The 2 countries with citizenship-based Taxation

Citizenship-based taxation (CBT) is a system that requires citizens of a country to pay taxes on their worldwide income, regardless of whether they reside in the country or not. This means that citizens of certain countries may have to pay taxes to their home country even if they do not live there or have not earned any income within the country. This system is different from the residency-based taxation system that most countries use, where taxes are only paid on income earned within the country's borders.

There are only two countries in the world that currently use citizenship-based taxation: Eritrea and the United States. In this article, we will explore the reasons behind these two countries' decision to use CBT and the impact it has had on their citizens.

1. Eritrea

Eritrea is a small country located in the Horn of Africa. The country gained independence from Ethiopia in 1993 after a long and bloody civil war. Since then, Eritrea has been ruled by a one-party state, the People's Front for Democracy and Justice (PFDJ), led by President Isaias Afwerki.

Eritrea is a poor country with a largely agrarian economy. The country has been under UN sanctions since 2009 due to its alleged support for terrorist groups in the region and its human rights abuses. The government has been accused of conscripting its citizens into indefinite military service, restricting freedom of speech and the press, and using forced labor.

Eritrea's decision to use citizenship-based taxation is based on its desire to finance its military and development programs. The government of Eritrea imposes a 2% tax on its citizens living abroad, regardless of their income level. This tax is collected by Eritrean embassies and consulates around the world.

The tax has been criticized by human rights groups as a form of extortion and a violation of the rights of Eritrean citizens living abroad. The UN has also condemned the tax and imposed sanctions on Eritrea for using it to fund its military activities.

The Eritrean government defends the tax as a way to fund development programs in the country. The tax is also seen as a way to prevent Eritreans living abroad from completely cutting ties with their home country. Many Eritreans have fled the country due to the government's policies, and the tax is seen as a way to maintain a connection with those who have left.

The impact of the tax on Eritreans living abroad has been significant. Many Eritreans living in the diaspora have refused to pay the tax, fearing that it will go towards funding the government's military activities or be used to enrich government officials. The tax has also made it difficult for Eritreans to obtain passports and other documents from their home country.

2. United States

The United States is the only other country in the world that currently uses citizenship-based taxation. The US has used this system since the passage of the Revenue Act of 1862 during the Civil War.

The US tax system is one of the most complex in the world, with a myriad of tax codes and regulations that can be difficult for even the most experienced taxpayer to navigate. For US citizens living abroad, the system can be particularly onerous. US citizens are required to file tax returns and pay taxes on their worldwide income, regardless of where they live or earn their income.

The US government justifies citizenship-based taxation as a way to prevent tax evasion by US citizens living abroad. The government argues that without this system, wealthy Americans could simply move their assets and income to tax havens and avoid paying US taxes.

The impact of citizenship-based taxation on US citizens living abroad has been significant. Many Americans living abroad have reported difficulties in obtaining financial services such as bank accounts and mortgages, as many foreign financial institutions are reluctant to deal with the US tax system. Additionally, the cost of complying with US tax regulations can be significant, as US citizens may have to hire tax professionals to help them navigate the system.

There have been calls to reform the US tax system to move away from citizenship-based taxation. In recent years, a growing number of US citizens living abroad have formed advocacy groups to push for change. These groups argue that the current system is unfair and places an undue burden on Americans living overseas.

Some proposals for reform include moving to a residency-based tax system, where taxes are only paid on income earned within the US, or implementing a territorial tax system, where taxes are only paid on income earned within the US and its territories. However, these proposals face significant opposition from those who argue that they would lead to lower tax revenues for the US government.

The debate over citizenship-based taxation in the US has also been linked to discussions over the country's role in the global economy. Some argue that the current system puts the US at a disadvantage, as it makes it difficult for Americans to compete for jobs and do business in other countries.

Overall, citizenship-based taxation is a controversial and complex issue. While it may be seen as a way for countries to generate revenue and maintain a connection with their citizens living abroad, it can also be seen as a violation of individual rights and an impediment to economic growth. As the global economy continues to evolve, it remains to be seen whether citizenship-based taxation will continue to be used by any countries or whether a new system will emerge that better reflects the realities of the modern world.