous on businesses that some companies have ceased hiring Americans altogether. Many foreign banks now refuse to open accounts for Americans due to the burdensome U.S. reporting requirements.
The US should change America’s tax system from a system based on citizenship to a territorial system based on the American individual’s country of residence. This would level the playing field for Americans working abroad. It would also make it make it less costly for companies operating abroad to hire American workers and stop the outsourcing of jobs to foreign nationals.
An American seeking employment abroad must now consider both how the foreign country and the US government will tax earnings. Many Americans working abroad are subject to double taxation and must pay income taxes to the country in which they reside, in addition to US income, taxes. While some countries do have tax treaties with the United States that limit this burden, most do not.
A non-American worker, on the other hand, has no such concerns.
The U.S. argues that Americans working abroad are important source of tax revenue.
However, under the auspices of the World Trade Organization (WTO), the U.S. bestows lavish tax and other benefits on U.S. businesses willing to transfer their operations to a foreign country (while firing their American workers back home). An investigation by the U.S. government has uncovered a sophisticated scheme by Apple involving the creation of an international web of subsidiaries to avoid taxes. Thanks to its foreign subsidiaries, Apple has paid no tax, zero, nada, on $74bn profits.
The American working abroad has none of these benefits.
The WTO’s benefits include the U.S. financing (for free) of all foreign capital expenses for the business. In addition, under the WTO, the U.S. provides a free financial guarantee to the company against losses.
Finally, thanks to the WTO, the U.S. does not tax the revenues of U.S. companies abroad, so long as the company does not repatriate their tax-free profits back to the U.S. This keeps profits overseas where they can be invested instead of bringing them back to create jobs in the U.S.
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