What is Global Tax?

Global tax is an often mentioned and, at the same time, very confusing term. It is not rare to come across two people who are discussing about this matter actually assume two different meanings of this very same term. So what is global tax?

First, most countries tax their tax residents based on their worldwide income. This practice is called global tax. The important thing here is who are tax residents? Almost all countries adopting such a global tax scheme define tax residents as those people who ordinarily live in their countries, regardless of their nationalities. The exact criteria of "ordinarily living" vary from country to country, but many countries define it as people who physically appear within its territory for at least 183 days within a given year.

For example, an American who ordinarily lives in the UK should pay tax to the UK based on his worldwide income. However, a British citizen living outside the UK does not need to pay tax to UK for his income from the US. This is because the former, the American, is a UK tax resident. But the latter, the British citizen, is not a UK tax resident.

Though almost all countries define tax residents based on residency, not nationality. There are two countries in the world, the US and a small eastern African country called Eritrea, define tax residents not only based on residency, but also on nationality. This is where the confusion comes from. Taking the US as an example, if one has US citizenship or is granted permant residency status (i.e. the greencard), he is treated as a US tax resident regardless of where he lives. So the American living in the UK, as given in the previous example, is not only a UK tax resident, but also a US tax resident even if he never returns to the US for a single day! As a result, in addition to UK tax, he also needs to pay tax to the US based on his worldwide income. An American living outside the US still needs to pay tax to the US because of his nationality is the meaning when someone talks about the US global tax system. (While this unfornate American who needs to pay tax to two countries based on the same worldwide income, he usually can avoid being double taxed. We will discuss this in another article.)

As we can see, the main principle of global tax is consistent in both interpretations, i.e. a tax resident need to pay tax based on his worldwide income. The confusion comes from the fact that the US includes the citizenship as the basis of defining tax residents.

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