Month: February 2018

Comment #2 on “Think You Can Leave the U.S. – Think Again

 

 


 

“There is something fundamentally wrong with a country where compliance with its laws
forces you to (eventually) renounce your citizenship.”

 
This post is based on a comment by John Richardson. The comment is a response to
a post by laurainparis on the Thom Hartmann blogsite.

Laura, you conclude your last comment with:

“In asking his question Thom demonstrates the importance of how the United States treates it citizens when they leave the country. He demonstrates that this is an important question not just for Americans who live outside the US, but for ALL Americans, regardless of where they live. Because anyone who thinks they can leave the country, anyone who comforts themselves with this idea – anyone who asks the question “why don’t more Americans leave?” – they are deluding themselves. There is no freedom for Americans. Americans are not free to live normal lives outside the US, unless they are financially and emotionally prepared to STOP BEING AMERICANS (that is, renounce their citizenship). The word “ironic” doesn’t begin to describe the situation. The words “impossible” and “tragic” do.”

A tragic situation indeed.

What’s most interesting and tragic is that:

The ones who try the hardest to comply with the U.S. rules are the ones who ultimately are forced to renounce. I have assisted a very large number of people in renouncing their U.S. citizenship (and thereby ending U.S. jursidction over them). A high percentage of people I have assisted are people who:

1. Have tried for years to comply with the “alphabet soup” series of laws and reguations that govern the lives of Americans abroad; and

2. Realize that compliance is no longer possible.

The only remaining Americans abroad will be “noncompliant” Americans abroad

In the long run, the only Americans abroad who will be able to retain their U.S. citizenship are those who do NOT attempt compliance with these laws. There is something fundamentally wrong with a country where compliance with its laws forces you to (eventually) renounce your citizenship. This is a problem that has escalated over time.

U.S. citizens abroad are living under siege.

A wonderful expression of the evolution of the problem comes from Jackie Bugnion in
her submission
to the House Ways and Means Committee on Tax Reform. Writing in 2013 she said:

“In 1776, the United States declared independence because the mother country on the other side of the ocean was imposing taxes on the colonies for the benefit of England. Resentment started when Britain tried to enforce the Navigation Act after 1763. Resentment increased with the Stamp Act in 1765, a way for Britain to tax the colonies. The British Tea Act of 1773 led to the Tea Party and we all know the outcome – the American Revolution and independence crying out “no taxation without representation”.

Today, the estimated 7 million Americans resident abroad, of whom the majority are long-term overseas residents in high tax OECD countries, face a comparable situation. Their representation in Congress is non-existent in reality. Americans abroad amount to only 1 to 2% of the votes in any particular state; Congressmen and Senators have ignored their tax issues. The unjustified myth that Americans abroad are wealthy and disloyal restricts a rational approach to the problems because of political image issues.

Citizenship-based taxation (CBT) has existed ever since the federal income tax was adopted. Despite CBT being an anomaly involving double taxation, taxation of phantom gains and explicit tax code discrimination, it was grudgingly tolerated by Americans abroad because it was essentially voluntary, most often involved little tax or no U.S. tax liability and basically was not enforced. In particular, the FBAR filing requirement was so obscure that even the big four accounting firms were not aware of the filing obligation dating from 1970 and failed to inform Americans abroad of the need to file the FBAR.

Since 2001, a series of legislative events have radically changed the situation:

  • In 2001, the Patriot Act made anything foreign suspect, including Americans residing overseas.
  • In 2004, Congress, under the Jobs Act, drastically increased the FBAR civil and criminal penalties to confiscatory levels, creating a disguised form of taxation on assets held overseas.
  • In 2006 administration of the FBAR reports was transferred to the IRS for enforcement.
  • In 2006 the Tax Increase Prevention and Reconciliation Act (TIPRA) extended the Bush tax cuts and included a compensatory revenue raising provision that reduced the benefit of the foreign earned income exclusion, limited the foreign housing allowance and pushed Americans overseas into higher tax brackets, thereby increasing U.S. tax liabilities for many Americans abroad.
  • In 2008 the law relating to renunciation of U.S. citizenship was revised under Section 877A and introduced an Exit Tax on wealthy individuals (defined as “covered”). The law also provided that Americans who inherit from estates of former “covered” U.S. citizens are subject to U.S.
    inheritance tax with no exclusion. This outrageous discriminatory provision aims to discourage renunciation of citizenship, but in fact penalizes children of former U.S. citizens for an act they did not commit. In practice, it encourages the children to also renounce their U.S. citizenship.
  • In 2009 the IRS launched its initiative against tax evasion linked to foreign assets through the Overseas Voluntary Disclosure Programs and a threatening public relations campaign. While it justifiably targeted U.S. resident tax evaders, it simultaneously trapped Americans abroad who necessarily have foreign assets. The IRS’s one size fits all policy and bait and switch tactics led to abuses of Americans abroad which inspired sharp criticism from the National Taxpayer Advocate.
  • In 2010 FATCA was slipped into the HIRE bill with no debate in Congress and no cost/benefit
    analysis. FATCA aims to provide the door that closes the fiscal trap by requiring foreign financial institutions to report to the IRS on assets held overseas by U.S. persons. It effectively cuts off many Americans from foreign financial institutions which find it too onerous to maintain American clients. FATCA creates a barrier to free movement of capital and people.
  • In 2012 S.3457 proposed to grant the IRS the authority to have a U.S. passport cancelled or not issued if the IRS determined that the individual owed $50,000 or more U.S. tax.
  • In 2012 the Ex-patriot Act, S.3205, proposed to deny any “covered” expatriate re-entry into the United States, with retroactive effect for ten years prior to enactment of the law. The Reed
    Amendment of the 1996 Illegal Immigration Reform and Immigrant Responsibility Act already
    allows the United States to deny entry of former citizens into the United States.
  • In 2013, S.268 was introduced; it compounds difficulties created by FATCA.
  • In 2013 the Senate Finance Committee included in its tax reform recommendations a provision which would grant the IRS authority to cancel a U.S. passport for tax collection purposes.

This stream of legislation and proposals categorizes Americans abroad as suspected criminals seeking to escape U.S. taxes. Congress has outdone George III and has turned the United States into a fiscal prison, including legislation which is deemed anti-constitutional under the Fifth Amendment1 and is contrary to Articles of the Universal Declaration of Human Rights.2
The foundation of the U.S. fiscal prison is citizenship-based taxation. Americans working and living abroad carry a ball and chain of dual taxation throughout their entire lives up to and including death.

Americans abroad already pay taxes in the country where they reside and receive governmental services.

The additional U.S. tax obligation creates inevitable incompatibilities and discrimination and even requires Americans abroad to break foreign exchange control laws to pay U.S. taxes.

A revolution among long-term overseas residents is now underway. Five years ago, Americans abroad never talked about renunciation of citizenship. Today, it is a common topic in the press and among the community abroad. For more and more individuals, renunciation is the only solution to an intolerable situation created by the U.S. imposing its laws beyond its borders. The United States is literally destroying the community of Americans abroad, which plays an essential role in representing U.S. interests and goodwill overseas. The United States is shooting itself in the foot.

While the absolute number of renunciations, currently around 2,000 a year, is insignificant compared to the average annual U.S. citizenship naturalizations of 680,000, renunciations have multiplied seven times over the last four years. So far we have seen only the tip of the iceberg if CBT remains in force.

Today’s situation leads to serious hidden prejudice for the United States. U.S. exports are far below where they should to be because citizenship-based discourages U.S. companies from deploying U.S. citizens overseas to sell U.S. products; the law makes them too expensive. U.S. tax law and FATCA create insurmountable barriers for small and medium-sized companies to establish beachheads abroad to develop exports. The loss represents millions of U.S. jobs, hundreds of billions of dollars of exports, billions of dollars of U.S. tax revenue, and an unsustainable trade and budget deficit. Americans married to a foreign spouse, who represent about a third of the Americans resident abroad, now hesitate to register their children born abroad with the U.S. Embassy. The hot thing among young adults in their twenties is to renounce U.S. citizenship; they are aware of the impossible web of U.S. regulations that restrict job opportunities and personal freedom. Pushing away the young generation of Americans abroad is an immense loss to the United States. In prior generations, many highly educated multi-lingual American children returned to the United States, founded companies and created jobs in the U.S.

Adopting RBT will stop this revolution immediately. RBT law needs to be drafted in the spirit to allow free movement of individuals to leave and return to the United States, to reinforce the competitiveness of Americans and the United States overseas, to provide a simple, non-penalizing transition to RBT for the community of Americans already overseas, to ensure that Americans abroad are not subject to FATCA and FBAR, to adapt existing bilateral tax treaties and enter into new tax treaties so that withholding tax rates on U.S. source income are reasonable and to ensure that Americans abroad who have the majority of their assets in the United States (retirement funds, pension funds, real estate) are not disadvantaged under RBT with regard to either income or estate taxes.

I thank you for the opportunity to comment and hold high hopes that your bi-partisan efforts will lead to the constructive tax reform so necessary for Americans residing abroad.

Sincerely yours,
Jacqueline Bugnion”

 

What is Tax Residency? – Episode 2 with John Richardson & Olivier Wagner

 
“Tax residence American style” AKA : Imposing “worldwide taxation” on those with @taxresidency in other countries

The issue of tax residence has gained so much attention since the “crackdown” on non-resident US Persons began in 2009. It is commonly understood that you pay taxes to the country/state/city-town that you reside in. (For an interesting comparison of differences between countries please see this incredible list compiled by the OECD). It simply does not occur to anyone that they would be required to pay taxes to a foreign government.

However, the United States claims jurisdiction due to citizenship. One does not even have to have touched foot in the U.S., according to U.S. law. Of course, due to the viciousness of the U.S. “FBAR Fundraiser” many people began to resist whether of anger or fear.

Not much has changed* , in spite of all the factors that have contributed to this debacle (and debacle it is, what could one expect when a country tries to take what is someone else’s, based on an idea of fake residence?).

For a detailed discussion concerning the determination of tax residence and related factors, please see here.

In this interview, John Richardson speaks with Olivier Wagner about tax residency and how a seemingly simple concept has become so terribly important in the 21st century. At the 38 minute mark, we talk about how to describe U.S. “tax residence”.


INTERVIEW HERE

Comment on “Think You Can Leave U.S. – Think Again”

 


 

Recently an excellent article Think you can leave the US? Think again!
appeared on the Thom Hartmann site.

Written by an expat laurainparis , it is one of the best summaries/sources of information available. This post is based on a comment to the article.
 

by John Richardson

*******
 
Laura, this is one of the very best articles I have seen about the reality of this situation.

At the outset, I would like to explain that what most people call U.S. “citizenship-based taxation” (sounds kind of patriotic) is the U.S. policy of “imposing worldwide taxtion on the “tax residents” of other countries who do NOT live in the United States” (which is what it really is). In other words, let’s call it like it really is. It is NOT restricted to “so called Americans abroad”. The vast majority of people impacted by this are the citizen/residents of other countries.

You explain what it means when the United States claims the right to impose “worldwide taxation” on the residents of other countries. This of course means (as you know first hand) that a resident of France must pay U.S. tax on his/her French income. In addition (as you point out) the penalty regime imposed on assets that are local to the resident of France but “foreign” to the USA are draconian and completely idiotic.

I would also like to point out that although this discussion is frequently framed in terms of “taxation”, what this is really about is the United States exporting the Internal Revenue Code to other countries. This exports certain U.S. cultural values, reporting requirements and penalties on those who “commit personal finance outside the United States”. In other words, this is about much more than taxation.

There was an attempt to effect change, but it failed

The previous comment above by “PetLover” outlined and reinforced many of your points. PetLover also commented on the efforts made by various groups to effect legislative change. These efforts failed.

I would like to comment on why (I believe) these efforts failed and suggest what should be done on a “going forward” basis.

Why the efforts on the part of Americans abroad failed

On an organizational level the efforts were led by “Republicans Overseas” and “Americans Citizens Abroad – ACA”.

On an “individual level”, hundreds of individuals affected by this wrote to the House Ways and Means Committee in 2013 and the Senate Finance Committee in 2015. I mean 100s!! In fact the largest number (by far) of submissions on International Tax Reform came from Americans abroad. These submissions were acknowledged but basically ignored.

Tax “reform” (if you want to call it that) came to fruition on December 22, 2017. It included benefits for corporations, a few temporary benefits for U.S. resident individuals, no effort to improve the situation for Americans abroad and a possible worsening of the situation for Americans abroad who are self-employed.

There is a suggestion that the new “transition tax” applies to the small businesses owned by indivdual Americans abroad. If this is true, the U.S government would (if you believe the compliance community) confiscate approximately 20% of the retained earnings of small businesses owned by certain Americans abroad. If this is true (and I do NOT agree with the prevailing sentiment in the tax compliance community), it would mean that NOT only did Congress NOT assist Americans abroad but they made it even worse for them! In my view, the possible applicability of the “transition tax” is the final straw and those who can afford to renounce U.S. citizenship need to renounce “quick time”. But, back to the question, why did the efforts fail?

1. It’ s about the message – After all this time, most people do NOT make the distinction between FATCA and “citizenship-based taxation” (which is the U.S. tax policiy of taxing residents of other countries). Some were urging the repeal of FATCA. Some were urging a change in U.S tax policies. FATCA and tax policies are not the same thing. In fact, if the U.S were to change its policy of imposing taxation on the “tax residents” of other countries, FATCA would be far less of a problem. This is becaue those who resided in other countries would cease to be U.S. “tax residents”.

FATCA is a law that essentially “hunts” for people who are U.S. “tax residents”. It is U.S. tax law that imposes “worldwide taxation” on the tax residents of other countries. The former is an extreme irritation. It’s the latter that makes life untenable for “tax residents” of other countries.

The focus should have been on changing the U.S. tax policies and less on the repeal of FATCA. But, this requires that people NOT treat “FATCA” and U.S. tax laws as being the same.

So, the message needed to be: Stop imposing U.S. “worldwide taxation” on the “tax residents” of other countriese who do NOT live in the United States!

2. Partisanship – The inability of Americans abroad to behave in a non-partisan way. FATCA may be a partisan issue. But, the U.S. policy of imposing “worldwide taxation” on the “tax residents” of other countries is NOT partisan at all. It’s been around since the 1800s (as the article points out).

3. If you don’t ask for what you want, you won’t get what you want: Neither of the primary organizations (Republicans Overseas nor ACA) made the simple and understandable request that:

“The United States stop imposing “worldwide taxation” on the “tax residents” of other countries who do NOT live in the United States.”

How the organizations framed the issue:

Republicans Overseas: Did not focus on the issue of “tax residency”. It did NOT ask that the United States stop imposing taxation on the residents of other countries. Rather, it asked that the United States stop imposing taxation on certain kinds of income earned regardless of residence (asking for territorial taxation for individuals). Republicans Overseas asked that income earned outside the United States be exempt from U.S. taxation. The focus was NOT on “who” was subject to U.S. taxation, but rather on “what” income was subject to U.S. taxation.

American Citizens Abroad- ACA: Did not ask that the United States stop imposing taxation on the “tax residents” of other countries. Rather it asked that certain individuals, under certain circumstances should be exempted from “worldwide taxation” imposed on “nonresidents”. (Keep “citizenship-based taxation” with a carve out for certain people.)

Don’t get me wrong. I DO applaud the efforts of both organizations. It’s just that neither organization asked specifically for the only acceptable solution. What is that solution?

“The United States MUST stop imposing “worldwide taxation” on the “tax residents” of other countries” who do NOT live in the United States!”

Going forward …

I believe that the world (organizations, individuals, foreign governments, etc.) MUST unite behind this SIMPLE principle. No “carve outs”. No exceptions. No confusing the issues. No suggestions that change is complicated. This is the only solution that makes sense. Furthermore, by framing the issue in this way, the real issue is being discussed. It’s direct. It’s clear. It’s honest. It demonstrates how outrageous the situation is. It’s non-partisan. There is NOT a single individual, organization or foreign government that would disagree with this. Because the issue becomes non-partisan, the partisan fighting should stop. There will be no “divide and conquer”. The message will be clear.
 
Individuals must commit to the overall principle even if they are not individually impacted by all of the aspects of the Internal Revenue Code

For example:

– individuals who do NOT have mutual funds should not say: I don’t have mutual funds. This does not specifically affect me, therefore it is not a problem;

– individuals who have not had to pay capital gains taxes on the sale of their homes should not say: This does not specifically affect me, therefore this is not a problem.

– individuals who do not have small business corporations, should not say: This does not specifically affect me, therefore this is not a problem.
– those individuals who identify strongly as U.S. citizens living abroad, should recognize the impact that U.S. tax policies have on their country of residence. They should not say, this doesn’t affect me, therefore this is not a problem.

– those individuals who are not impacted by the S. 877A “Exit Tax” should not say: If I renounce citizenship, I will not have to pay an “Exit Tax”. They should not say, I don’t have to pay the “Exit Tax” and because it doesn’t affect me, it is not a problem.

Until individuals impacted by outrageous and unjust U.S. policies, unite and support the principle, regardless of how these policies affect them individually, there will be no united voice (only isolated pockets of discontent).

Finally, U.S. citizens living outside the United States are going to have to do some “soul searching” and ask themselves a simple question:

Are they “free” individuals that are entitled to a level of dignity and human rights that individuals in other first world democracies are entitled to? Or are they satisfied to be Americans – essentially the property of the United States government. In other words, are they satisfied to have the lower level of human rights and dignity that are allowed to Americans. Sorry, in the 21st century, the United States is NOT a leader in human rights. Other countries have long since passed the USA in that regard.

The author of this superb article asks:

Q. Why should U.S. residents care? The answer is simple.

A. Because all U.S. residents need to understand their future is to see how the U.S. Government treats its fellow citizens abroad. Their only crime is to have pursued a life (often attempting to sell U.S. products) outside the United States!

 

What is Tax Residency? – Episode 1 with John Richardson & Olivier Wagner

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The issue of tax residence has gained so much attention since the “crackdown” on non-resident US Persons began in 2009. It is commonly understood that you pay taxes to the country/state/city-town that you reside in. (For an interesting comparison of differences between countries please see this incredible list compiled by the OECD). It simply does not occur to anyone that they would be required to pay taxes to a foreign government.

However, the United States claims jurisdiction due to citizenship. One does not even have to have touched foot in the U.S., according to U.S. law. Of course, due to the viciousness of the U.S. “FBAR Fundraiser” many people began to resist whether of anger or fear.

Not much has changed* , in spite of all the factors that have contributed to this debacle (and debacle it is, what could one expect when a country tries to take what is someone else’s, based on an idea of fake residence?).

For a detailed discussion concerning the determination of tax residence and related factors, please see here.

In this interview, John Richardson speaks with Olivier Wagner about tax residency and how a seemingly simple concept has become so terribly important in the 21st century.

 

 

It’s Happening Again – Enough is Enough is Enough

 

NB: STAY TUNED – a 7-part video on the Transition Tax, with
John Richardson & Karen Alpert will be posted in the next couple of days.
 
 
NB: For anyone with time to spare/the interest/needing specifics to make the point regarding the “intention” of the law, here are some of the relevant House/Senate hearings and/or documents:

Oct 3, 2017 Full Committee Hearing -Senate Finance

Nov 6 – 9, 2017 H W & M Markup
Nov 13, 2017 Open Executive Session to Consider an Original Bill Entitled the Tax Cuts and Jobs Act Sessions also continued Nov 14, 15, 16 with videos at the page)
Supporting Document Markup – Senate Finance Committee

*******

Another day, another set of articles and comments where the #TransitionTax & #GILTI are being stuffed down the throats of expatriates who have their own small corporations. The proliferation of articles on this issue, all proclaiming the U.S. can now inflict a deeper cut into the retirement savings of non-residents, is infuriating. The first two articles at least expressed the idea that these provisions might affect non-resident U.S. taxpayers.

Max Reed , posted on November 3, 2017:

As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986.

Kevyn Nightengale, posted on November 10, 2017 (I have not included the updated comments because this is what we saw at that time):

This provision was not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.

When I saw the House version, I expected that individuals would be exempted after a sober second (or third) thought. Or at least individuals living abroad would be exempted. But seeing a parallel provision in the Senate version makes me expect the worst.

Seems fairly obvious that the biggest clue that the #TransitionTax IS NOT meant to apply to small CFC’s is that they are not “transitioned” from a worldwide system to a territorial one. This is so basic it is hard to believe nobody just calls these people out on this. How many tax professionals watched all of the House/Senate hearings? Many of us did, all hoping to hear that the move to territorial would include individuals; or at least some mention of us. There simply was nothing to suggest that this tax applied to anyone except large multi-national corporations.This provides the context in which the law was conceived. It should be considered just as thoroughly as the plain reading that professionals claim catches expats in the net. Just exactly who is really making the law here?

Now, on to the two prominent articles of the week. The Financial Post has U.S. tax reform to bring double taxation to some Canadians by Julius Melnitzer. Mr. Melnitzer is well-known for making huge distortions of reality. Canadians are familiar with the fact that he perpetuated “the biggest personal loan fraud in Canadian banking history.”

The biggest personal loan fraud in Canadian banking history was the work of a wealthy, respectable London, Ontario lawyer, Julius Melnitzer. When he left the board of Vanguard Trust, a small firm with which his law firm had been dealing, he just happened to take a copy of the corporate seal that Vanguard had used, among other purposes, to attest to the validity of certain forms which it issued in lieu of custom-designed share certificates. Melnitzer’s first trick was to create fake shares by simply typing in the share amounts and stamping the certificates with the company seal. He created five certificates representing a total of almost 900,000 shares. Then he used these “shares” as collateral for personal lines of credit. He also forged financial statements of a company that his father had founded, in which Melnitzer owned 20% of the shares, along with a pledge from the company that it would guarantee Melnitzer’s debts. Using the Vanguard shares and the phoney loan guarantees Melnitzer received a total of $5.6 million in lines of credit from five major Canadian banks. The scam went on for years. Each time a bank would start to press him for repayment, he would threaten to take his business elsewhere. He would also request a letter of recommendation from one bank, then use it to obtain funds from its competitors. A few years later, the banks pressed him to either pay up or come up with better collateral. Emboldened by the fact that no one had questioned the veracity of the forged documents, he decided to do the second.

Melnitzer went to a small local printing company that his law firm had done business with for years. He told them he was representing a client charged with using forged stock certificates to get loans at banks. He wanted to prove in court that printing technology had improved so much, even a small shop like theirs could do a credible job. When the company agreed, he ordered single shares of five blue-chip companies in the name of his daughter to avoid suspicion. He then altered them to put in his own name and bumped up the amounts until they had a face value of about $30 million. Not only did the great majority of the financial institutions he dealt with accept these in the place of the initial collateral, but some even significantly increased his line of credit. Alas, when an officer at National became suspicious about how Melnitzer’s personal wealth had risen so quickly, the officer asked bank experts to inspect the stock certificates. Melnitzer was arrested three days later.

Further:

Julius Melnitzer, a London, Ont., lawyer, was brilliant in the courtroom and had a stable of powerful clients, including some of the province’s biggest landlords. Thanks to a tip from an observant middle manager at a bank, the police discovered Melnitzer had printed up more than $100 million worth of stock certificates bearing blue-chip names like Exxon Corp. and used them to secure around $67 million in loans from several banks. He also bilked several friends out of more than $14 million by getting them to invest in a bogus property deal in Singapore. In 1992, Melnitzer pleaded guilty to 43 counts of fraud. He was sentenced to nine years in jail but was out on day parole after a couple of years and full parole in 1995. Melnitzer is now a well-known and respected Canadian legal affairs writer.

For Mr. Melnitzer’s point of view see here.

So why am I making such a big deal out of Mr. Melnitzer’s background? Irony. Hypocrisy. Disgraceful. Despicable. Along with government and the tax compliance community, the media is guilty of presenting only one side of the picture, consistently. We are labelled as “tax cheats” “scofflaws” and so on for not filing pieces of paper we knew nothing about. This man, who cheated banks out of $67 million, his friends out of $14 million, is promoting a questionable point of view that seriously affects the lives of millions of expats. Sorry, I cannot consider him a “well-known and respected Canadian legal affairs writer.”

The article quotes Roy Berg on the Transition Tax issues and Paul Seraganian on estate tax issues. An example of the Transition Tax issue:
 
A doctor who is a dual citizen practising in Canada,
with $2M of accumulated earnings in a private Canadian corporation,
would have a one-time U.S. tax liability of $300,000 this year
Roy Berg, director, U.S. tax law, Moodys Gartner
 

“A one-time tax liability of $300,000.” Incredible. Just a “fact.” Doesn’t matter at all how immoral this tax is in the first place. Doesn’t matter that this likely represents the doctor’s retirement savings. He/she likely worked very hard to earn that.This is a real-life person, not a hugely wealthy individual such as a corporate CEO who makes far more than $2 million a year in bonuses alone. It’s not small potatoes to confiscate that from a non-resident “U.S.” person. A Canadian citizen and resident. It is unbelievable that anyone, in any country would simply accept that U.S law applies outside it’s borders. It seems to me that “tax professionals” need to think carefully about what they are doing, who they are hurting and their role in what is truly an amoral regime at best and an immoral regime at worst. And people affected by this should think long and hard about parting with such amounts. I sincerely hope renunciations will be off the charts next year. One can at least be certain that “unofficial” renunciations, people “just walking with their feet” (as in non-compliance) will continue. There is a limit to the value of anything and U.S. citizenship is quickly becoming something non-residents simply cannot afford to keep.

An excellent comment by Karen Alpert on this article:

It is patently clear that Congress was not thinking about the impact of tax reform on non-resident US citizens. None of the discussion in the lead-up to tax reform, or in the committee hearings, indicated that Congress intended to punish the citizens and residents of other countries who happen to be claimed by the US as citizens. Nothing written by the IRS so far has indicated that they believe this applies to non-resident individuals – every example in the IRS notices has specifically looked at corporate shareholders. The only indication that this might apply to non-resident individual shareholders is from the tax compliance industry that stands to earn a large amount of fees on attempts to comply with this extra-territorial over-reach by the US.

If applied to non-resident individuals, the “transition” tax would be a pre-emptive grab at the tax base of Canada and every other country where US emigrants and Accidental Americans are living. The “deferred foreign income” that would be confiscated is money that was never subject to US tax, and is only claimed by the US because of a fictional “deemed repatriation”. Think about what that really means – the US is pretending that US emigrants are “repatriating” funds back to a country where they don’t live, and that they may no longer really identify with. The only good that could possibly come from this is the long overdue realisation that US taxation of the citizens and residents of other countries is contrary to the national interests of those countries and contrary to normal international practice.

The comments section is still open; please go over and make your views known.

**********

The other major article this week is at the Financial Times.

You can see the article on the

citizenshiptaxation facebook group

 
Financial Times
Americans abroad hit by Trump’s new repatriation tax rules
by Andrew Edgecliffe-Johnson in New York – FEBRUARY 4, 2018

John Richardson comments:

(A previous comment of John’s is here . )

@Mitchell @WBY @Brian Lillis @Monte

@Mitchell gives us an excellent description of the reality of this situation.

We are dealing with a situation where the “tax compliance community” says: “Resistance is futile” and the reality is “compliance is impossible”.

What will be people do? Those who have long term relationships with “tax compliance people” are probably in the worst situation. They will be under enormous pressure to transfer their pensions (in reality this is how these corps are often used) to the IRS. These people will be confused, frightened and “easy prey”for the amoral individuals who populate the industry. I saw one explanation of the “transition tax” from a highly regarded tax firm that noted that they must search their client base for “victims”.

Notably, this is also taking place against a backdrop where VERY FEW “tax professionals” even understand how this (so called) tax works and how to work with it (or against it).

It is laughable that the only way any individual could even know that this exists is because of the combined efforts of the media and the “tax compliance industry” (frankly the last group of people I would trust).

I would also like to stress that members of the tax compliance community do NOT know more about this than the individuals impacted. Sure, they may be able to calculate the tax better (assuming that it applies to Americans abroad at all.) But their insight into this is limited by the thought (if you want to call it a thought):

The law is the law – the intent of the law was irrelevant – the unintended consequences are irrelevant.

The unfortunate truth is this:

People are going to have to choose between following the advice from their tax professional that “the law is the law” and retaining their life savings.

It will be interesting to see what happens.

 
 

U.S. Tax Culture Sees Individual Using a Small Corporation as a “Presumptive Tax Cheat”

 
 

 
This post is an actual comment by John Richardson that appeared here (PAYWALLED)

You can see the article on the
citizenshiptaxation facebook group
 
Financial Times
Americans abroad hit by Trump’s new repatriation tax rules
by Andrew Edgecliffe-Johnson in New York – FEBRUARY 4, 2018

 
 

Interesting article that demonstrates the impact of the U.S. tax policy of (1) exporting the Internal Revenue Code to other countries and (2) using the Internal Revenue Code to impose direct taxation on the “tax residents” of those other countries.

Some thoughts on this:

1. Different countries have different “cultures” of financial planning and carrying on businesses. The U.S. tax culture is such that an individual carrying on a business through a corporation is considered to be a “presumptive tax cheat”. This is NOT so in other countries. For example, in Canada (and other countries), it is normal for people to use small business corporations to both carry on business and create private pension plans. So, the first point that must be understood is that (if this tax applies) it is in effect a “tax” (actually it’s confiscation) of private pension plans!!! That’s what it actually is. The suggestion in one of the comments that these corporations were created to somehow avoid “self-employment” tax (although possibly true in countries that don’t have totalization agreements) is generally incorrect. I suspect that the largest number of people affected by this are in Canada and the U.K. which are countries which do have “totalization agreements”.

2. None of the people interviewed, made the point (or at least it was not reported) that this “tax” as applied to individuals is actually higher than the “tax” as applied to corporations. In the case of individuals the tax would be about 17.5% and not the 15.5% for corporations. (And individuals do not get the benefit of a transition to “territorial taxation”.)

3. As Mr. Bruce notes people will not easily be able to pay this. There is no realization event whatsoever. It’s just: (“Hey, we see there is some money there, let’s take it). Because there is no realization event, this should be viewed as an “asset confiscation” and not as a “tax”.

4. Understand that this is a pool of capital that was NEVER subject to U.S. taxation on the past. Therefore, if this is a tax at all, it should be viewed as a “retroactive tax”.

5. Under general principles of law, common sense and morality (does any of this matter?) the retained earnings of non-U.S. corporations are first subject to taxation by the country of incorporation. The U.S. “transition tax” is the creation of a “fictitious taxable event” which results in a preemptive “tax strike” against the tax base of other countries. If this is allowed under tax treaties, it’s only because when the treaties were signed, nobody could have imagined anything this outrageous.

6. It is obvious that this was NEVER INTENDED TO APPLY TO Americans abroad. Furthermore, no individual would even imagine that this could apply to them without “Education provided by the tax compliance industry”. Those in the industry should figure out how to argue that this was never intended to apply to Americans abroad, that there is no suggestion from the IRS that this applies to Americans abroad, that there is no legislative history suggesting that this applies to Americans abroad, and that this should not be applied to Americans abroad.

7. Finally, the title of this article refers to “Americans abroad”. This is a gross misstatement of the reality. The problem is that these (so called) “Americans abroad” are primarily the citizens and “tax residents” of other countries – that just happen to have been born in the United States. They have no connection to the USA. Are these citizen/residents of other countries (many who don’t even identify as Americans) expected to simply “turn over” their retirement plans to the IRS???? Come on!

The Attributes of Immoral Laws or How the Internal Revenue Code Applies to Non-Resident Taxpayers

 

cross-posted from Tax Connections

After the latest IRS Medic podcast, Tax Connections published a post by Anthony Parent.

Perhaps the most unifying statement of the post is:

A part of our interview that really stands out to me is when Attorney Richardson referred to the current system of global taxation and compliance as immoral.

John Richardson answers :

As a person who lives “offshore”, and attempts to assist individuals who are “tax residents” of other countries (Canada and others), I am a keen observer of the damage (perhaps “carnage”) that the Internal Revenue Code inflicts on people who do not live in the United States.

As a law student I had little interest in the philosophy of law. As a person who sees how the extra-territorial application of laws impacts the lives of ordinary people, I recently had the following memory.

Many years ago I was introduced to Professor Lon Fuller’s (of Harvard law school fame) book titled “The Morality of Law”. In Chapter 2 he describes “The Morality That Makes Law Possible”. It is a fascinating and relevant read. He identifies the following (among others) as characteristics of immoral laws:

– retroactive laws
– laws that lack clarity
– contradictory laws
– laws requiring the impossible
– laws that are not constant through time – laws where the law is applied in a manner that is inconsistent with it’s intent (FBAR anyone?)

Professor Fuller was writing in the early 1970s. Looks to me as though the application of the Internal Revenue Code to “tax residents” of other countries, was specifically designed to include all of these immoral attributes.

Funny how rereading Professor Fuller’s book many years (at least one generation) later reminded me of the great American writer Mark Twain:

“When I was 14 my father was so ignorant I couldn’t stand to with him. By the time I turned 21, I was amazed at how much my father had learned in 7 years.”
 

Imposing Tax & Reporting Obligations on the Citizens & Residents of Other Countries is Immoral

https://www.taxconnections.com/taxblog/latest-podcast-guest-tax-attorney-john-richardson/#comment-15477

 

cross-posted from Tax Connections

After the latest IRS Medic podcast, Tax Connections published a post by Anthony Parent.

Perhaps the most unifying statement of the post is:

A part of our interview that really stands out to me is when Attorney Richardson referred to the current system of global taxation and compliance as immoral.

John Richardson answers :

With the respect to the following excerpt as evidence of the “immorality”:

“Imposes compliance obligations on tax residents of other countries.”

Notice that that says “compliance” obligations. This includes but is certainly not limited to “tax obligations”.

The Internal Revenue Code is written so that EVERY INDIVIDUAL in the world EXCEPT “NONRESIDENT ALIENS” is required to comply with the Internal Revenue Code in its entirety. This requirement is without regard to where you live in the world. So, in determining how the Internal Revenue Code applies to an individual, one would simply ask whether the person is a “nonresident alien”. If not, the the Internal Revenue Code applies in its full force. This means that the full force of the Internal Revenue Code applies to individuals who are citizens and residents of other countries who just happen to have been born in the United States. (U.S. citizenship is automatically conferred on those who were “Born In The USA”).

Think of it. The U.S. has actually exported the Internal Revenue Code around the world. The Internal Revenue Code is used to impose direct taxation on people who are BOTH citizens and “tax residents” of other countries! Note that is the Internal Revenue Code (in its full force) that applies.

Whether you are a seasoned tax professional or doing your first tax return, you know full well that that compliance with the Internal revenue code requires much more than the payment of U.S. tax. It requires compliance with a range of penalty laden and intrusive reporting obligations. It also punishes those who “commit personal finance abroad” and/or attempt financial and retirement planning outside the United States.

As mentioned in the video, all tax systems are expressions of the cultural values of the country. So, the application of the Internal Revenue Code to other countries, means that the U.S. (via its tax system) is actually exporting and attempting to impose U.S. cultural values (or lack thereof) on the citizens and residents of other countries. The video used the example of imposing the Internal Revenue Code on residents of Muslim countries. This is a big problem that can lead only to trouble. (See for example a recent article written by Virginia La Torre Jeker that suggests conflicts between the Internal Revenue Code and Sharia law.)

The United States and Eritrea are the only two countries in the world that attempt to impose “worldwide taxation” on the residents of other countries. Interestingly, Eritrea imposes only an excise tax. It does not export its reporting requirements and create “fake income”. It is a far more gentle system than that imposed by the United States.

Frankly, to compare the Eritrea to the United States (in this regard), is an insult to Eritrea.

The Current System of Global Taxation and Compliance is Immoral

 

cross-posted from Tax Connections

UPDATE February 2,2018
For more on how an expat can have higher U.S. taxes than a comparably situated Homeland American, please see here.
 
After the latest IRS Medic podcast, Tax Connections published a post by Anthony Parent.

Perhaps the most unifying statement of the post is:

A part of our interview that really stands out to me is when Attorney Richardson referred to the current system of global taxation and compliance as immoral.

John Richardson answers:

 
With the respect to the following excerpt as evidence of the “immorality”:

“Taxes due are usually nothing because of the foreign income exclusion and foreign tax credits or incredibly high because of that the type of income is one that was disfavored by Congress.”

Two general thoughts:

1. It is true that many Americans abroad do not have to send a check to the IRS to pay U.S. taxes. This does NOT necessarily mean that U.S. tax is not owing. Remember that FTCs are a mechanism to pay taxes that ARE ACTUALLY OWED. One pays a tax that would otherwise be owed by using the FTC. What is astonishing about the situation of Americans abroad is that:

Absent the tax mitigation provisions afforded by the FTC rules and the FEIE (“Foreign Earned Income Exclusion”), their U.S. tax bill might be higher than the tax bill of a comparably situated Homeland American!! In other words, the rules of the Internal Revenue Code operate so that Americans abroad (because they have a non-U.S. financial footprint) will have higher U.S. taxes than a comparably situated Homeland American.

A good example of this would be the sale of a principal residence. The fact that their mortgage is in foreign currency frequently means that Americans abroad would pay a tax on the sale of the principal residence even if there is no capital gain on the property.

2. Americans abroad are subject to all kinds of things that I would call “fake income”. Again this is due to the fact that they live outside the United States. I define “fake income” as income that is specifically created where there really isn’t any. Examples would include:

– phantom gains on foreign currency transactions (see the example of the discharge of the mortgage above)

– Subpart F income because they carry on business through small business corporations that are in their country of residence (but foreign to the USA)

– PFIC “taxation” (interpreted to apply to non-U.S. mutual funds)

– the consequences of using the “married filing separately” category (because they are frequently married to non-U.S. citizens)

– more expensive divorce (because of the rules governing marriage to a non-U.S. citizen)

– and probably more

The bottom line is this:

U.S. citizens who attempt to live outside the USA will be punished for it by the Internal Revenue Code.