Tax freedom starts with a territorial tax system

I’ll bet you wouldn’t be surprised if I told you that western governments want to have their cake and eat it, too. Yet that’s exactly what they do when making their tax policy.

On one hand, Big Government wants you to believe their excellence is responsible for your success. After all, “you didn’t build that”. The reason you’re so successful – and owe them a bundle – is because of the infrastructure they’ve set up.

While it would undoubtedly be hard to start a business in Somalia, I suspect many successful entrepreneurs could do just fine somewhere else.

On the other hand, governments want to tax you based on your place of residence. Most western countries base your tax obligations on where you live the majority of the year. They figure since you’re using all of their great services, you have to pay up. Even if your income comes from another country, you owe them.

So which is it? It’s either, or neither, or both. Or whichever is more convenient at the moment.

Real tax freedom starts with what’s called a territorial tax system. Quite simply, territorial tax means you pay based on where the income was sourced. It eliminates the confusion and keeps Big Government from double-dipping.

Territorial tax is just another reason to plant flags around the world. Or even considering moving to another country to start your business. Some countries get it. They know where their bread is buttered and they work to make life easier for the people that butter it.

These are the places I routinely travel to in order to learn more about how you can do business, bank, and invest there.

And keep more of your own money.

Take the Philippines. It’s easy to start a business there. Getting residence there isn’t that hard either. And as long as you’re not a citizen, you only pay tax on the money you earn within their borders, even if you live there 365 days a year.

Own a business in the United States? Filipino tax authorities don’t think it’s any of their business. Have interest income from a bank account in the UK? No worries.

That’s what makes the territorial tax system the most fair system there is. While I don’t believe taxes are fair to begin with, if you can’t outright eliminate the income tax or don’t want to move to one of the world’s few zero-tax jurisdictions, this is the next best thing.

From Costa Rica to Panama, Singapore to Hong Kong, Malaysia to Macau, and Paraguay to Nicaragua, you can achieve lower taxation just by touching down at the airport.

That’s before you take into consideration any offshore corporation or other tax minimization tactics you might use. It’s not just easy to minimize your tax burden and internationalize your assets in these places; it’s part of the deal.

For those who travel or maintain multiple homes, these countries can be especially beneficial in allowing you to earn money around the world and move it to the lowest tax jurisdiction.

To me, a quick look at which countries use a territorial tax model versus a residential one lets me take the pulse of the country and figure out their perceived role in the economy. In Georgia (the one near Russia), the government has slashed the number of taxes from 21 to just six. They also have a territorial tax system. Now that’s a government trying to attract capital.

Meanwhile, countries in the west keep piling on more taxes. No matter how much they get, it’s never enough. While some of these countries can still be considered pleasant to live in, most are suffering downward momentum. Their best days are behind them, but like the stuck-up jock or prom queen who think their high school glory days can buy them access thirty years after graduating, these governments have yet to realize their best days are behind them. They’ve yet to embrace tax fairness because it would cut off their tax-and-spend adventures.

They’ve spent all they can and then some and they need your cash to cover it up as best they can. If you flinch, they’ll just call you a traitor.

While some in the Land of the Free have said President Obama is open to a territorial tax system for corporations, others severely doubt it. It’s a lot easier to bully corporations for keeping their money offshore rather than admit fault for having the highest corporate tax rates in the world. The loopholes and other funny business that goes on there just give politicians more ways to pay back their cronies and score political points against big business.

If you’re looking for a country to relocate to – or just start a business – the list of those with a territorial tax system is a good place to start. Imagine living in one of these places and earning the bulk of your income from overseas. If you set it up right, you could pay virtually zero tax with no effort required.

Of course, Americans are still liable to pay Uncle Sam no matter where they live. That’s where having an offshore business and proper tax planning can come in handy to achieve similar results. More on that shortly.

Andrew Henderson

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