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Written by Tamir Shanan and Doron Narotzki

Introduction

In today’s globalized world, human capital is more mobile than ever before. The increasing cross-border human capital mobility, driven by technological and communicational advancements, economic opportunities, and changing societal norms, necessitates a reevaluation of international tax rules that were established over a century ago in a different reality. Our recent Article, “Taxing Migrants More Fairly in an Era of Globalization,” addresses some of the principal changes and proposes a novel set of rules for taxing cross-border migrants more effectively and fairly. The traditional tax systems were designed in an era when cross-border movement was relatively rare and human capital was largely immobile. However, in the 21st century, the ease of international travel and digital communication has created new patterns of work and residence. Digital nomads, remote workers, and frequent international business travelers challenge the conventional notions of tax residency and create potential for both tax avoidance and unfair taxation. Our article seeks to provide solutions that better align with the current global economic, cultural and demographic landscape, ensuring fair and efficient tax practices for all.

The Rising Tide of Migration

The movement of individuals across borders has reached unprecedented levels, with the number of cross-border migrants tripling since the 1970s. Despite making up only about 4% of the global population, migrants have a significant economic impact, contributing hundreds of billions of dollars annually to both their host countries and countries of origin through remittances, payments and other economic activities.

Challenges of Current Tax Systems

The international tax rules that determine fiscal residency and allocate taxing rights among countries are outdated and assume that individuals are born, raised, works and establish their career, get married and bring children, and dies in the same country and if one has relations with more than a single taxing jurisdiction, their relations to one of which are clearly closer (aka binary residency approach). Developed nearly a century ago, these rules were designed for a time when human capital was relatively immobile and international travel was rare and difficult. Today, they fail to adequately address the complexities of modern migration, where individuals can work remotely, frequently travel across borders, and often can even establish meaningful economic ties in multiple countries. This outdated framework can lead at times to issues like double taxation, where individuals are taxed by two or more taxing jurisdictions, or no taxation whatsoever, as they are not taxed by any taxing jurisdiction.

Proposed Solutions

Our article suggests several reforms to create a fairer tax system for cross-border migrants:

1. Non-Binary Fiscal Residency: We propose replacing the current binary concept of tax residency with a non-binary approach. This acknowledges that individuals can have meaningful connections to more than one country. A scalar conception of tax residence allows for a more nuanced and flexible determination that better reflects the complexities of modern global mobility, thereby reducing opportunities for tax avoidance. However, scalar approach would also require incorporating mechanisms that would mitigate double/multiple taxation by the resident countries, as the foreign tax credit is mainly helpful in case the double taxation results from source – residence tax claims.
2. Shortening Physical Presence Threshold: The current 183-day rule for establishing tax residency is outdated because it was created during a time when human mobility was much more limited. With significant advancements in transportation and technology, people can now move across borders more frequently and easily. This rule also fails to account for modern patterns of work, such as remote work, digital nomadism, and frequent short-term business trips, which do not fit neatly into the old paradigm. As a result, the 183-day threshold can be easily manipulated or may not capture the true extent of an individual’s economic and social ties to a country, leading to potential tax avoidance or inequitable taxation. We recommend shortening this period to 30 or 60 days, reflecting the increased ease and frequency of cross-border movement.
3. Eliminating Statelessness: To prevent individuals from becoming stateless for tax purposes, we suggest that once a taxpayer is deemed a resident, they cannot renounce this status unless they acquire a new tax residency in a country that taxes comprehensively (on a worldwide basis) at standard rates like any other taxpayer in the country. Statelessness for tax purposes occurs when an individual is not considered a tax resident by any country, allowing them to avoid paying taxes anywhere. This situation undermines the fairness and integrity of international tax systems.
4. Combating Favorable Tax Regimes: We call for mechanisms to neutralize abusive tax regimes that attract individuals with favorable terms by adopting global minimum tax standards and ensuring progressive taxation principles. This includes implementing a baseline tax rate that all countries adhere to, thereby preventing tax shopping for the lowest rates. Additionally, enforcing progressive tax rates universally ensures that high-income earners contribute fairly. Enhanced international cooperation and transparency are essential to identify and curb abusive practices. These measures promote a fairer, more equitable global tax system, preventing erosion of national tax bases and ensuring all individuals and corporations pay their fair share.

Conclusion

The increasing mobility of human capital demands a comprehensive overhaul of international tax rules. By adopting our proposed measures, we can create a fairer, more equitable tax system that reflects the new realities of the 21st century. These changes will ensure that countries can fairly tax individuals who benefit from their services and infrastructure, while also addressing the economic impacts of migration on both host and origin countries.

For a more detailed exploration of these proposals and their implications, we invite you to read our full article, “Taxing Migrants More Fairly in an Era of Globalization”, available on ElgarOnline.

Taxation, Citizenship and Democracy in the 21st Century 

By Yvette Lind, Professor of Law, Department of Law and Governance, BI Norwegian Business School, Norway and Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, Michigan Law School, University of Michigan, US.

Find more information on this title here.

Read the introduction for free and find Tamir Shanan and Doron Narotzki’s chapter on Elgaronline.