Tax systems around the world: from the simplest to the most complex
The International Tax Competitiveness Index (ITCI) assesses different tax systems in terms of their competitiveness and neutrality. According to the study, the more complex a country's tax laws, the less neutral it is. Every individual should be able to understand the main rules for calculating taxes and take the necessary steps without having to consult a tax adviser. The 2022 edition of the Index ranks Estonia as the country with the OECD's most straightforward and competitive tax system. Latvia comes just behind, followed closely by New Zealand and Switzerland. The Czech Republic ranks 5th. European countries, already in the top 5, are also well represented in the top 10. Luxembourg ranked 6th, ahead of Hungary and Lithuania. Turkey ranked 9th and Israel 10th.
Further on the list, we can still find European countries, such as Portugal, Italy and France, which rank 36th, 37th and 38th, respectively. France is a world champion in terms of tax burden due to its complex tax system. However, the reform introducing withholding of tax was designed to simplify the process for taxpayers. Other countries known for high tax burdens managed to secure higher rankings thanks to their tax systems that are considered to be more comprehensible, such as Denmark (33rd), Belgium (24th), the United States (22nd) and Japan (21st). Even Hungary is among the most competitive countries.
Focus on countries with simple tax systems
The Estonian tax model is emulating. In the 2010s, European countries like France, for example, were looking to Estonia to understand the reasons for its success. Firstly, the tax filing system is highly simplified and digitized. Everyone is subject to the same level of taxation, regardless of their income (20% tax rate): this is known as "flat tax" or “proportional tax at a flat rate”. For expatriates, the Estonian tax system means less paperwork (due to digitalization) and more clarity. Estonia was the first European country to introduce a flat tax.
Since the 1990s, other European countries, such as Latvia, have been inspired by its model. In fact, flat tax is often referred to as tax benefits for foreign companies operating in Estonia or Latvia. Estonia has also simplified the steps of business creation (100% online, e-residence, quick procedures) to attract more foreign professionals. In Estonia, the corporate tax is set at 10%. It is 20% in Latvia, but only on distributed profits. There is no tax on reinvested profits.
New Zealand also has a straightforward tax system thanks to the IRD (Inland Revenue Department). The IRD attributes a Tax Identification Number, a unique number, to each individual. This TIN enables every citizen to be identified by the tax department. It simplifies procedures by providing a global view of information about an individual's income, taxes and all personal data. In fact, the TIN it's mandatory for work, investment real estate transactions, and even to open a bank account.
The complex American tax system
Administrative formalities in the US can be pretty challenging for expats, especially for those who don't have a good command of the language. And even for those who do, it can be difficult to understand the administrative jargon. Therefore, filing tax returns in the US can be very complex. How do you manage in a country of 50 states, each with its own tax laws? Not only do expatriates have to juggle different rules in different states, but they also have to pay different types of taxes depending on the geographical area they are targeting (federal, state, county, etc.).
You might think that these different laws do not affect expatriates and that a person living in one state shouldn't have to worry about the tax system of another state. It's worth noting that taxes are calculated differently for professional activities taking place in two different geographical areas. Working in California and carrying out a few professional assignments in the neighboring state involves a certain amount of reflection. While withholding tax does exist, you still need to file a tax return. However, the obligation to declare your income depends on several factors, including income level and family status. Given the complexity of the process, many organizations offer tax assistance free of charge or against a fee. This may comprise a simple explanation or tax assistance for expats navigating the complex tax system for the first time.
