— U.S. Citizen Abroad (@USCitizenAbroad) January 8, 2020
The article referenced in the above tweet – published in 1985 by Richard Pomp of the University Connecticut School of Law – was posted at one of Facebook groups here. The Facebook post includes some interesting commentary and begins with:
The Experience of the Phillipines in Taxing Its Nonresident Citizens:
I’ve often wondered about the process the Philippines went through when adopting a CBT system then going to one based on residency.
This study was written in 1985 to help determine whether CBT would be effective in deterring “brain drain” from less developed countries (LDCs). Although it was written prior to the Philippines adoption of residency-based taxation, it demonstrates very clearly the problems the Philippines had with enforcing CBT, problems that are strongly mirrored in the US today (complete with amnesties, passport revocation and the like). Unfortunately the US at this point doesn’t know there is a problem that needs to be addressed like the Philippines did as long as 50 years ago! I do think though the biggest difference between the Philippians then and the US now, is that the Philippines valued it emigrants in ways that the US does not.
As it began in the Philippines, they only taxed on citizenship because the US did!
“The early Philippine reliance on citizenship as a basis for tax jurisdiction reflects more the country’s colonial legacy from the United States than a carefully developed policy. Initially, Philippine citizens were taxed under the U.S. Revenue Act of 1913. This Act, adopted shortly after ratification of the sixteenth amendment in the United States, taxed the worldwide income of U.S. and Philippine citizens, regardless of their residence. Thus, early in its history, the Philippines incorporated citizenship jurisdiction into its own law following the U.S. model.”
When that didn’t work for reasons similar to what the US is currently experiencing, they went to a flat rate system one can compare to Eritrea’s, but with a deduction for taxes paid where one lives. It still didn’t encourage compliance.
The article is lengthy and the pdf is too big to upload here. But, you can download it yourself at this link.
I haven’t had time to read the article in any detail. But, if you look at the conclusion you will see all kinds of discussion about enforceability and the co-operation of other countries in enforcing the tax. The article was written in 1985 in a Pre-FATCA world.
This is an interesting article that may well shed light on why the Phillipines abandoned citizenship-baed taxation.
It would be interesting if Brockers were comment on:
1. Aspects in which you think the Phillipines situation is different from the U.S. situation.
2. Assuming automatic information exchange (FATCA and CRS) existed in 1985, how might the author have included this into the analysis.
For those who like to read the conclusion before reading Professor Pomp’s article, see:
“IV. SUMMARY AND CONCLUSION
This case study questions whether Professor Bhagwati’s proposal to tax nonresident citizens can be unilaterally implemented by an LDC. To be sure, generalizations based upon the experience of only one LDC are subject to obvious limitations. The available pool of evidence upon which to base a judgment, however, will never be large because the Philippines and Mexico are the only LDCs to assert citizenship jurisdiction. Although a case study of the Mexican experience would be valuable, its results probably would not contradict those of the Philippine study.1t 8 Unless the behavior of Filipino nonresidents is idiosyncratic, non-compliance among emigrants-the group most likely to constitute an LDC’s brain drain-can be expected.
Enforcement by the LDC will require the assistance of the host DC.13 9 A host DC can provide assistance at each stage of the administration of the LDC tax by compiling a tax role, assessing a nonresident’s tax liability, and collecting the amount of tax owed. The most efficient way of combating widespread noncompliance would be for the host DC to collect the tax on behalf of the LDC. 140 DC collection of a LDC tax, however, as well as less interventionist roles, would far exceed the current limited amount of intergovernmental cooperation. 14 1
For an LDC tax on nonresidents to be workable, a host DC would have to make costly and time-consuming changes
in its existing procedures. For example, although a surtax would perhaps require fewer changes in DC practices than would other alternatives, the changes nevertheless would still be considerable. Initially, it might appear that a surtax would only require a DC to add a line to its tax form. This simplicity is superficial because collecting a surtax from select groups of DC taxpayers-nonresident citizens of an LDC-would be equivalent in its administrative aspects to the adoption of a new DC tax. A DC tax administration would have to revise its tax forms and instructions; compile special tax rolls of persons subject to the tax; design special withholding tables and instructions; modify current payment programs for persons not subject to withholding; expand taxpayer education programs; respond to questions; and handle disputes.
This brief outline indicates that DC collection of an LDC tax, even one levied in its simplest form as a surtax, would demand numerous changes in DC practices. These changes would require a serious commitment on the part of a DC.142
Because of the controversy surrounding the Bhagwati proposal, a DC would not be likely to make this commitment. Even if a DC were inclined to cooperate with an LDC, it still might not be willing to do so unless convinced that other DCs were similarly disposed. Otherwise, a DC competing with other countries for specific types of emigrants, such as doctors, nurses, or engineers,143 might fear that its efforts at policing an LDC tax would only divert immigration to those DCs not willing to cooperate.
In addition, a DC would be unlikely to participate in the enforcement of a tax on individuals who emigrated in order to escape religious, political, or social oppression. A DC might demand some guarantee that this group will be exempt from the tax.144 Such an exemption, however, may be impossible to administer fairly.145
A DC would probably require that an LDC tax impose equitable burdens on taxpayers. An LDC tax that was levied
as a modest surtax would satisfy this condition; other versions of an LDC tax might not. At the very least, a DC may insist that an LDC tax on the LDC’s nonresidents will not deter individuals from emigrating.
Although a DC may view its assistance to the LDG as a form of foreign aid or as a gesture of goodwill, the DC itself is unlikely to derive any immediate benefit from such assistance. Accordingly, a DC may have difficulty justifying costly or time-consuming changes in its existing procedures or law.
If host DCs refuse to play an active role in enforcing an LDC tax on nonresidents, supporters of the Bhagwati proposal will face a serious dilemma. They can, of course, continue to encourage the LDCs to levy taxes on nonresident citizens. At a minimum, some revenue and foreign exchange will be generated. The tax will also serve as a moral statement about the responsibility of nonresidents to their country of citizenship. Indeed, over time, if enough LDCs levy a tax based on citizenship jurisdiction, perhaps the DCs will be convinced to provide the necessary administrative assistance.
After a longer gestation period, the DCs might accept Professor Bhagwati’s argument that the benefits accruing from the brain drain impose an obligation upon them to cooperate with the LDCs in policing the tax.’ 46
If the assistance of the DCs is not provided quickly, however, a tax on nonresident citizens may fall disproportionately on transient nonresidents, such as contract workers and seamen, who tend to be unskilled or semi-skilled workers. If the Philippine experience is probative, the tax may be reduced to nothing more than a voluntary contribution by emigrants to their country of citizenship. Unless DCs actively assist in the collection of LDC taxes, Professor Bhagwati’s proposal would become a tax on the muscle drain rather than a tax on the brain drain, accomplishing few of its objectives.”