No matter which country you call home, there are pros and cons to every system. Which means that at the end of the day each and every individual on the planet is paying some form of a tax, regardless if it is buried in the cost of living for a country or an outright tax such as federal income tax or sales tax or value added tax (VAT). But one of the beautiful parts about being an expat traveling the world and making the entire planet your home is that you can choose your own tax rates rather than be forced to deal with governments which try and claim the majority share of your income.
Perhaps one of the most unfair taxes in modern history has been the wealth tax of the United Kingdom in the early 1970s, which at one point rose as high as 83% of personal income for top earnings, forcing high-earning individuals such as actor Michael Caine to become tax exiles abroad in other countries so as to avoid being forced to fork over 83% of their income to an unjust system.
The band U2 is another perfect example of a group who decided to move their corporation headquarters to a more favorable tax state, with the argument that as global citizens and a business which has the majority of its income coming in from global sources, not merely from Ireland, they should be able to choose where they pay taxes. The Rolling Stones have similarly and famously only paid around 1.2% on their estimated 300+ million earnings over the years, all by utilizing the same global concepts.
The same thing applies to regular expats who fall into the average, ordinary, median-wage category. You don’t have to be a millionaire to take advantage of tax breaks and loopholes in the system. You just have to know which hoops to jump through and which ones you can avoid and how to go about it. This is where expat tax advisers can come in handy…as well as doing your own due diligence in terms of finding out the best potential country for your own benefits.
As an international expat, you have the human right to choose where you want to pay taxes on your income. The accident of your birth (location) has absolutely no bearing on where you pay your taxes; the bottom line is that wherever you are calling home now, whichever country has your residency, whichever country is your primary base of operations, this is where you should be paying your taxes. After all, taxes are not unfair; without them you wouldn’t have roads to drive on, schools to send your kids to, hospitals to use when you are sick, police and firemen and medical services and so on and so forth. But the common myth is that you have no choice in who you pay your taxes to. The reality is that you have the option to pay who you want.
Bulgaria is a good example of a country that has a favorable tax rate. It’s 10% across the board for income tax, as well as 10% across the board for corporations. That means you are only taxed 10% on your income, regardless if it is personal or corporate. And the best part of all is that you can utilize the same type of deductions you can in most other parts of the world, so if you are an expat who has a passive income coming in from an online business of some kind, you can use deductions to keep your taxable income down as low as possible. It doesn’t matter if you make 50k or 5 million; you only pay 10% in Bulgaria.
The United States, on the other hand, has an income-based tax rate that can range from 10% to 35%. Let’s assume, for a moment, that you make the average, median salary of 40-50k a year. That puts you in the 25% tax bracket range…but you also have to pay state tax on top of that, which can range all over the map. Utah, for example, has a 5% state tax on top of that, so if you live in Utah you are giving up 30% of your income to the government every year.
Meanwhile, Brazil has a 7% to 28% variable rate similar to the United States on income tax, but has a whopping 37% on their corporate taxes, which makes having a business based out of this South American economic giant a somewhat expensive venture. But what many people fail to realize is that part of the expat lifestyle is the ability for you to choose which countries have the best advantages for you as an individual…because it’s not just about the tax rates themselves. It’s also about the cost of living, which usually includes taxes that most people take for granted.
Consider, for a moment, the fact that the average, ordinary individual living a middle class lifestyle in New York City needs around $30,000 a year to cover a bottom-of-the-barrel lifestyle, or around $50,000 a year if they want to maintain a middle-class existence. If you look at Mexico City in comparison, the two look exactly the same on paper; they have the same population, they are both top five contenders for largest/most influential cities on the planet, they both have international banks, universities, business headquarters, safety numbers, crime and murder rates and beyond. But the middle-class lifestyle that costs 50k a year in NYC costs a mere 10-15k per year in Mexico City. Why is that?
The taxes related to the cost of living. Things like taxes on your cable bill, on your cell phone bill, alcohol tax, tobacco tax, vehicle license taxes, city taxes, county taxes, water taxes, electric taxes, Internet taxes and all the various little surcharges and fees that pad every single little bill you ever receive on a monthly basis such as your phone bill, cable bill and so on. These taxes, otherwise known as the cost of living, are what make living in New York City roughly 30,000 dollars a year more expensive than Mexico City in terms of a middle-class lifestyle.
So, for example, while Mexico might have a variable income tax rate that ranges from 0 to 28%, with the average person paying between 20 and 25 percent just like the average person in the United States, the cost of living is so much lower that those taxes naturally affect expats living here much less than they would in the United States. That’s because, while you might be paying 25% of your income in taxes just as you would if you were living in the United States, the associated taxes on the cost of living sundries are so much lower you still receive the lion’s share of your income.
Let’s assume for moment that you make the median salary of around $40,000 a year (U.S. salary). If you lived in the United State’s you’d be shelling out around $10,000 a year in taxes, leaving you with $30,000 of net income. However, you can’t live on that in a place like New York City unless you want to scrape by on the bottom of the barrel. This is why most people are living on credit in the United States; their net income doesn’t come close to covering their actual costs of living.
Now let’s look at living in Mexico City. You might still be giving up $10,000 of your income per year to taxes (assuming you don’t use deductibles), but your net income of $30,000 a year against a cost of living that maxes out at 15k a year (I personally haven’t gone above 10k per year in total cost of living and I have a current base of operations in Cancun, which is more expensive than Mexico City) means you are left with 15k or more per year of completely disposable income that you can do whatever you want with.
Now, granted, there are a lot of other variables that could pop up. Let’s say you have a company based out of Bulgaria while you are living in Argentina as an expat. Since you are an employee of said company, and corporate taxes are only 10% at most, you can live in Argentina while making money through your Bulgarian company and as long as you have residency/citizenship for Bulgaria you can continue utilizing that baseline 10% income tax even if you are living in a country which has an income tax rate that can go as high as 35%. Or let’s say you are self-employed as a freelancer; whichever country holds your residency dictates your tax rate.
Taxes can be a somewhat confusing aspect to many first-time travelers, but the bottom line is this: your place of birth is nothing more than an accident. The entire planet is your home. You can pick and choose which countries make the most sense financially for you and your family. And it’s not just about taxes; it’s also about things like care for your family, such as going to Bulgaria to raise your children because women are given 410 days of maternity leave with 90% salary against a mere 12 weeks of unpaid maternity leave in the United States.
You have a choice as an expat to control every aspect of your life. It’s absolute freedom. You are not bound by chains to any one location. You can choose the best place for your finances, for your lifestyle, for your family and for your freedom. It’s simply a matter of doing your due diligence to find out the best options for you and yours and then take advantage of those options through affirmative action.
About the author: T.W. Anderson has been traveling since 1999 and living abroad full time as an independent international citizen since January of 2008. He has established residency, opened businesses and lived long-term in four different countries and visited over 20 since first starting out. He is the founder of Marginal Boundaries, a company dedicated to cultural immersion and long-term, slow travel as a permanent expat. He is the author of The Expat Guidebook as well as immersion guides for Sofia, Bulgaria; Bogota, Colombia; and Cancun, Mexico. For more information on how to live a life of continual travel on a passive income, visit www.marginalboundaries.com.