Of all the sovereign nations on the planet, there are only two that tax their citizens’ income earned while living abroad: the United States and, perhaps surprisingly, China. Most countries ascribe to the philosophy that taxation should be primarily national rather than global, but both the United States and China require their citizens living abroad to pay domestic taxes on income earned worldwide. Since these two countries agree on little else, it’s worth taking a look at why each country favors this policy.
Why the U.S. Taxes Citizens Living Abroad
The standard justification for the long-running policy imposed by the United States is that it deters tax evasion by its citizens and ensures that all of them pay for the benefits that come with their citizenship; many of which they still receive while living abroad. With these funds being used to help pay the enormous costs associated with running the government, even those citizens living abroad are therefore significant contributors to the federal budget. Economists globally debate the fairness of taxing citizens and companies overseas, arguing that citizens in another country can’t make use of state-run healthcare or social welfare programs while also promoting exports.
Benefits to China from Taxing Citizens Living Abroad
China’s government implemented sweeping economic changes in the early 1990’s in an effort to modernize its federal tax system, which had fallen into a dreadful state of confusion and inefficiency. After evaluating the systems in place around the world, especially those employed by the global superpowers, China’s political leaders decided to adopt the model then in use by the United States.
Strangely, after adopting this policy China then declined to actually enforce it among citizens living around the world. In response to criticism, political leaders contended that resources in the federal agency charged with levying and collecting taxes were simply insufficient to meet the requirements for tracking down all those living beyond the country’s borders. In addition, the relevant earnings data from private employers was seldom available to provide a basis for taxation.
That will all change in 2015, however. Now the State Administration of Taxation (SAT) insists that all income earned abroad must be accounted for right alongside domestic earnings, and that China’s government will no longer tolerate evasion of taxes. One of the chief reasons for the about-face on the enforcement of the rules seems attributable to the fact that the country has a greatly increased need for revenue to fuel its economic growth.
How China’s SAT Will Enforce Taxation Abroad
One of the past obstacles to tax enforcement abroad was that necessary tax data was lacking on citizens’ overseas investments and earnings. Early in 2015, taxation officials met with executives from more than 150 of China’s largest corporations to inform them that it would require information on their employees’ earnings while living abroad. In this way, one of the loopholes of the system has been tightened up to make the system more enforceable.
The SAT also plans to reign in some of the huge overseas investments made by billionaire Chinese individuals and corporations, which it deems to be no more than shelters designed to subvert the taxation process. In prior years, it was common practice for wealthy Chinese businessmen to make foreign investments through specially created companies to protect income. Corrupt officials who have fled overseas to escape this new level of zeal by tax officials may now be caught in the net of taxation reform.
Chinese officials have been negotiating quietly with financial and political officials in the U.S. and other countries where its citizens have been living abroad in order to be granted access to information on earned income and bank account data. With this data, another missing link would be supplied and the SAT would then be much better informed about taxable income.
Potential Influence on Other Nations
Up to now, European countries have resisted adoption of the citizenship-based taxation model for those living abroad, because these countries felt that their foreign citizens received few of the benefits of citizenship. With global economies now slowing, it is entirely conceivable that more countries around the world will begin to adopt this same model of taxation.