Introduction – Citizenship Taxation Eritrea Style

My last post discussed the United States Net Investment Income Tax (“NIIT”) AKA the 3.8% Obamacare surtax.

 

Part A – How Does One Compare U.S. citizenship Taxation To Eritrea Citizenship Taxation?

About the United States Net Investment Income Tax

At it’s core the NIIT is a straight 3.8% calculation on taxable net investment income (subject to the usual U.S. aversion to simplicity). It’s important to understand that the NIIT is a separate tax that is calculated separately from the basic income tax. The NIIT is found  in Chapter 2A of the Internal Revenue Code and NOT in Chapter 1. (See the Appendix below.) Any NIIT owing is reported on the Form 1040 along with taxes owing from Chapter 1. U.S. citizens abroad with investment income are required to comply with BOTH:

1. Taxes calculated under Chapter 1 (a detailed calculation with all kinds of deductions, exclusions, forms, taxes and penalties); and

2. Taxes calculated under Chapter 2A (a 3.8% charge on taxable investment income).

The Net Investment Income Tax has had a particularly harsh impact on impact on Americans abroad. Those interested in the details are invited to read a 2023 post by Virginia La Torre Jeker describing how the NIIT impacts Americans abroad. You will find a podcast with Virgina as Appendix B of this post.

The purpose of the NIIT is to pay for health care for resident Americans. Americans abroad do NOT benfeift from this tax.

Significantly, the Net Investment Income Tax is a tax imposed on Americans abroad which is specifically designed to benefit resident Americans and exclude Americans abroad from the benefits.

About Eritrea’s (kinder and more gentle) version of citizenship taxation

The nation of Eritrea levies a 2% excise tax its citizens abroad. The tax is referred to as the “Recovery and Rehabilitation Tax.” The calculation is simple and – as the actual Eritrea tax return makes clear – is based on the income reported in their country of residence. Simplicity is virtue!!

Significantly the (stated) purpose of the “Recovery and Rehabilitation Tax” is to aid in the reconstruction of Eritrea.

Like the United States NIIT, Eritrea’s tax on its citizens abroad is not designed to benefit citizens abroad, but rather to benefit Eritrean residents.

Eritrea’s tax on its citizens abroad is a simple excise tax based on a percentage of income.

Comparing Eritrea’s “Recovery and Rehabilitation Tax” to the U.S. “Net Investment Income Tax”

The two taxes are very similar because both taxes:

1. Are based on a percentage of income; and

2. Are NOT designed to benefit citizens abroad, but are for the purpose of benefiting residents of their respective countries.

Therefore, when comparing U.S. citizenship taxation to Eritrea citizenship taxation, the United States 3.8% Net Investment Income Tax  is the better comparison to “Eritrea’s 2% Diaspora Tax”.

To put it simply:

The U.S. NIIT at 3.8% is a reasonable comparison to “Eritrea’s 2% Diaspora Tax”. (Although the U.S. NIIT is far more difficult to calculate.)

But Americans abroad still are obliged to deal with the Chapter 1 taxes!

In addition to the NIIT, U.S. citizens abroad are required to deal with all the normal taxes in Chapter 1.

Furthermore, Chapter 1 taxes (without consideration of the Chapter 2A NIIT) operate to:

First, impose more punitive taxation on Americans abroad than on U.S. residents; and

Second, impose far harsher compliance requirements on Americans abroad than on U.S. residents.

Interestingly Karl Steinke on a blog post at “Tax Fairness Abroad” wrote an interesting post arguing (for somewhat different reasons) the U.S. system of citizenship taxation is more punitive than Eritrea’s system of citizenship taxation. His article concludes with:

If you think about the time and cost of the above and the non-ability to participate in normal savings and retirement planning activities, I think the Eritrean system is preferable to the US system.

Since the U.N. Security Council has condemned Eritrea for its extraterritorial taxation, the United States should take note of the extraterritorial consequences of its own taxation and financial crimes regimes.

The United States should end this unfair extraterritorial taxation and align with the global standard of residence-based taxation!

https://www.taxfairnessabroad.org/blog/is-the-us-tax-system-worse-than-eritreas-for-overseas-citizens

Part B – How The World Has Reacted To Eritrea’s Citizenship Taxation And Eritrea’s Response

This has made me curious to find out more about how (1) How the Eritrea tax is justified (2) How the Eritrea tax works (3) how it is perceived by the International community and (4) Eritrea’s response to condemnation by the international community (“2% is my right!)

The following AI generated podcast attempts to integrate the answers to these four questions.

 

1. How the Eritrea “Recovery and Rehabilitation Tax” is justified

Information on the Eritrea U.S. Embassy site includes:

It’s very simple. You can see the actual tax form here:

Click to access Recovery_and_Rehabilitation_Tax_04042020.pdf

3. How The Eritrea “Recovery and Rehabilitation Tax” is perceived by the international community

On December 5, 2011 under Resolution 2023 (2011) the United Nations Security Council condemned Eritrea for reasons that include the following:

10. Condemns the use of the “Diaspora tax” on Eritrean diaspora by the Eritrean Government to destabilize the Horn of Africa region or violate relevant resolutions, including 1844 (2008), 1862 (2009) and 1907 (2009), including for purposes such as procuring arms and related materiel for transfer to armed opposition groups or providing any services or financial transfers provided directly or indirectly to such groups, as outlined in the findings of the Somalia/Eritrea Monitoring Group in its 18 July 2011 report (S/2011/433), and decides that Eritrea shall cease these practices;

11. Decides that Eritrea shall cease using extortion, threats of violence, fraud and other illicit means to collect taxes outside of Eritrea from its nationals or other individuals of Eritrean descent, decides further that States shall undertake appropriate measures to hold accountable, consistent with international law, those individuals on their territory who are acting, officially or unofficially, on behalf of the Eritrean government or the PFDJ contrary to the prohibitions imposed in this paragraph and the laws of the States concerned, and calls upon States to take such action as may be appropriate consistent with their domestic law and international relevant instruments, including the 1961 Vienna Convention on Diplomatic Relations and the 1963 Vienna Convention on Consular Relations, to prevent such individuals from facilitating further violations;

https://docs.un.org/en/S/RES/2023(2011)

In May of 2013  Canada sanctioned Eritrea over it’s attempt to collect the 2% tax on Canadian residents. A particularly harsh article from Canada’s CBC is available here.

Significantly, one year later, on July 1, 2014 Canada assisted the United States in imposing U.S. citizenship taxation and FATCA on Canadian residents with U.S. citizenship!

4. Eritrea’s response to condemnation by the international community (“2% is my right!)

 

Government of Eritrea official response to the international community

Rehabilitation & Recovery Tax: why the uproar?

Of particular interest in the above article is:

“The 2% RRT tax has always been small and the excessive preoccupation with it by certain political parties and media outlets is intriguing to say the least. In fact, other countries, and especially the United States, have tax systems that incorporate citizens abroad. In the case of the United States, the taxes levied are high and the punitive measures for tax evaders taken by the IRS very onerous.
Remittances are of course a different matter. Eritreans send money to their relatives or bring money with them during their holidays on a constant basis. This is not unique to Eritrea.
As mentioned earlier, the African continent boasts about US$ 120-160 billion going through informal channels (Radlicki, June 2015).

The case of the Eritrean Diaspora validates the affirmation by Kennedy (2000) that transnational migration is not just a cultural and political process but also one which acts as a central agent of economic globalization in its own right.

In the event, the media spotlight on the 2% RRT or Eritrean remittances is hard to fathom. The aim seems to instill fear among the Diaspora to impel them to cut ties with their homeland and not be a participant in Eritrea’s development efforts.

This provocation is engendering indignation and strong resistance. The Diaspora has responded massively with the slogan ‘2% is my right’.”

Conclusion

It is true that Eritrea and the United States are the only two countries that specifically tax their citizens abroad. Nevertheless, they impose their versions of citizenship taxation very differently. Eritrea’s tax, much like the United States NIIT is is a percentage based excise tax. There are few compliance difficulties. Eritrea’s tax does NOT compare with the U.S. citizenship tax rules found in Chapter 1 which make the lives of Americans abroad a living hell.

In fact, to compare Eritrea’s citizenship taxation to the United States citizenship taxation is gross insult to the nation of Eritrea.

Appendix A – Chapter 1 and Chapter 2A are two separate parts of the Internal Revenue Code

The Internal Revenue Code is Title 26 of U.S. Laws. The Income Tax rules are found in Subtitle A of Title 26. Notice how the Subtitle A – Income Taxes – is divided into different Chapters.

Chapter 2A (creating the NIIT) is different from Chapter 1 (Normal Taxes And Surtaxes) which includes the foreign tax credit rules.

 

26 U.S. Code Subtitle A – Income Taxes

Subtitle A (consisting of Chapters 1 – 6) deals with “Income Taxes”

CHAPTER 1 is where the foreign tax credit rules live.

CHAPTER 2A is where the 3.8% Obamacare surtax on Net Investment Income lives.

CHAPTER 2A does NOT include a provision for foreign tax credits to offset the “NIIT”

(This means that under purely domestic U.S. law NO foreign tax credit is allowed to offset the NIIT.)

 

Appendix B – Podcast: John Richardson and Virginia La Torre Jeker discuss the 3.8% Net Investment Income tax

 

 

John Richardson – Follow me on X.com/Expatriationlaw