Digital Nomads – The New Breed of Café Surfing Entrepreneurs
If there has been a prevailing theme to Donald Trump’s talk about businesses, it has not been forward-looking. Most of the industries the President has focused on are in struggling blue-collar sectors, with talk of revivals and the return of lost jobs.
Whatever you think of his other qualities, Trump is ultimately a businessman and a pragmatist, and he is likely to pursue all avenues that might enhance the American business landscape. One such area is tax reform. While there are no guarantees, evidence has been growing for changes in two key areas: tax and trade.
Most of the discussion around the former has centred on a lower rate of corporate tax. For many entrepreneurs, however, the bigger development is that the U.S. may be about to abandon the ‘citizenship tax’. For the digital nomad – a new breed of café surfing entrepreneurs – this change could be momentous, and set the stage for a more modern and flexible business landscape.
While most countries only seek to tax people who live or conduct business inside their borders, the United States is one of the only countries in the world to tax its citizens wherever they are currently residing. Avoiding this requires an IRS exemption known as the FEIE, or foreign earned income exclusion. Among the key stipulations is that you are a permanent resident of another country, or have spent a minimum of 330 days outside of U.S. territories.
Acquiring this exemption is not always easy, however. The IRS will chase you wherever you happen to move, and the burden is on you to prove that you are tax exempt. If you fail to do so, you can end up paying more tax to the U.S. than you would otherwise, or even paying twice if your country of residence does not have a double taxation treaty.
The rapid development of mobile technologies and spread of wifi has made it possible to run a business from any location. The result is the digital nomad: a tech savvy, worldly entrepreneur who works where (and largely when) they want, with little more than a laptop.
While this lifestyle is incredibly desirable, it’s also a huge leap to take with current tax laws. The uncertainty of citizenship tax and the definition of a ‘local business’, whereby people have to send paperwork to a distant government while hopping between several countries, is stifling those people who want to set up businesses on the move.
The American dream abroad
The life of a digital nomad is too good to keep down, however, and the idea has continued to gain traction in recent years. Multiple hubs and co-working spaces have popped up across the world, particularly in the luscious climes of Southeast Asia, where the combination of sunny beaches, reasonable prices and high speed internet has been particularly appealing. With the strength of the dollar, Europe and the UK are also turning into increasingly popular destinations.
Changing from a citizenship tax to the more usual territorial tax would make sense for businesses, who would feel less inclined to set up European subsidiaries. But it would also be a hugely significant move for individuals and small businesses. The sudden freedom to set up abroad without barriers could lead to the expansion of small enterprise, as well as enabling individuals to travel and conducting business on the go.
This may be an accidental benefit; it’s not likely that the U.S. administration would want businesses leaving. But the benefits could be broader than immediate tax revenue. Millennials are showing that young people are more self-determined and entrepreneurial than ever. Making it easier to travel could ultimately bring more skills – and businesses – back to America, as digital nomads age and return to settle in their domicile.
Being a digital nomad is also a perfect lifestyle for the tech industry. Career tracks such as coding, web design and video game development often only need a laptop, with hours tending to be irregular. This suits both the travel and flexibility of a life spent working on the move.
Casual and relaxing environments tend to breed creativity. And ultimately, all good tech ideas – and the multi-million dollar businesses they create – come back to roost in Silicon Valley (though other options, such as the CES dominant La French Tech, are becoming increasingly palatable).
With a bit of luck, the impending changes to U.S. tax law could be among the first in the world to accommodate new forms of business. Formal arrangements for digital nomads and similarly location independent businesses are not yet enshrined anywhere.
If the Trump administration does deliberately address these issues, it could blaze a trail for an entirely new era of boundary and border crossing entrepreneurs. In either case however, the reforms to citizenship tax, lowering of corporate tax and imposition of border taxes stands to change U.S. business markedly.
While the short-term result may be that some entrepreneurs leave America, Trump will hope that both small businesses and large enterprise will eventually flock back in droves.