Tax is a mandatory fee or charge levied by the government on individuals and companies. It is primarily used to fund various public expenditure. Through this article, let us try to understand the taxation system of different countries, but mainly United States.
Every country has its own unique kind of tax computing system. This ultimately regulates taxability of citizens in that particular country and also who are not citizen but reside in that country. In this regard, you have what we call a DTAA Agreement. A DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) is an agreement signed between two countries/nations for resolving the issues of taxability of income and increased transparency to avoid tax evasion or double taxation.[1] “Governments usually limit the scope of their income taxation in some manner territorially or provide for offsets to taxation relating to extraterritorial income. The manner of limitation generally takes the form of a territorial, residence-based, or exclusionary system. Some governments have attempted to mitigate the differing limitations of each of these three broad systems by enacting a hybrid system with characteristics of two or more.”[2]
Usually, tax so levied happen on income of an individual or an enterprise, which may be levied differently. Apart from general rules, the system can vary in different jurisdictions. Entities are often taxed in a unified manner on all types of income while individuals are taxed in differing manners depending on the nature or source of the income.[3] Many jurisdictions impose tax at both an entity level and at the owner level on one or more types of enterprises.[4] These jurisdictions often rely on the company law of that jurisdiction or other jurisdictions in determining whether an entity’s owners are to be taxed directly on the entity income. However, there are notable exceptions, including U.S. rules characterizing entities independently of legal form.[5]
It is important to note that, taxation system has nothing to do with citizenship of a country. Taxing schemes are usually categorized as either residence-based or non-residence based. The United Kingdom, prior to 2013, established three categories: non-resident, resident, and resident but not ordinarily resident.[6] India too have similar categorization. Where tax is levied on individuals based on the number of days they reside in the country and their income.[7] However, in India agricultural income is not taxed, provided the income does not exceed Rs. 5000, per year.
In The United States of America taxes are levied on:
- Local income (its citizens or residents),
- Foreign income of residents and non-residents citizens,
The US taxation system also provides for an extensive and comprehensive guideline for individual residency of foreigners, covering:
- “Periods establishing residency (including a formulary calculation involving three years),
- Start and end date of residency,
- Exceptions for transitory visits, medical conditions, etc.”[8]
To mitigate double taxation, nonresident citizens may exclude some of their foreign income from work from U.S. taxation, and take credit for income tax paid to other countries, but they must file a U.S. tax return to claim the exclusion or credit even if they result in no tax liability.[9] “U.S. persons” abroad, like U.S. residents, are also subject to various reporting requirements regarding foreign finances, such as FBAR, FATCA, and IRS forms 3520, 5471, 8621 and 8938.[10] Despite FATCA, FBAR Penalties Still Under Fire Forbes, March 12, 2012.[11] Countries like Finland and Italy continue to levy tax on its citizens who move to other countries. This however changes if individuals prove that they no longer part or have ties attached to the respected country. In view of this, they are no longer considered citizens for tax purposes.
France taxes its citizens who move to Monaco as residents of France, according to a treaty signed between the two countries in 1963.[12] However, those who already lived in Monaco since 1957, as well as those who were born in Monaco and have always lived there, are not subject to taxation as residents of France.[13]
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[1] A brief Study on International Taxation (taxguru.in) [2] International taxation - Wikipedia [3] Ibid. [4] E.g., the U.S. taxes corporations on their income and their shareholders on dividends distributed from the corporation. See U.S. IRC sections 11, 1, and 61. [5] U.S. Internal Revenue Service (U.S. IRS) Reg. (hereafter 26 CFR) §§301.7701-2 and -3 Archived 2010-04-21 at the Wayback Machine. [6] See, e.g., "Residents and non-residents", IR20, Inland Revenue, HMRC, page 6 et seq. [7] See Section 6 of Income Tax Act 1961. [8] Supra 2. [9] Information for U.S. Citizens or Dual Citizens Residing Outside the U.S. [10] Despite FATCA, FBAR Penalties Still Under Fire Forbes, March 12, 2012. [11] FBARs & FATCA Form 8938: Maddening Duplication? - Forbes (archive.org) [12] Individuals whose residence for tax purposes is outside France, Fiscal Administration of France, 2015. (in French). [13] Article Monaco Matin of April 18, 2014, on the subject of ruling no. 362237 of the Conseil d'État, Union des Français de l'Etranger.
