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The Dangers of Chasing Lower Taxes
Tax haven countries are wisening up to what they're losing out on.
788 Words | 3 Min 18 Sec Read
Welcome to another issue of Passionate Income.
Today we’ll be discussing the ever shifting landscape of territorial tax countries.
In particular, why the number of countries that don't tax foreign income is decreasing, which countries are left, and what you should think about if you're considering moving to one of these places to reduce/eliminate your tax burden.
Let’s dive in.
Over the last week there's been some huge news surrounding digital nomad tax havens.
Yesterday Thailand announced an amendment that - if accepted - would oblige foreign residents to worldwide income taxes regardless of if that income was "earned" from a foreign country (e.g. you have a US LLC, earn in dollars and sell to US clients).
Around the same day, Portugal announced a new Golden Visa program designed to support "vulnerable" (aka illegal) migrants by charging legal migrants exorbitant amounts of money to get permanent citizenship.
Last, after years of strengthening against the US dollar, the Mexican Peso cratered almost 10% after Mexico announced Claudia Sheinbaum - which many accuse of being a socialist - was elected President on June 3rd.*
*Which is great news if you live in Mexico, earn in dollars and have been suffering from the skyrocketing cost of living there.
While these particular stories may not impact you directly, they highlight a growing trend that will very much affect you if you live overseas or are planning to move in the near future.
In particular, that the world is becoming more international.
The above stories are part of a growing trend where major countries realize the importance of - and potential tax revenue that can be gained from - attracting and taxing foreign residents.
This is most evidenced by the growing popularity of countries offering Digital Nomad visas. The majority of which grant users to 6-12 months stays and require participants to pay local taxes (without offering a path toward citizenship).
At the same time, a growing number of countries are offering favorable tax treatment to foreign migrants. And in some cases, like that of Dubai / the UAE, they're doing so aggressively.
The goal, however, is much larger than just attracting bodies.
Instead, many countries hope to attract not just digital nomad types, but entrepreneurs who bring capital, brain power and access to their network.
With that said, it's not all champagne and roses for expats.
Instead, a growing number of countries are starting to realize the downsides of attracting foreign-born residents with Low or No Tax Exemptions.
As an example, after years of offering tax exemptions to part-time foreign residents, Portugal has backtracked, citing skyrocketing real estate prices after receiving an explosion of expats hungry to dodge taxes.
One could assume the same is true for Thailand, which over the last two years, has shifted from 0% taxes on foreign earned income, to territorial tax residency, to proposing worldwide income taxation.
At the end of the day, the policy a given country pursues is a one of trade-offs.
While tax exemptions can attract new migrants (which most countries desperately need thanks to decreasing birth rates), doing so carries it's fair share of negatives.
From gentrification (which is becoming an increasingly hot topic in Mexico), to lost revenue opportunities, there are Pros and Cons to being a tax haven.
At the same time, it's not just countries that have to weigh the Pros and Cons.
Instead, foreigners considering moving somewhere need to think just as hard.
If your only (or your largest) motivation for moving to a country is to lower your tax burden, you may find yourself disappointed if that country decides to changes the rules a couple years after you move there (like we've seen in Thailand, Dubai/the UAE, Portugal and others).
So, while I agree with the Nomad Capitalist mantra of "Go where you're treated best," understand the treatment you get today may not be the treatment you get in the future.
And because of that, it's our opinion you should optimize your moving decisions for more than just a couple percentage points of tax savings.
💡 Takeaway: As the world becomes more international, a growing number of countries are realizing both the upsides and downsides of using tax exemption programs to attract foreign residents. And because of that, we're seeing constant changes as countries change their policies to attract foreigners and maximize tax revenue.
🎁 Resources:
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