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Double Taxation SSIn the world today there are only two classes of people; those who get robbed taxed in their country and those who get robbed taxed in other countries as well. We know that at a local level there are many taxation layers that build one on top of the other. To be precise, they not only build one on top of the other but they feed from previous taxes. We have taxes imposed on taxes which were previously imposed on even more taxes. Consider milk for example.

The farmer pays taxes on land and on profits. These taxes get included in the prices of milk sold at wholesale to milk packagers. These packagers pay taxes on profits from the packaged milk which is then resold to distributors and whose price includes their taxes. The distributors pay taxes on profits from wholesale packaged milk sales to retailers at prices including their taxes. Retailers pay taxes on profits from sales of retail sold milk to you whose price includes their taxes. Are we done yet? Oh…no… on top of that you have Value Added Taxes…because it is only "fair" you know?

Yet, all these taxes are "local". But what happens if you have the disgrace (yes the disgrace) of having assets outside the country you reside in? Then you are veritably screwed because this game of taxes is played at an international level and you are the sucker taxpayer.

NO, WE ARE NOT BEING DISINGENUOUS

Obviously your tax authority wants to know which assets you have in a jurisdiction different than theirs because if you sell them or make a profit, they have no authority to tax you in that jurisdiction. But they do have the authority to tax you in your jurisdiction and they want their pound of flesh.

Most countries used to have taxation rules that taxed you on your local profits only, not on your world profits. This made sort of a twisted modicum of common sense (never forget that taxation, any taxation, is robbery). If you live in the country A you receive so-called "government services" in this country because you pay for these services through taxation in country A. If you have assets in country B, you pay taxes in that country but you receive no "government services" because you live in A and not in B. Basically, your taxes in B are pure loss. Almost.

It is possible to argue that the price (or value) of your assets in B are a little bit higher due to the conditions that the government in B creates. This sometimes is true but oftentimes it is just the opposite. As a matter of fact if we include government debts and inflation in our calculations, the so-called "benefits" are always loses. And so, yes, formally speaking you may get tiny benefits. Realistically speaking, you are losing wealth.

It makes no sense to tax you in A for the profits that you made in B considering that you already paid taxes in B.

Furthermore consider this scenario. If you live in A (where you have no profits) and your profits come entirely from B (after you paid taxes in there), you will still transfer significant amounts of money from B to A because you have to live in A. You are helping A's economy by spending money in there. What you are not doing is you are not helping A's government to waste your money by being taxed in A. And politicians don't like this because they have to spend money to stay in power.

But as governments got more and more into debt, monetary debauchery, trickery and all around financial orgies, they became desperate. As such, they declared that now you must pay taxes on your world income, regardless of where you live.

Thanks to this "improvement" in the "fair tax treatment" that you receive, and assuming that you live in A, now you have to pay:

  • Taxes in A from your profits in A
  • Taxes in A from your profits in B
  • Taxes in B from your profits in B
  • Taxes in B from your profits in A (sometimes)

Happy now?

IT GETS BETTER… OR WORSE TO BE PRECISE

But thanks to our "progressive" taxation system, the amount of taxes that you pay in A from profits in B and viceversa are not, repeat not, related to your profits in the country where profits originate.

If you live in A and have an asset that produces profits in B, your taxes in B will be related to your profits in B. Yet your taxes in A from B will be related to your profits in A and not in B!

Allow us to illustrate with an example. Let's say that you live and work in A. You have a salary of 10.000 NOK per year (middle class). You purchase a tiny apartment in B which you rent for 500 NOK per year. Your tax in B is 10% of your profits or 50 NOK per year and you pay this tax in B. However, your tax in A will be calculated on a grand total of 10.000 + 500 NOK, this is 10500 NOK. As this amount falls within the first taxation "bracket" in the "progressive" tax system in A, you pay 15% or 1575 NOK. Your total tax from A and B is now 1625 NOK.

Now let's assume that you get a promotion in your job. Now your salary is 12.000 NOK per year. Your taxes from B are the same. If we now recalculate your taxes from A we get 15% of 12500 NOK or 1875 NOK right? Well, no. It so happens that anything over 12000 NOK falls into the second taxation bracket which is taxed at 30%. And so now your total tax is 2000 NOK!

Before your raise you were paying 75 NOK of tax in A due to the apartment. Now you are paying 150 NOK.

Do you see the problem? Your asset is producing the same amount of profit in B yet, it increased your tax levels in A substantially. For no reason.

And of course, we did not even consider the scenario where B would be taxing you on 12500 NOK just because you have an apartment there although you do not live in B and you use exactly ZERO government services in B (excluding municipal services which you do pay locally regardless). Yes, this is as ridiculous as it sounds yet this is exactly what many (most) countries do.

RELIEF…OF SORTS

Then we have to consider the many treaties that bombastically claim to provide "Double Tax Relief". It sounds good, doesn't it? You pay in A based on your profits in A and you pay in B based on your profits in B. As you already paid taxes in B, A won't add those profits into your calculation in A. This is how any common sense person would interpret these treaties. Alas, this is not how governments interpret them. Allow us to demonstrate.

In our previous example, we have:

  • Taxes in A = 10000 x 15% = 1500
  • Taxes in B = 500 x 10% = 50

And that should be it! But it is not. The way these treaties operate is as follows:

  • Taxes in A = (10000 + 500 - (50 x 20%)) x 15% = 10490 x 15% = 1574 (or 1 NOK less than what you paid before)
  • Taxes in B = 500 x 10% = 50

What happened here???

Simple, you were conned. They played you. The "Double Tax Relief" that these treaties refer to is simply a discount or a recognition of a tiny portion of the taxes you already paid and almost never the full taxes and almost never the profit totals.

In other words, in A you pay taxes for:

  • Your salary = 10000
  • Your profits in B = 500

Minus your discount from taxes you already paid in B (or 20%) from 50 = 10.

And so you end up paying taxes on 10000 + 500 - 10 = 10490 instead of 10500!!!

So much for "relief".

Of course this is just one of the methods to calculate this "relief". There are many others but they all amount to the same outcome. The amount of tax that you end up paying is tiny (almost microscopically) smaller than the amount of tax you would have paid otherwise. In the end you are being taxed twice, or trice, or… or… or… who knows how many times over as taxes overlap over taxes. And don't get us started if you have properties, in A, B, C, D and so on.

THE IRRATIONAL RATIONALE

Of course, the so-called rationale is that as you live in A you should be contributing to pay for services given others who are less fortunate than yourself. In other words, you will be subjected to a forced redistribution of wealth. Expressed in this fashion it all seems oh so logical, so humane, so socialistic that it is almost impossible to argue against. Almost.

The little, tiny detail that all these politicians leave out when they so say is that thanks to all these wonderful taxes the wealth in the entire world has not only decreased substantially but it continues to decrease day by day. Should taxes would not exist then there would be no need to "redistribute" wealth to the "less fortunate" because we would all be sufficiently wealthy to be able to afford better goods and services than governments are offering today "for free" (see Governments The Real Robbers).

CONCLUSION

Double taxation is just one of the Ponzi schemes that governments inflict on us. And if you believe that this is a joke, consider this little statistic. In Argentina in the Ciudad Autonoma de Buenos Aires (or CABA - what used to be the Federal Capital) there are about 700.000 people lacking proper housing. Yet about 340.000 apartments and houses remain empty. The owners of those houses and apartments have made the calculations and came to the conclusion that if they would have to pay all the taxes from "profits" they would lose money! It is actually cheaper to pay municipal and property taxes and not rent to people! Owners lose less money. Part of this taxation massacre is precisely due to double taxation issues since many of such owners live in Uruguay or Spain or elsewhere. Things are currently so dire that a politician proposed to add a "penalty tax" of 1000% on any rental house or apartment that remains empty for more than 6 months. That's right. Thousand present. No, this is not a typo.

Consider this. The Argentine government creates economics debacles systematically. Once they find themselves between a rock and a hard place, they raise taxes, raise borrowing and rise printing… which pushes the economy to the brink of disaster... and then beyond. In this kind of situation nothing prospers. As such, prices are yanked even higher through taxation and inflation making every day needs unassailable to regular people. Then the government comes along and places a cap on many prices. Producers are left with two options: manufacture at a loss or stop manufacturing. In the case of renters is rent at a loss or don't rent. And then and just to make things even more fun and complicated, politicians find a way to "punish" those vicious "speculators" who are "profiteering" from the economic conditions affecting the "most vulnerable" citizens… conditions that were caused by the government itself… but of course politicians never mention this part. It is for this very reason that so many rental properties in CABA and anywhere else in Argentina are rented "in black". Because it is the "black" market that, by ignoring taxes, is solving a real problem in a real market. Double taxation (and widespread taxation) created the problem and the black market (or more precisely, the oppressed market) solved it. And what do people get for solving the problem that the government caused in the first place? That's right! More penalties!

That's justice for you, the democratic and "right" way.

And so now go and enjoy your democracy and sleep tight in the knowledge that "justice has been served". Just one thing though, when you can't get a good or service that you need because the suppliers have been wiped out by the government, don't try to call your "representative". They don't take calls from drones!

Note: please see the Glossary if you are unfamiliar with certain words.

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