How Taxation in the International Level Work



There are two types of taxation in the international level – territorial based and residence based. The territorial system taxes income that has been generated inside the country. The residence-based system, on the other hand, taxes their citizens living within the country or abroad who are generating an income. The noncitizens are only taxed when they are living in the host country. The United States is different, as they tax their citizens or non-citizens whether they are operating locally or on a worldwide scale. As a result of the internal agreements between governments, double taxation can be prevented, allowing the people to earn more, and avoid paying additional taxes.


For countries which are practicing a territorial-based taxation system, the government needs to define who will fall under the category as a resident and a nonresident. As a result, the definition in each country changes, but it all falls under the same factor, with governments considering the number of days that they lived in a territory. In the United States, the government considers its citizens as the residents, and the definition for foreign residency depends on the following factors: how long they have been living in the United States, the date when their residency began, and when it will end, and providing an exemption for those who are only transiting and has an extreme medical condition. The United Kingdom, on the other hand, has three major categories for their international tax system: resident, non-resident, and the residents who are not ordinarily residents. The residency status in the United Kingdom is being processed by a dedicated government agency, and once it has been approved, the residents must comply with the taxation rules observed in the country. Switzerland simplifies their taxation system by offering residency to everyone who has an employment permit issued within the country, resulting in more taxes collected from foreign workers.


Despite the wide acceptance of residence-based taxation around the world, there are also countries practicing a taxation system that collects taxes from non-residents living in foreign countries, with Eritrea and the United States being a primary example. In Eritrea, their nonresident citizens are being taxed at a rate of 2% for every income they generated in a foreign country. If the Eritreans would never pay for the diaspora tax, they will end up having their passports denied, and being barred from entering or leaving the country. In extreme cases, their relatives left in Eritrea are constantly harassed by the government, until they give up and pay the taxes. The United Nations have called for the abolishment of Eritrean diaspora tax, stating that it violates the Eritrean’s human rights. The United States is also practicing the taxation on their nonresident citizens, and if someone refused to pay their taxes, the United States government has the right to confiscate their passports. Unlike Eritrea, the United States faced little backlash regarding their law of taxing nonresident citizens. These taxes that are paid to the United States government is used for federal projects implemented all over the country.