Recently we blogged about the “Exit Tax” or Expatriation Tax. 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.
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.
Universal tax jurisdiction is extremely rare. While the United States imposes it, no other country in the developed world does. 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.
These are the questions we have:
- 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? And worse,could she 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 even close to the Universal Tax Jurisdiction of the IRS?
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.
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.
A simple monthly income and annual income backed by documentation from an employer is sufficient. So 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.
North Korea DOES have universal tax jurisdiction but here's 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.
Foreigners who live in North Korea for more than one year have to pay tax on all foreign sourced income. If a foreign national 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%.
Officially, North Korea does not tax its citizens! Kim Il-sung, the Eternal President of North Korea abolished taxes for the "lucky" North Korean citizens. How well this is enforced on the the other hand is a matter subject to debate.
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.
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 in.
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.
If, after reading this, you realize you have accounts or finances you shoule have reported to the US, contact us for help. We can set you up with a confidential, complimentary consultation
By: Anthony E. Parent, Esq. and Andrew Feng, summer intern, Parent & Parent LLP, University of Connecticut School of Law (JD. '14)