REEVALUATING THE ALLOCATION OF TAX COLLECTION OF IMMIGRANTS BETWEEN HOME COUNTRY AND HOST COUNTRY
TAMIR SHANAN AND DORON NAROTZKI
In 1972, when Professor Jagdish Bhagwati published his seminal proposal “The Brain Drain and Income Taxation, a Proposal,” his fundamental idea was to tax skilled workers who had emigrated from developing countries to developed countries and return at least some of the income to developed countries for their economic loss. Professor Bhagwati underlying rationale for this tax was the need to compensate developing countries for the losses those countries experienced by individuals who were born, raised, and often times professionally trained there but eventually left to developed countries in order to find a more lucrative employment opportunities (higher salaries, better working conditions, etc.) and improve their standard of living (more stable lives in the developed countries and better educational opportunities for the migrant’s children).
This basic idea of the so-called “brain drain tax” is that skilled migrants typically earn economic rents, that rely on skills and know-how which they received in their home-country (especially when the training and education relies on state funding) and that due to their relocation benefit the host-country which did not invest any of its own resources in order to receive skilled professionals. Furthermore, such relocation of skilled professional from developing countries to developed countries also results in shortages of skilled professional in the developing countries and as a result put those in another disadvantage.
Professor Bhagwati proposal was aimed mainly at promoting global fairness between developing countries and developed countries and focused on the phenomena of skilled migrants leaving developing countries and moving to developed countries. However, our research wishes to further develop this idea, and explore the jurisdiction to tax individuals and more specifically the fundamental principle of “residency” under the existing international norms. Accordingly, our research would explore migration economic and tax implications in general, regarding skilled and unskilled migrants and regarding migration from one country to another (not necessarily from developing countries to developed countries), and eventually suggest a model that will assist countries with ways to tax those individuals in a more fair manner that will lean on social justice and social contracts and ties between the individual and her domiciliary community, and not solely between countries or on technical standards as it is currently.
One of the challenges in implementing such a tax is the fact that under the current international tax regime the taxing jurisdiction follows residence and that many countries define residency for tax purposes based on one version or another of a physical presence test (presence of more than 183 days in one country during the calendar year), or based on the place where the migrant’s habitual abode was in the relevant calendar year. As such, under existing rules, and more often than not, immigrants are considered residents of the host-country rather than of their home-country. One possible solution to this challenge is in strengthening the domiciliary concept which interprets the notion of “home” in the country where the individual resides permanently without any intention of moving. For instance, under this concept, an immigrant who studied a graduate degree in a host-country who decides to work for several years after graduating, does not cease to have his permanent home in his home-country merely because he is temporarily residing elsewhere. Another possible solution to this challenge can be achieved in an alternative personal jurisdiction regime – adoption of a citizenship-based taxation.
The need to compensate home countries, whose citizens relocate and move to another country, from the loss of untaxed unrealized gains was addressed by many countries that adopted exit taxes. These exit taxes attempt to capture unrealized untaxed appreciated gains of assets based on their appreciation during the period the individuals owned the property just before she or he abandoned her or his tax residency or just before she or he renounced her or his citizenship. However, these exit taxes unfortunately do not capture the human capital appreciation since at the time of migration emigrants generally do not benefit from the increase of wages, and in any event many of the economic benefits that derive from the know-how, intellectual property they acquired/developed prior to the relocation can easily be deferred, and also because the “appreciation” period (unlike the holding period of a movable property) is less explicit and as such pose greater collection challenges for the home countries.
Our research will explore the different proposals raised by legal and tax scholars over the years regarding brain drain tax and propose a model that would try to capture unrealized and untaxed economic “rent” that derives from know-how and skills that may be attributed to their home-countries. We would also compare between the U.K. domiciliary-based regime and the U.S. citizenship-based regime and propose a model that can be relatively easily adopted, administered and monitored by the home-countries and that will enhance global fairness between countries.