Who else taxes like the United States?
By: Anthony E. Parent, Esq. and Andrew Feng, summer intern, Parent, Parent & Wynn LLP, University of Connecticut School of Law (JD. ’14)
Recently we blogged about the “Exit Tax” or Expatriation Tax. If you want to leave the abusive taxing scheme of the IRS, you actually may need to pay a tax in order to do so — a tax that is more punitive than the so-called death tax!
Anyway, as an aside, we wrote that the only other country in the world with universal tax jurisdiction, like the United States, was North Korea. A few of our friends, notably Chad Conrad, tax counsel at the Canadian firm of Felesky Flynn LLP, informed us that this may not be accurate, pointing out the African country of Eritrea has the most similar universal tax jurisdiction to the United States. So we looked a little deeper, found our confusion (o.k., we were at least partially wrong) but also found out a little bit more to the story. Yet, our overall premise — that the United States of America has a truly bizarre taxing regime — this premise still proudly hails in the dawn’s early light.
Read on for our analysis.
What is universal tax jurisdiction? Why does the US have it? Why is it so nasty?
Universal tax jurisdiction means that a country can tax you wherever you are for whatever income you earn — anywhere in the universe.
The only way for a US citizen not to be subject to the taxing authority of the IRS is not by fleeing to the farthest reaches of the universe, but by renouncing citizenship and paying an exit tax, if required.
But universal tax jurisdiction is extremely rare. While the United States imposes it, no other country in the developed world does.
Now is this an egocentric, or perhaps a “big stick” taxing policy? We don’t know. But what we can say is that this policy came out of thin air. The idea of universal tax jurisdiction was not voted on or argued for by any elected office-holder. It was actually created by judicial fiat. An incredibly activist Supreme Court simply decided that the IRS should tax citizens on worldwide income. Precedent or legislative history from the 16th amendment not required.
Over the course of time, many US citizens would get it wrong and fail to properly report income earned overseas. If proponents of the 16th Amendment couldn’t be bothered to think about it when creating the law, then it follows that someone who the law would affect, would be in his right mind not to think about it either.
But still, it is the law of the land.
As a tax firm which helps people deal with the reality of the US tax code, these are questions we are asked everyday:
- Why should a dual US-India citizens have to pay US taxes on a demat account in Mumbai?
- Why should a US green card holder have to report foreign accounts to the IRS for a software company he owns with his brother?
- Why should a widowed American who has lived in Austria for the past 40 years, have to report her life savings she inherited from her Austrian husband to the IRS when the US had absolutely nothing to do with her creating the wealth in the first place? And worse, be subject to FBAR penalties that could completely wipe her out?
There is no way to answer these questions by relying on any principles of equity, but rather, on the principle of raw power. The U.S. government has the power to do this, so therefore, it is lawful. And that is what you need to know about universal taxation jurisdiction.
But the United States can’t be alone in treating its citizens so shabbily, can it?
Which other countries have anything approaching the Universal Tax Jurisdiction of the IRS?
Eritrea: Yes, but not quite.
Eritrea has received a lot of bad press because of their taxation of foreign-sourced income of Eritrean nationals living abroad. Eritrea does have global tax jurisdiction. Eritreans working abroad must pay their government 2% of their income from wages.For Eritreans living in the United States, the tax form is available at the Eritrean embassy or consulate in every nation with diplomatic relations to Eritrea.
Yet there are key distinctions between the U.S. and Eritrean systems. Eritreans are not subject to any sort of local “FBAR equivalent” requirements. Eritrea does not require citizens of Eritrea to file with the treasury a list of their foreign accounts and to pay taxes on income related to property overseas. Eritrea does not require citizens to pay capital gains tax and interest on those accounts. Eritrea does not require citizens living overseas to pay massive penalties for innocent mistakes that many thousands of citizens or millions of Americans have made by not knowing the reporting requirements.
As you can see from the tax return, simple monthly income and annual income backed by documentation from an employer is sufficient. So that yes, Eritrea does impose a tax on 2% on the earned income of its citizens, but there is no tax on unearned income such as dividends, interest or capital gains.
North Korea: Yes, but not on North Korean citizens.
Yes, you read that correctly. It is a little complicated, so read on.
North Korea DOES have universal tax jurisdiction But and here is the weird thing: The universal tax jurisdiction only applies to foreign nationals who reside inside the territories of North Korea. Like the United States, North Korea’s version of universal tax jurisdiction includes taxation of foreign income for foreigners.
Speaking of weird things, how about the North Korean official website? A “webpage” (just one, huh?) that gives visitors unfettered access to “Parks/Pleasure Ground.” And inadvertently, but accurately, has a flash animation transition that, frozen in time, appears to be prison bars. Go here to see for yourself.
Article 36 and Article 37 of the “Enforcement Regulations for Foreign-Invested Business and Foreign Individual Tax Law” approved by the Administration Council of the DPRK state that foreigners living who live in North Korea for more than one year have to pay tax on all foreign sourced income. If a foreign national for whatever reason decides he wants to move to North Korea and reside there, he will need to pay income tax derived from licenses, dividends, capital gains from stock sales or property sales, among others. To be fair, rate of taxation is comparable to those that we pay in the United States. Taxes on dividends or licenses for foreigners residing in North Korea are 20%. Taxes on capital gains is 25%.
Because guess what? Officially, North Korea does not tax its citizens! Kim Il-sung, the Eternal President of North Korea abolished taxes in accordance with Article 33 of the Socialist Constitution for the “lucky” North Korean citizens. How well this is enforced on the the other hand is a matter subject to debate. There have been a number of articles on the internet about North Koreans paying taxes in for form of market stand rental fees payable to the government or requiring students to work in order to cover school fees (other taxes North Koreans may incur are payable in the form of being tortured, starved and/or brainwashed into complying whatever the regime demands).
But technically speaking, this is very different from a universal tax jurisdiction — there is no taxes on North Korean citizens on income related to working, investment, or investment overseas (again, a North Korean may find an impediment to working overseas). Americans pay taxes on foreign sourced income. North Koreans do not. Yet, should a North Korean actually escape and earn income aboard, any money they make, would still be tax-free, as far as North Korea is concerned.
What about the North Korean death tax?
Like the United States, North Korea also has a death tax. Ours is in the form of an estate tax where we pay federal taxes on the value of the deceased with certain exclusionary amounts that change on an annual basis. North Korea does not have an estate tax on foreign nationals but it has implemented an inheritance tax for foreigners residing in North Korea. We do not tax inheritance on the federal level, but certain states within the union however have inheritance tax.
And for those truly curious about North Korean taxation, foreign nationals residing in North Korea have an exemption which allows those individuals to inherit money without making inheritance tax filings. However, our research shows that the exemption was 200,000 KPW. In 1994 when the regulations were passed, North Korea’s currency was pegged at 2.16 KPW to 1 USD. Using the exchange rate from 1994, 200,000 KPW was an insurmountable sum in North Korea and estate tax would be limited to very few foreign residents if any. We were unable to come up with any amendments which adjusted this amount for North Korean hyper inflationary period of the past decade.
So, who else taxes like the United States?
Nobody. Not one other country. In fact, at least when it comes to universal tax jurisdiction, the closest comparisons are either (1) a country you never heard of, or (2) a state-sponsor of terrorism. What a strange neighborhood to find oneself.
We wonder if it is about time for a change — this can hardly be what our servicemen and women fought for, and what their families have sacrificed and continue to sacrifice for. This cannot be what our founders intended when they risked everything on a document put out for ratification on July 4, 1776.