When talking about taxes in the live of digital nomads, we often use the terms tax evasion and tax avoidance for digital nomads. Sometimes these terms are used in alternation of each other. There is, however, a big difference between the two of them. We’ll explain you the difference and apply them to the live of a digital nomad.
Tax evasion for digital nomads
Tax evasion is something you don’t want to pursue as it is simply illegal. That’s it, nothing more and nothing less, as easy as that.
An example will make this clear. Let’s say you are a tax resident of a country where you need to declare your worldwide income (i.e. all the income you generate, irrespective if it is generated locally or from a foreign source). If you decide not to declare the income you generated abroad because you think your local tax authorities won’t ever find out while it is actually taxable income, you are committing tax evasion.
This means you are simply breaking the law and you can be punished with fines or even worse – depending on the rigidity of the laws and the extent of your offence – imprisonment. It goes without saying you don’t want to get involved with tax evasion.
Summary: tax evasion is illegal and you should stay away from it.
Tax avoidance for digital nomads
Tax avoidance on the other hand is the good counterpart of tax evasion. Again, it’s probably best to show this with an example.
Let’s say that today you are a tax resident in a high-tax country. In order to avoid the high tax burden, you decide to become a tax resident in a country with lower tax rates (tax avoidance) instead of not declaring all your income (tax evasion; cfr. supra).
So tax avoidance is simply avoiding taxes in accordance with the laws. In the above example, if you are no longer a tax resident in the high-tax country, you avoid paying taxes there. If everything is set up properly, this is a perfectly legal way to reduce your taxes.
Tax evasion versus tax avoidance: conclusion
The difference between tax evasion and tax avoidance thus lays in the fact that the first one is illegal as you are not following the applicable laws while the second one is legal because you are limiting your tax burden in line with tax regulations.
Tax evasion versus tax avoidance for digital nomads
To apply these concepts to digital nomads we can again jump to our example of tax residency. Changing your tax residency in line with the applicable tax laws is probably the easiest way to increase your income.
Let’s say you are making $5.000 per month and are currently paying a (fixed) tax rate of 30% on that. That means that at the end of the month, you have $3.500 left. If you’d move to a jurisdiction with a tax rate of 10% instead of 30%, your disposable income at the end of the month will spontaneously jump to $4.500 or a $1.000 more. Probably the easiest way to give yourself a raise without putting in additional hours.
Most people living a ‘traditional’ live won’t have too much options in order to use tax avoidance to their advantage as they aren’t as flexible as digital nomads. This flexibility comes with more options if structured properly. Again another benefit of the digital nomad life.
The above is just one of the examples on how tax avoidance can help digital nomads decrease their tax burden and at the same time increase their spending power or reduce the amount of time they need to work for the same level of income. The decision is all yours.