Where do you declare your taxes if you never spend long enough in any country to be considered a tax resident?
The precise answer can be complicated and depends on a lot of factors, including things like where you were born and the rules of the countries you have visited.
But the simplest answer to this tax question is always somewhere.
And, sometimes, more than one country.
If you did not declare all your income and pay required taxes on it somewhere, in almost all cases, especially with typical digital nomad cases, you are most likely a tax evader.
Even if you declared every last dollar somewhere, if you’ve spent time in multiple countries, you may owe additional taxes to some of them too.
The most important thing though, aside from making sure you know the rules so you never get prosecuted, is, once you know those rules, you may be able to actually pay less tax than you currently owe and be 100% legal.
Before discussing how to get legal and owe less tax, you might still be asking, why do you think I owe tax? Prove it!
(Note: If you are from the USA, don’t assume from the first few paragraphs below you are off the hook just because you file a mandatory tax return every year – you, like many, may be filing incorrectly – keep reading to get the full picture)
(Note 2: We are expats based in the Republic of Georgia and this article focuses on the tax laws here in some cases, however, most of the topics covered are applicable to digital nomads no matter what country you are from.)
Why You Owe Tax Even Though You Country Hop
It’s the elephant in the room for many digital nomads. Deep inside, you know that maybe you should be paying tax somewhere. But because you are not quite sure which of the 9 countries you visited this year deserves your tax dollars, it’s easier to just keep living partially, or entirely, tax free.
After all, you were only in each country for a month or so, how will anyone keep track of your finances when you are moving all the time? Who specifically would track you down anyway? Especially if your country of citizenship is somewhere you haven’t lived in years.
Why would they even deserve your tax dollars? You don’t live there, or use public services.
Sadly, the benefits you expect from paying tax, and what tax you must pay and where, really have no connection to one another. Just because you choose to travel, and not get benefits in your home country, doesn’t mean you instantly don’t have to pay tax there.
Your tax liability comes down exclusively to the tax laws of countries you are connected to. Whether that connection is that
- You were born there;
- you have (access to) a home there;
- you visited for a certain period of time;
- you receive income to a bank there;
- you own a business there;
- or one of many other factors I’ll discuss below.
Your tax liability has nothing to do with whether you get any benefits in return for paying tax, or whether the tax laws you inadvertently triggered while staying in a country more than 30 days / 3 months / 6 months etc. are inconvenient to you.
Tax evasion, whether by accident or sort of on purpose but you prefer not to think about it, is still tax evasion.
So, if you haven’t thought about it, or didn’t realise, it’s best to be informed because tax departments can and do prosecute tax evasion – regardless of if you didn’t realise you were doing it. It’s quite literally one of their main functions. It’s one of the things they are best at. And it’s not just the fines for not filing that will sting you. The worst thing will be the back taxes, plus the interest on those unpaid taxes, going back years in some cases.
You might still be thinking, but why would they come after me? How would they know to come after me? But the old question “why” was based on the concept that it was too complicated and expensive to track people down internationally and trace their tax and finances across multiple countries. So tax prosecutors only went after the big fish.
This was true when things were done by individual tax agents and they had to try and connect with agents in other countries, other languages and more. But with the power of the internet, it was clear to tax departments that knowing everything about everyone could be simpler than ever before…
The CRS Will Eventually Eliminate Most Opportunity For Tax Evasion
This was an initiative started in 2014 in order for countries to easily share financial information between tax authorities worldwide.
In simple terms, tax departments in the majority of countries on Earth (including most of the big ones like the UK, EU, Australia etc.) have all agreed to allow each other to see tax records and banking data of every last person who has any digital financial footprint.
For the USA FATCA, rather than the CRS, is relevant and the IRS will have access to some financial information relating to your international bank accounts. As a US citizen it is mandatory to inform the IRS of any and all foreign bank accounts you open in Georgia (or anywhere). At this time, FATCA allows the IRS to access financial records from countries in the network, which includes Georgia. Georgia does not currently have access to your US banking information via FATCA.
For many countries, the CRS is already active, others are already committed to joining.
This means that any tax agent, if they want to do a quick audit of anyone, has the opportunity to easily investigate everything you have paid to tax departments around the world, as well as money movements in all your bank accounts within the CRS network. Since 2018 the systems have been more fully implemented. So get ready for audits to happen more easily and frequently going forward.
The above is what is happening now. What you should be more concerned about is if/when artificial intelligence, or even just simple tax algorithms, will be able to zip through thousands of financial records in seconds and bring back a report showing tax agents all the most likely candidates for an audit and exactly where they have been hiding their money.
For those physically present in Georgia, where we are based, for more than 183 days in any 12 month period, you are now a tax resident here, automatically. So you should be aware Georgia will join the CRS in 2023. The statute of limitation here is 3 years, meaning the tax department can potentially fine you and charge back-taxes and interest on any foreign income you didn’t pay tax on that you were liable to.
So, that means that 2020 is the year where you need to make sure you have got everything correct with how the tax code in Georgia works and what you owe. If you get audited in 2023, anything you did wrong in 2020 will still be prosecutable.
So, tax is a more serious business than ever.
By seriously reducing the expense of building evidence against tax evaders, and with complete access to financial records, people who would never have been on the radar of tax departments (like digital nomads on low 5 figures incomes) might become so easy to prosecute that one day you may be getting fines automatically by email and never even go to court or speak with a tax agent unless you fight the evidence supplied with the fine. We are not quite there yet, but in this decade or the next it seems inevitable. Death & Taxes come for you in the end.
If you are not sure about your tax situation and want to avoid future problems, we offer a free consultation to foreigners who are looking to become a tax resident, open a business, or think they owe taxes, in The Republic of Georgia.
Book a free 30 minute consultation with one of our tax advisers, or read on for a more DIY-based approach.
In the rest of this article, you’ll get closer to figuring out your current tax situation as a digital nomad, as well as some options for minimizing your taxes and going 100% legal so you don’t have to live waiting on the day a tax department, somewhere, realises you owe them a whole lot of money.
Where Do You Owe Tax?
Figuring out where you owe tax is the first step to getting 100% legal. It could be in one country. Or it could in multiple countries. Especially if you travel a lot, or opened a business (including you sole proprietor freelance gigs) in a country where you don’t reside.
Let’s look at the territorial vs residence-based vs worldwide tax systems to see which may apply to you.
Residence-Based Tax Systems
The vast majority of countries of the world, including most developed countries, employ what’s called the Residence Based Tax System.
In simple terms, it means that that a country’s residents are taxed on all their income: worldwide and local income.
This is the simplest tax regime, as there is usually very little room for interpretation – you make money and you pay tax. No difference where the money was made.
The main nuance for digital nomads comes into play when determining the tax residency status itself.
Most countries in the world tax their residents on their worldwide (foreign) income. That list includes nearly all of the EU countries, the UK, Australia, Canada and a large number of others.
Territorial Tax Systems
The territorial tax system means you owe taxes on all income earned within the borders of the country in question. The exact definition of what is earned locally and what is foreign sourced income can be nuanced, but in general, foreign income tax exemptions usually apply only to things like interest and dividends received from abroad.
In Georgia, and many others, income which is earned through actual work performed within the country, whether the income comes from a foreign source or not, is considered to be Georgian source income. So, if you have a client who pays you from abroad, direct to a foreign bank account, even if the money never arrives in Georgia, it is still Georgian source income as the work was performed here.
In essence, depending on the exact condition and duration of your visit and double taxation agreements (see below) with other countries where you already pay tax, if you perform work within the borders of any country with a territorial tax system, you may owe tax in that country.
Which parts of your income will be taxed will also depend on if you have become a tax resident of the country (see below) or not, as well as other factors.
Apart from Georgia, some other countries where the territorial system applies are Hong Kong, Singapore, Panama, Costa Rica, Malaysia, and around 30 others – mostly smaller island countries.
Worldwide Tax Systems
The USA is the only developed country which operates a worldwide tax system. With this system, you are required to file a tax return every year even if you are not physically resident within the USA. The only way to get out of this is to renounce your citizenship.
That said, the amount of tax due in the USA may be as low as zero if you qualify for foreign income exclusion, and depending on the nature of your income.
The restrictions are tough, and one of the reasons the myth of tax free living is so pervasive in the digital nomad community might also be due to an overly optimistic interpretation of one specific term within the IRS rules.
Namely, you don’t have to pay US tax, up to the earning threshold (about $107k USD in 2020), on foreign earned income if you are:
“A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.” Read the rest of the information here – direct from the IRS website.
So, it sounds like if you travel forever, you don’t have to pay tax as a US citizen/resident. But, you also need to read the fine print…
The biggest kicker that seems sometimes gets ignored is the actual definition of foreign earned income. According to the IRS:
“foreign earned income is income you receive for services you perform in a foreign country in a period during which your tax home is in a foreign country and you meet either the bona fide residence test or the physical presence test.”
Firstly, if you visit that article you’ll find that “foreign earned income” only applies to personal services income – like salary, commissions, payment for services. It doesn’t apply to dividends. And only sometimes applies to royalties. There are more things on the full list, so read that fine print.
But the most important thing, that is very clear in the above quote, you have to prove to the IRS that your “tax home is a foreign country”. So, if you country hop to avoid becoming a tax resident anywhere, you literally could never prove that your tax home is elsewhere, and hence ALL your income is taxable by the IRS.
It’s also essential to remember that you still have to file in the US, even if you really are a full tax resident abroad.
Where US citizens may also get confused is when they are diligently paying their US taxes in full, every year, that they are not required to pay tax in any of the countries they visit. This is not always true, especially if you visit other countries for longer periods, rather than just for a 2 week vacation.
This is where residence based taxation may apply:
Residence Based Taxation vs. Citizen Based Taxation
Residence based taxation means that you owe taxes on some or all of your income in a country in which you were physically present long enough to become a tax resident – the length of time varies depending on local laws of the country in question.
Tax residency in this case could be triggered, for example, in Georgia, if you spend 183 days in any rolling 12 month period within the borders.
In some countries, like the UK, the 183 day rule is also true, but you can also become a tax resident if “your only home was in the UK – you must have owned, rented or lived in it for at least 91 days in total – and you spent at least 30 days there in the tax year”. Essentially, if you live in the UK, you can’t just go travelling for 6 months per year and stop paying tax.
But you might think reading this, perhaps you can go travel for 336 days, spend 29 days in the UK and you are no longer a tax resident for that year. This is also not necessarily true because of the notion of domicile. which I’ll discuss below.
Citizen based taxation, like in the case of the USA above, means, if you are a US citizen, you might owe taxes in the USA even if you don’t reside there and even if you have triggered tax residency by staying in another country long enough to trigger tax residency there.
What is Domicile?
Just when you thought that, except for US citizens, if you stay out of every country long enough, that would mean you could live tax free… Domicile came to ruin your party.
Yes, domicile is the concept that attaches you to a default country of tax residency if you don’t qualify for tax residency anywhere else. So, if you purposefully traveled around the world, staying in each country just a short time, in order to avoid triggering tax residency, instead of avoiding all tax residency, your tax residency will likely default back to the place where you are domiciled.
Domicile can be determined using a number of factors, depending on the laws of the country you are domiciled in. Some examples of things that may trigger domicile:
- You have a passport / are a citizen of that country
- You own property in that country
- You lived there for years and could be proven to have ties to the country
- You have family in that country
- You have bank accounts there
This is a non exhaustive list. The only simple way to eliminate domicile for tax, is to become a tax resident elsewhere. Even then, in most cases you still have to inform your domicile country and prove that you are a tax resident elsewhere in order to be released. Furthermore, if you have business or property in that former country, you may still have some tax liabilities there. It depends.
Your citizenship country, or a country you have lived in long term since leaving your citizenship country permanently, almost certainly has a very specific list of rules, or even an online test, which will let you assess if you are domiciled there.
Google the domicile rules for any country you think you may be domiciled to. In the case of US citizens, as explained above, you are strictly domiciled to the US unless you can prove tax residency in another country.
Double Taxation Avoidance Agreements (DTAs)
If you have worked in, or generated revenue through business or other activities (working for your employer via your laptop while sitting at a cafe in Tbilisi, for example) you may be liable to pay tax both in the country you performed the work, and your country of domicile.
If you end up being liable for tax in multiple countries, your single income may be taxed twice. DTAs could help prevent that such that if your income has been taxed in one country already, you don’t have to declare the same income in the second country, providing you can show the record of tax already being withheld/paid.
This situation is not universally true and, for example, if tax rates in one country are very low, and in the second country, very high, that second country might want to claim the additional tax – the difference between what was paid, and what they would have taxed. ie. at a tax rate of 5% where you paid tax, if 40% was due in the second country, you may owe them as much as 35%.
Check each DTA for the exact terms of what tax rates may apply to your individual case.
In addition to this problem, DTAs do not exist between all countries. The UK has a reciprocal DTA with Georgia. The USA on the other hand, has a DTA with Georgia (A remnant of the USSR), but as at 2020 independent Georgia does not have a DTA with the USA.
So, if you have tax connections to the USA and Georgia, and already pay tax in the USA, Georgia may also want to tax you a second time on the same income you are paying to the US. If you already pay tax in Georgia, however, then the USA is not able to pursue you unless you owe additional taxes under their DTA.
But How Will The Foreign Country Know I Owe Tax If I’m Not On Their System?
So, we discussed earlier that tax departments now share financial information very easily under the CRS. So, if you visit a country, don’t register for tax, don’t open a bank account, and don’t mention to anyone you are working on your laptop…
How likely is it anyone will ever find out you worked in that foreign country?
This question is comparable to how will the boss know I’m stealing the petty cash if he is always out of the office when I do it.
Whether you get caught or not isn’t just down to if you blatantly make money or work in a foreign country without registering for tax.
In Georgia, for example, The tax department don’t seem to be detaining every foreigner at the airport who has been in the country more than the 183 days it takes to become a legal tax resident automatically.
But what should concern you is that the revenue service here have direct access to your passport records. It’s as simple as knowing your passport number, or name, to do a quick check in the system.
Unless your name is Giorgi, chances are your name is far less common in Georgia than it is in your home country, Jack. So, you are likely a lot easier to find than you think. If the RS did decide they wanted an automatic trigger to send them an alert every time a passport reached 183 days, it wouldn’t be that hard to implement.
A digital nomad on a low 5 figure income, who passes through Georgia for 184 days and then leaves forever, might not be worth their time, maybe. But if you plan to stay for longer periods, or have any sort of higher income, you could easily be targeted and you wouldn’t even know you were on the list until you got detained at the airport.
That said, I’m in no way suggesting it is ok to evade tax if you are only just over the 183 day limit, or are on a low salary. I’m just saying that, historically, those sorts of people seem to have been coming in and out of the country issue free.
However, when it comes to tax evasion, anything could change at anytime. Especially with a COVID recession, when governments need to find tax money any way they can. It only takes one policy change, and you could find every person trying to get through passport control is being stopped if they have spent more than 183 days in the country.
The safest way to avoid problems is…
Know the tax rules of the countries you visit.
Know where you are domiciled.
If you want to take advantage of some very favorable tax rates around the world (such as the Georgian 1% tax for small businesses), then do your research in advance. If you don’t want to get caught up in the 183 day tax residency rule (many countries have something similar), then plan to leave the country before that applies. Also check if you may have tax liabilities prior to becoming a tax resident in any country you visit.
Typically, the worst outcome when it comes to tax is assuming things will work out in your favor rather than planning to best take advantage of worldwide tax systems.
For example, in Georgia, that 1% tax rate is not retroactive. So, if you were already here, working on a laptop and earning income, and you only start looking into your tax situation as you hit the 6 months threshold, you are going to find you have to pay 20% tax on your gross income for the whole of the tax year up until the day you get approved for the 1% on turnover rate.
Whereas, if you always read up on the tax rules of a country before traveling there, you might find some really good options for lowering your taxes and being legal.
If you’d like to learn more about how moving your business or personal tax residency to Georgia could improve your tax situation, and get you out of the “Digital nomads can live tax free” misunderstanding that you might currently be stuck in, we offer free and confidential 30 minute tax consultations. Online via zoom, or here in Tbilisi.