Celebrating America’s birthday within the firm of foreigners may be nice enjoyable. I just lately spent the Fourth of July with some British expats who stay in Washington, D.C., and find it irresistible right here.

Whereas awaiting the fireworks, we joked concerning the some ways our international locations’ cultures differ. My friends remarked that we Individuals assist the mistaken form of soccer. I countered that the Brits drive on the mistaken facet of the highway. It was a pleasant tussle ending in a diplomatic truce about which nation does issues the higher means.

However there may be one matter relating to which I encourage the remainder of the world not to duplicate the American expertise: the taxation of residents who stay overseas. A current weblog put up from veteran tax lawyer Dan Neidle, who runs the London-based assume tank Tax Coverage Associates, presents the next query: “Citizenship-based taxation: Ought to all UK residents pay tax within the UK, even when they stay overseas?”

Neidle explains how the US and the UK depend on completely different guidelines for taxing people who stay exterior their nation of origin. The put up underscores the conceptual divide between residence-based and citizenship-based taxation. That is an space that’s turn into more and more controversial in recent times, partly due to the International Account Tax Compliance Act regime, which makes life burdensome for U.S. residents who stay overseas.

The UK taxes individuals based on their residence. If an individual lives in the UK for no less than 183 days in a single yr, she or he will fulfill the edge for establishing authorized residence and will probably be taxed accordingly. Appears honest sufficient. The residence threshold drops to 90 days if the individual owns a house in the UK. That makes nonresident standing harder to realize as a result of the individual should then stay exterior the nation for no less than 275 days in a single yr. Once more, no complaints.

If the individual qualifies as a nonresident beneath U.Okay. legislation, they’re typically off the hook for functions of British taxes. That’s regardless of being a U.Okay. citizen. Said otherwise, British citizenship alone doesn’t present a foundational foundation for the imposition of U.Okay. taxing rights. This strategy shouldn’t be some uniquely British anomaly. Residence-based taxation is the worldwide norm. It’s how each nation on the planet (aside from the US and Eritrea) goes about issues.

The U.S. strategy is sort of completely different. It determines tax jurisdiction by contemplating each residence and citizenship, that means that U.S. expats and so-called unintended Individuals are absolutely taxable in the US regardless of having overseas residency.

The one means they will escape citizenship-based taxation — and the accompanying burdens of FATCA — is to formally surrender their citizenship.

Neidle displays on residence-based taxation as follows:

The issue with this from some individuals’s perspective is that it turns into remarkably straightforward to cease being topic to UK tax. Merely give up the UK. Loads of rich individuals skip the UK to maneuver to tax havens, usually simply earlier than making giant capital positive aspects. You may be positive we’d see extra of that if the UK was about to introduce a hefty wealth tax.

He then makes the purpose that if a authorities’s sole consideration is to stop extraordinarily wealthy individuals from fleeing the nation and establishing store in a tax haven, the U.S. mannequin is preferable to the British mannequin. The assertion caught my consideration as a result of it’s the identical argument I routinely hear from U.S. opponents of residence-based taxation.

Regardless of the statement, and after weighing all of the related professionals and cons, Neidle comes down firmly towards citizenship-based taxation. He describes it as “unfair and unjust,” including that it will be a horrible thought for U.Okay. policymakers to contemplate adopting the apply. I couldn’t agree extra. No nation ought to comply with the U.S. instance on this occasion.

It was refreshing to listen to these ideas from somebody with no specific ax to grind relating to the operation of the U.S. revenue tax system. Even on a patriotic event just like the Fourth of July, the views of an outsider (even a Brit) generally is a welcome supply of objectivity.

Citizenship-based taxation is suboptimal tax coverage — with or with out the bags of FATCA.