Dateline: Kuala Lumpur, Malaysia
I’m all for paying my fair share in taxes, but curiously, what governments interpret to be “my fair share” is directly correlated with the government deficit. I appreciate the hustle and verbal dexterity on their part, but it’s not a game that I care to play or pay for.
Increasingly, every wealthy individual and entity is being considered as an ATM to withdraw from when times are tough.
People like Bill Gates have gone on record saying that they paid well over $10bn in taxes over the course of their lives, but politicians still say that this is not enough.
To me, this seems very weird. Bill Gates still drives on the same roads and uses the same services he always has. Financially speaking, he paid for them a million lifetimes over, yet people still think that his tax rates are too low.
In fact, there is growing talk of a “wealth tax” that would dictate that, past a certain net worth, you would be taxed at ever-higher rates. In some proposed instances, it would be impossible to go beyond a certain level of wealth as the taxes would be so prohibitive.
This may become a reality within our lifetimes as politicians in many countries are making noise in that direction.
But there is a far more pressing matter right now – the introduction of a “Global Minimum Tax”. This tax will wreak havoc on your bottom line, no matter where you happen to live or conduct business.
Here’s what you need to know about it.
The Coming Global Minimum Tax
Citizens of the US are already well acquainted with citizenship-based taxation, wherein you are taxed on your worldwide income no matter where you live, simply by being a citizen (or resident) of a country.
In practice, the United States is the only major country to use such an exacting system.
I dare say it’s the only country capable of pulling it off, as you need some degree of compliance and transparency from all other major financial centers. However, this won’t stop some countries like Australia and Canada from attempting their own take on this policy.
That said, the new Global Minimum Tax would function like US citizenship-based taxation in many regards. Global citizens, no matter where they were born or where they happen to be living, will be subject to pay a minimum tax.
It works like this: let’s say you were born in a country with a 10% tax rate, but you decided to seek your fortune and moved somewhere with a 2% tax rate to build your business, even though you kept your birth citizenship. Then, as you’re building your fortune, some politicians passed the Global Minimum Tax law.
The tax season after it is passed, your accountant will tell you that you need to pay your regular 2% tax to the country you live in, but you also have to pay 8% of your income to your country of birth. After all, your other compatriots are paying this tax rate, and you should pay “your fair share”, no?
We are beginning to see the first salvos of this coming war already. Until now, companies and individuals have been able to set up their tax jurisdiction in a country of their choosing. But this is becoming increasingly difficult.
Given the fact that the remote worker is becoming normal, and the digital nomad lifestyle more appealing by the day, high tax states are losing their tax base.
At the moment, the number of people traveling the world on a permanent basis doesn’t make a major dent in the government demographics. Where it does make a difference though, is in their revenue, as these location-independent remote workers are also often the founders of a location independent business.
For instance, imagine that you’re an entrepreneurial Swede who doesn’t want to have high taxes in Sweden. It’s increasingly easier to just hit the road, become location independent, and pay zero taxes legally. This means that the Swedish government not only loses the tax revenue from your employment but also your entrepreneurial zeal and all the taxes derived from it.
Sweden and all other high tax states aren’t particularly happy about this state of affairs. In the past, they had a captive audience – even if someone wanted to go elsewhere, the feasibility of it wasn’t quite there.
Now that this is a reality, rather than adjusting their taxes to compete for taxpayers, high-tax countries have launched an attack on the low-tax countries that are luring their citizens away.
Tax Wars and the Global Minumum Tax
There is now a war of high-tax states vs. low-tax states – one wanting to keep things the way they have always been, and the other vying for new clientele.
In many countries, this war can and does happen internally. For example, in the US, people can see how high taxes are in California when compared to other areas and so they move to another state.
But you can also see this war play out at an international level, where high-tax countries are losing their taxpayers to the UAEs of the world with their zero tax policies and other attractive tax incentives.
Naturally, spendthrift governments won’t understand why high taxes are bad. Instead, they double down and attempt to continue charging you those same taxes even if you haven’t set foot in their jurisdiction.
While it used to be enough to simply avoid living in a given region for the majority of the year to no longer be considered a tax resident, there are a host of tests now – there’s the “center of life test”, the “economic substance test” and the “economic interest test”, just to name a few.
All these are designed to try to prove your ties to a certain community and charge you for it. I’ve even heard of people getting a hefty tax bill because they left a surfboard in a friend’s house, which supposedly meant that they planned to come back with regularity.
This is far from the only example, and there have been some high profile, almost comical in their scope, examples:
Even as far back as the 1990s, California tax authorities went after inventor Gilbert Hyatt, who was living in Nevada. At one point, he had been a resident of Orange County, but in 1991 he moved to Las Vegas. This didn’t stop the Californian government from seeking their cut after a bureaucrat read about his billion-dollar patent for a “microcontroller” in a magazine.
They rifled through his trash, staked out his home, harassed his former neighbors as well as his rabbi, and even hired a detective to find proof that he still had ties to California.
Long story short, this resulted in a 25-year court battle, one that Gilbert ultimately “won” after having spent $10m in legal fees and $2m as a settlement (for the record, the tax authority spent $25m throughout this goose chase).
In this battle of high taxes vs. low taxes, it tends to be larger states vs. smaller ones. Meaning that the smaller states that decided to offer reduced tax rates to remain competitive on the world stage will often get bullied by larger ones that want them to stop.
Just ask the Caribbean countries that were offering citizenship by investment or offshore banking with excellent tax rates about US-led threats. Or ask Andorra about how it got threatened by the EU to have tax rates in the first place.
Countries with high taxes have historically joined arms to stamp out any low-tax option giving them competition. So, it makes sense that in time they will coerce most of the smaller nations into obedience, or else.
The Future of Taxation
Recently, the OECD proposed taxes on multinational corporations based on where they are selling rather than where they are incorporated. Right now, companies can set up in Ireland or the Netherlands and deliver services elsewhere, bypassing the need to pay tax.
This shows us two things:
Firstly, it is no longer going to be a matter of skillfully dodging the regulation of a single country. Instead, large blocs of countries will pool their resources together to enact the policies benefiting them.
These powerful groups will then use their geopolitical might to force any smaller entities into conceding to their demands. And unless they are rich or important enough (like the UAE) they will have to obey.
Secondly, they will likely go after corporations before they go after individuals. It’s much less popular politically to apply taxes to individuals. Most individuals do not have illusions of owning a large corporation, so they assume that what happens to corporate rights won’t happen to them.
But whatever happens to corporate rights is a good barometer of the direction of political winds.
If businesses are suddenly being taxed in every country they happen to do business in, don’t be surprised if shortly thereafter similar taxes start popping up for those paying zero tax who are location independent.
However, if governments learned from their history, and their bureaucrats are astute, they will structure it in a way to make it seem like you still have a choice.
For example, let’s say you’re living in France but you move to Bulgaria, as taxes are lower there. Curiously though, the French government doesn’t come knocking on your door demanding taxes. But had you moved to the UAE to pay zero taxes, then they would have come for the full amount of what they decided the minimum tax ought to be.
What happened in the theoretical example is that they presented you with a false choice. They didn’t want you to move out of the EU tax system, so they penalized you for going abroad and incentivized you to go to a location of their choosing.
In this way, you think you are getting a good deal, while they get to promote an area of their economy that is underutilized. It’s a magic trick – you’re so concerned about one outcome that you miss how they are forcing the cards to get you to play with them in the first place.
How to Legally Pay Zero Taxes
After hearing all this, some people might decide to go off the grid, put all their money into crypto or gold, and wish the government good riddance and good ever finding their wealth.
While crypto and precious metals should form part of any well-diversified portfolio, I disagree with this tax-dodging mindset entirely. I don’t want to be living in fear of whether the government will find my assets, and then if they will arrest me.
What I would suggest instead is that we all need “citizenship insurance” – a second passport offering a way out. As it stands, most people are at the mercy of their government. If the bureaucrats in power become tyrannical or start using them as a piggy bank, what other option do they have but pay up?
If you don’t have an exit plan, then you are simply forced to accept whatever terms you are given. The best you can hope for is one of those false choices we discussed in the last section, which are designed to placate you, rather than actually be a valid alternative.
If you actually want to live life on your own terms, here’s how to pay zero taxes permanently:
- Establish a primary residency in a low- to no- tax jurisdiction: You will likely need to live there a portion of the year to meet the requirements of for establishing tax residence status and dissuade your original government from taxing you.
- Get a good second passport: If you can’t renounce your primary citizenship without becoming stateless (or going to an even worse jurisdiction), then you don’t really have a choice. As soon as there is a global minimum tax, you will have to pay it. A second passport will give you the option to leave when the time comes and avoid this situation altogether.
You can’t insure your house when it has burnt down. In much the same way, you can’t safeguard your assets from the taxman once the regulation is already in place. You need to have options in place before they need to be used.
Otherwise, the best you can hope for is to get a hefty tax bill before you’re able to flee.
This is not an exaggeration either, contrary to most other types of laws in the Western legal tradition, these tax regulations can be retroactive.
For example the TCJA (Tax Cuts and Jobs Act 2017 – the Trump Tax Reform) went back to 1986 and placed a one-time tax on all retained earnings retroactively. And if you think that you are safe because you live in Europe, the UK had a similar law that undid previously legal structures.
The point is that states can do whatever they want with their citizens. I view it like a “psycho girlfriend”. If she’s already done weird stuff, get out before she slits your throat.
The way you lead your life and your finances are in danger right now, you can address it and be safe, or ignore it and expect the worst.
Insure Against The Global Minimum Tax
In the modern world, governments often function by running a deficit. This leads them to be perpetually searching for new revenue streams.
Because misery loves company, this means that the high-tax governments of the world will create alliances and work together to maximize their tax revenue.
These alliances are very powerful on the world stage, and jointly they can exert enough geopolitical pressure to convert or coerce smaller states with low taxes to obey them and raise their taxes to be in line with them, leading to a Global Minimum Tax that is practically inescapable for citizens of bankrupt western countries.
Over time, there will be fewer and fewer alternatives, unless you decide to take measures today to create a holistic offshore strategy and leave your bankrupt home country behind.
The bottom line?
There may come a time when you will have to pick between your citizenship and your tax rate. If you prepare now, at least you will have a choice.