The Best Tax System: Does It Exist?

Every person will have his/ her own understanding of an optimal tax system. If you ask for experts’ advice, they will tell you that an ideal tax system does not exist. There are two conflicting parties in the tax system: the state that wants to collect more in taxes and the taxpayer who wants to pay as little as possible. This means that the best tax system in the authorities’ opinion cannot possibly be the best tax system in the people’s opinion and vice versa. Another important property of a tax system is its predictability and tax legislations are amended rather often.

Another important fact to realize is that different countries have different approaches to taxing people depending on the amount of their income as well as its source. Some countries apply progressive scales while some other countries tax their residents at fixed rates no matter how much they earn. Some national tax systems are beneficial for the poor while some others are beneficial for the rich. Some business areas are prioritized in some countries and they are given tax incentives. These factors are essential if you are looking to change your tax residence. In any case, the tax system that you are considering has to be competitive in comparison to other tax systems.

A well-tuned tax system has to have the following properties:

Efficiency;
Predictability;
Stability;
Transparency;
Competitiveness.

A good tax system allows collecting enough money to cover the costs of various social programs. At the same time, the tax burden should not be too high because people would not start business ventures in this case.

With these properties in mind, we can offer the following list of characteristics that a well-balanced tax system should have:

The personal and corporate tax rates should be as low as possible.
The amount of taxes should be sufficient for maintaining a budget surplus.
The principles of fairness and justice should be adhered to.
The tax system should compare favorably to other national tax systems.
The tax Code should be written in a clear language.

Due to the fact that the tax collector and the taxpayer have conflicting interests, finding an ideal tax system is hardly possible. There are a few countries, however, where the fiscal burden is not too heavy. We point them out below.

Counties with tax systems favorable for the taxpayer

When choosing the country where you could become a tax resident, you should realize that there are two groups of taxes in every country: personal taxes and corporate taxes. Besides, national tax systems can be of three types:

With fixed tax rates: every person pays a fixed percentage of his/ her earning regardless of the amount of income.
With a progressive scale: the higher the income is the high the tax rate is.
With a regressive scale: the higher the income is the lower the tax rate is (because the gross amount of taxes is higher).

Some countries charge quite a lot in taxes. In some Western European states, people have to give up more than 50% of their income. On the other hand, these countries have high social security standards and the overall quality of life is good there. People may feel psychologically uncomfortable if they have to pay very much in taxes but these costs actually pay back.

There are jurisdictions, however, that offer comfortable living conditions and charge small taxes simultaneously. One of such jurisdictions is the Principality of Monaco. No personal income tax is charged in the Principality, which attracts wealthy individuals. The living standards are high there though as well as the prices. Please follow the link to find out more about European tax havens.

To become a tax resident of Monaco, you have to become its legal resident first. You have to spend the best part of the year in Monaco and have at least 1 million euros in the bank to qualify for legal residence in Monaco. This is not an option for a frequent traveler. Besides, if you have an international business company, your corporate income is going to be taxed in Monaco anyway.

Corporate taxes can be optimized in many offshore jurisdictions such as Panama, Belize, Seychelles, and others. Foreign companies registered in such countries do not have to pay any taxes and they have to do very little reporting. You have to realize, however, that this tax regime is applicable only to the companies that do business outside the country of their domiciliation. Besides, offshore-registered companies may face some issues with banking. Offshore jurisdictions are the best jurisdictions for tax purposes but only in certain respects.

National tax systems are rated by international organizations. The ratings are based on over 40 parameters such as the simplicity of the tax system, the tax rates, the taxable incomes, and so on. Such ratings are highly useful for those who are considering changing their tax residence.

Large corporations have made it a habit to monitor the changes in the national tax systems. If certain newly adapted rules look especially attractive, the company can re-domicile, that is, move to another country. With the development of communication technologies, the re-domiciliation process is becoming simpler day after day.

One more source of information about various national tax systems is the annual analytical report published by PricewaterhouseCoopers (PwC). It’s available to the public so anyone can find the latest report on the web.

Currently, the tax systems of the UAE and Qatar have the highest ratings. Then follow Saudi Arabia, Hong Kong, and Singapore.

Why these countries? Let’s look at some figures. The world’s average time required for filing a tax return is 240 hours. More than 20 obligatory payments are due on average. In some countries, 500 hours is required for filing a tax return and 50 payments are due. In the UAE, filing a tax return requires 12 hours per year and the number of payments is 4. The tax system of the UAE is clear, simple, and transparent. Legal entities can be tax-exempt in the country and natural persons don’t have to pay any income tax if they are legal residents of the UAE. The tax system of the country is unique in many respects.

Choosing the country of tax residence

If you would like to change the country of your tax residence, you would naturally look for a country with low tax rates. However, there are other important factors that you should also consider. These include the following ones:

Opportunities for adjusting your fiscal obligations;
The tax incentives available in the country under consideration;
The costs involved in changing the country of your tax residence;
Legal, financial, and corporate consequences of your decision to change the country of tax residence.

To conclude, becoming a tax resident of another jurisdiction is a legal way of reducing your tax burden. The good news is that it is quite possible to achieve this goal.