Over the past week, I've found myself embroiled in intense discussions on Quora, debating the complexities of digital nomads and income tax in their host countries. A common argument suggests that digital nomads, particularly those on tourist visas who avoid local income taxes, fall short of contributing to the GDP or overall well-being of their host countries.
In this post, I aim to dissect the intricacies of remote work legality, and the impracticalities of income-based taxation for digital nomads, and ultimately, debunk the myth that non-income-tax-paying digital nomads are a financial drain.
When Do You Become A Tax Resident Of a Country?
Let's establish how you become a tax resident of a country it comes down to the following three:
- Citizenship-Based Taxation: Only the United States and Eritrea tax their citizens regardless of where they live. This means that Americans abroad are still on the hook for U.S. taxes, with a large network of double tax treaties in place to prevent double taxation.
- The 183-Day Rule: Staying 183 days or more in a tax year or rolling year will trigger tax residency.
- Centre of life test: If your main residence, bank accounts, insurance, car registration, club membership, etc are all located in one country and you spent a minimum amount of days in that country you can be considered a tax resident of that country.
You can indeed find yourself as a tax resident in more than one country simultaneously, or in an intriguing twist, not be considered a tax resident anywhere at all. By strategically moving and navigating around the rules that define tax residency—such as the length of stay or where your life's core elements are anchored—it's feasible to escape being tethered to any single country's tax system. The practicalities of how digital nomads can achieve this elusive status are a topic I'll explore in depth in a forthcoming post.
Digital Nomad Visas
Digital Nomad Visas have emerged as a response to the unique value digital nomads offer, acting as high-spending tourists who reside in a host country for extended periods. The shift towards remote work, accelerated by the COVID-19 pandemic and the resulting downturn in international tourism, prompted countries to view digital nomads and remote workers as a viable solution to recover lost tourism income.
Consequently, digital nomad visas were introduced, typically valid for six to twelve months, with possibilities for extension and, in some cases, exemptions from local income taxes. These visas provide legal recognition for individuals to work remotely and reside within a country for a predetermined timeframe. Yet, the complexity of obtaining such a visa can deter applicants, pushing them towards simpler tourist visa options for their stays.
Tourist Visa Digital Nomads
Digital nomads often utilize tourist visas for their travels, especially in regions like Southeast Asia and Central and Latin America, where “visa runs” – exiting and re-entering a country to renew one's tourist visa – are a frequent strategy to prolong their stay. Such practices can inadvertently lead to staying long enough in a country to meet the criteria for tax residency.
Additionally, the inherently untraceable nature of remote work complicates the issue further, raising debates on whether host countries should impose income tax on these so-called tourist visa offenders.
Observations of the numerous visa agencies in Thailand, which facilitate everything from visa runs to questionable educational visas, alongside only a singular raid on a coworking space a decade ago, suggest that while authorities are aware of the situation, it hasn't been a high enforcement priority. I would go even further that they seem happy with the current status quo and the employment and fees it provides.
This situation brings us to a pivotal question: Should digital nomads, whether on a digital nomad visa or a tourist visa, be subjected to income tax in their host countries?
Applying Income TAX on DNs is Complicated
Imposing income tax on digital nomads introduces a layer of complexity for both the nomads themselves and the host countries. For digital nomads, it means navigating a labyrinth of bureaucracy: securing tax identification numbers, filing tax returns in unfamiliar countries, and dealing with the intricacies of global taxation rules, including taxes on investments, rental income, and dividends. Furthermore, entering into this system could necessitate engaging with double taxation agreements to prevent paying taxes on the same income in multiple countries.
Moreover, becoming part of the tax system might mean becoming liable for social security contributions, which, while granting access to benefits like unemployment and pensions, ties nomads to a long-term bureaucratic commitment (a pension is 40 years away for a 25-year-old digital nomad) they typically aim to avoid.
From the perspective of the host countries, collecting income tax from digital nomads poses its own challenges. The administrative effort required to tax individuals who are in the country temporarily can be substantial, raising questions about the efficiency and practicality of such measures. Considering that digital nomads are transient, evaluating whether they represent a financial burden or if there might be more streamlined methods to levy taxes or fees on them is crucial.
Just as nomads travel to avoid exhausting the food for their animals in one location, digital nomads travel to avoid the bureaucracy of visas, taxes and cost of living connected with living permanently in one country.
Are Digital Nomads a Financial Burden?
During my spirited discussion on Quora, I firmly believed that digital nomads who don't pay income tax aren't a financial drain on their host countries in terms of revenue contribution. My argument hinges on the fact that digital nomads contribute financially through indirect means. They pay a variety of taxes such as Value Added Tax (VAT), import duties, excise taxes, and even taxes related to departure and landing. Additionally, they contribute to local economies through tourism taxes and elevated fees at tourist spots.
Unlike residents, digital nomads don't benefit from free or subsidized access to healthcare, education, or pension schemes. Instead, they typically arrange for their own health insurance and education methods, such as online, home, or world schooling.
To illustrate my point, I referred to Malaysia, a country often mentioned by the original poster in my discussions on Quora. By analyzing Malaysia's 2024 budget, I focused on the tax contributions that matter, revealing how much of the country's budget revenue comes from various taxes. This approach only considers the taxes that digital nomads are likely to contribute to.
Contribution by a Resident to Malaysia's Revenue:
- 13.8% from Income Tax
- 11.6% from Sales and Services Tax
- 4% from Excise Duties
- Total Contribution: 29.4%
- Access to Services: 100%
- Contribution Ratio to Service Access: 0.294
Contribution by a DN-Tourist:
- 11.6% from Sales and Services Tax
- 4% from Excise Duty
- 2% from Tourist Duties, Landing Exit Fees
- Total Contribution: 17.6%
- Access to Services: 61.8% (Excluding 19% for Education, 11% for Healthcare, and 8.2% for Pensions) – I am confident there is a much larger part of subsidies and or other services that are not accessible to DN-tourists.
- Contribution Ratio to Service Access: 0.284
Comparing the contribution and service access ratios, they are nearly the same. This indicates that digital nomads, who typically don't pay income tax, do not place a financial strain on Malaysia. It's important to acknowledge that these figures are simplified, and a government budget department would have more detailed data that I don't have access to.
Langkawi Malaysia – one of my favourite destinations
As for enhancing the positive impact of digital nomads, it's clear that in many countries, they are unfairly blamed for local housing issues. However, the root cause often lies in the rise of short-term rental platforms like AirBnB, which can drive up local housing costs. Digital nomads tend to congregate in tourist hotspots, which exacerbates the issue.
Yet, there are strategies to leverage the presence of digital nomads in a way that can financially benefit host countries more significantly.
Solutions For Tourist-DNs to Limit Stay or Extract Taxes / Fees
Consider these innovative approaches for managing the stays of tourist digital nomads (DNs) and enhancing revenue, as suggested by Nomad Girl:
Implement Schengen-Style Stay Limits
Restrict tourist stays to 90 days within any 180-day period to prevent them from becoming tax residents and circumventing local tax laws. This change might deter the practice of visa runs used by tourist DNs, expats, or retirees to extend their stays. While this could impact a lucrative visitor segment, it allows countries to focus on streamlined programs specifically designed for digital nomads, expats, retirees, and educational visitors.
Alternative duration limits, such as 270 days within a 365-day cycle, could be established, alongside a tiered fee system for different stay durations, which I will explain in the point below.
Introduce Duration-Based Fees
Charge fees for re-entry if a tourist performs a visa run and returns within a specified timeframe, such as a month. Fees could escalate based on the cumulative length of previous stays and be applied progressively upon each re-entry or exit. Utilizing QR code technology for prepayment could expedite this process at immigration checkpoints. An additional rule can be introduced where 3 to 6 months away from the host country will result in a reset.
An example of what a proposed duration based exit fee would look like, can be found in the article in which Nomad Girl looks at ways to simplify Thailand's current visa mess.
Launch a Simplified Digital Nomad Visa
Offer a visa that allows for an extended stay without the complexities of income tax obligations, instead requiring a simple fee. This visa would enable digital nomads to legally reside in the host country longer without frequent exits and re-entries, and affirm their status as non-tax residents back home. Make the application process bureaucracy-free as the more complex it becomes it will push the digital nomad towards using a tourist visa.
These strategies are designed to not deter short-term tourists but to generate additional revenue from tourist digital nomads and those staying longer, contributing positively to the host country's GDP. They also provide an incentive to use the digital nomad visa.
Conclusion
In conclusion, the common belief that digital nomads who do not pay income tax—whether on a digital nomad visa or a tourist visa—pose a financial burden or create inequity among tax-paying residents and expatriates is largely unfounded.
There are ways for host countries to generate additional income from digital nomads without having to resort to income tax. An easily accessible digital nomad visa with structured fees at both the application and renewal phases goes a long way.
Implementing a cap on the total duration of stay for those on tourist visas can encourage the transition to digital nomad visas, while a tiered fee system based on the length of stay can further enhance revenue on tourist visas. Effective communication from governments about these programs will significantly aid in fostering a hospitable environment for both tourists and digital nomads alike.
