One of the most perverse and unfair results of the citizenship-based taxation system is its punitive effect on anyone who has incorporated outside the U.S. Over the last two years, the news is full of the difficulties multi-nationals have; they may avoid tax until the repatriation of funds to the U.S. Yet a corporate tax rate of over 35% has led to many moving the centre of their operations to the country of residence, a sort of “expatriation” known as a coporate inversion. This has infuriated factions in the U.S. government; Hillary Clinton has hinted at the implementation of an “Exit Tax” on such companies. Instead of analyzing the problem properly and working out a compromise that is in the best interests of all, the U.S. government, in its usual way, sees it only as something to be “punished.”
The effects on small corporations, in Canada known as a “Canadian Private Controlled Corporation, are equally insisidous. All income must be claimed as at the highest marginal rate, rather than allowing for the tax-deferral aspect allowed by the Canadian government. In addition, an incredibly complex information reporting form, 5471 must be filed. This return is a tax return in itself. Failure to file a 5471 is automatic $10k penalty.
Imagine you are an Accidental American in Canada or any 1st-world country. You are incorporated because you are a professional. Suddenly, your entire financial well-being is at risk. You have a higher income and will be less likely to be able to exclude it all via the FEIE/FTC. Plus the penalties.
This is another example of how U.S. tax policy has such horrendous effects on “US Persons” outside the country. For wealthier homelanders, the amount of their foreign income proportionally, is far less than that of someone living outside the country, where virtually ALL of the income is “foreign.” Discovery of one’s “U.S.-ness” for people in these situations represents a truly-life altering possibility of total financial ruin.
Here are some examples taken from ADCS’s submission to the Senate Finance Committee in 2014.
As an American living/working in Hong Kong, I’m witnessing all this firsthand. I’m not sure the US government nor its politicians have any idea how inconvenient they’re making it for US citizens who live and work abroad, especially those who are opening foreign offices or starting businesses overseas. This has a stifling effect on entrepreneurship and small business growth as the barriers to starting a business grow and solidify, and individuals decide it’s just easier to work for a large corporation. Perhaps this is all a plot by big business to hold on to talent and prevent competition? Perhaps not, but it has that effect. And we all suffer for it as innovative products and services are never created, which otherwise would have been.
Robert, it is extremely complicated and very costly for a US citizen to set up a business in a foreign country. It matters not whether the business is incorporated abroad or not ‘US persons’ abroad must set up three accounting systems: One in local currency in compliance with local legal and tax requirements, one in equivalent US dollars under US generally accepted accounting practices to comply with reporting requirements under Internal Revenue Code Sec. 6038, (even if there is no business need to maintain books under US GAAP and for which a $10,000 IRS penalty can be applied for failure to follow the rules) and one in US dollars under US tax principals for all other purposes. The rules for converting foreign currency values to US dollars are extraordinarily complex which, for a small business most likely requires competent (and costly) outside professional assistance. Any business owned 10% or more by a US person is required to comply with these rules, which also makes it extremely difficult to form joint ventures with nationals in other countries.
Compare this with the rules for foreign persons opening and operating a business in the US. Only one accounting system, in accordance with US GAAP is required.
This is, in a nutshell, why small US businesses and entrepreneurs find the US tax laws far too onerous to even contemplate setting up sales and marketing operations abroad whereas, because of the residence-based personal and territorial tax laws of all other countries their smaller entrepreneurs and businesses often capture foreign markets, not only in the US but everywhere else. Two thirds of US jobs are created by small businesses jobs. US entrepreneurs who venture abroad do so with a fiscal millstone tied around their necks.
This is the primary reason why the US has a $700 billion/year world trade deficit whereas most of our high-wage international competitor countries are racking up huge foreign trade surpluses. For 2013, for example, the trade surpluses of Germany, Switzerland. Korea and the Netherlands were $263 billion, $26 billion, $44
billion and $$58 billion respectively. According to the Commerce Department’s rule of thumb, each $1 billion
in US exports equates to some 10,000 American jobs. The US trade deficit equates to some 7 million
destroyed American jobs producing for export and, at 18.5% of GDP, some $150 billion in tax revenue these lost jobs fail to generate. The unique US citizenship-based taxation is clearly a lose-lose proposition for the US economy.
VIA EMAIL TO NOBLEDREAMER TUE, FEB 10, 2015 AT 5:39 PM
United States Senate Finance Committee
To Whom It May Concern:
Thank you for the opportunity to comment to the Committee. Under normal circumstances I would introduce myself however, given present circumstances, I cannot as my status as a US Person, is being reviewed by the State Department at my request to validate my relinquishing acts in the early 1970’s. I am a Canadian citizen,
registered as a Canadian born abroad at birth, in the United States while my Canadian parents completed their post graduate education in the United States.
If you are unaware, with the exception of the United States, it is not a good thing to be considered a US Person ( a newly coined status) for tax purposes, if you live outside the U.S. It is not a good thing to have any U.S. indicia at all.
Who am I? I’m a small business man that has owned and operated a small service company, successfully for 35 years. I attended elementary, middle school, high school and university in Canada.
I have never lived in the United States, have never voted in the United States and derive no US source income. I have never voted in a U.S. election, filed US tax returns, FBARS etc. I have never been made aware of this responsibility nor to my knowledge was there any attempt by the United States to make her Diaspora aware of this. I live in a large, progressive urban area with easy access to communicate.
I’ve raised my family in Canada, coached high school football, rugby and hockey teams. I’ve raised funds for various
community events, canvassed for Canadian Federal and Provincial politicians. In short, I think, contributed to Canadian society.
FATCA assumes I’m a tax cheat, a criminal under U.S. law. FATCA assumes my Canadian spouse and children, by
virtue of our (former) joint accounts are reportable to the IRS under FATCA with no rights to financial privacy for any of us.
FATCA has harmed us and it’s harming you too. I used to take some small pride in my birthplace, Canada’s
greatest friend, ally and trading partner. A country that has paid a great price to win independence and support equality and fairness for all. A country always willing to answer the call for help in a dangerous world. Now a country that must use coercion on the world to force its will to override indigenous constitutions and privacy laws by way of Inter Government Agreements, to deputize bankers to find people with the most tenuous and arbitrary ties to the U.S. Canada’s proudly inclusive society has been irresponsibly
damaged by FATCA. We now discriminate against certain Canadian citizens by place of birth. Canadian citizens, resident in Canada, paying taxes in Canada, have no rights to privacy in their most private affairs because of a foreign law.
I no longer have a relationship with my bank of 35 years, as my accounts have been withdrawn.
I no longer have joint accounts with my wife of 28 years. This is problematic and has created stresses in our relationship. I cannot maintain any significant bank accounts in my name or place of birth. I am now such a person, because I was born in the United States of America. A newly minted second class Canadian because of FATCA and citizen ship based taxation.
Please consider carefully the very real harm this ill conceived law is doing to average citizens around the
world. Our financial matters are not “Foreign “or “Offshore” to us that live, work and raise families outside
the United States. It is time for the U.S. Congress to put this right and repeal FATCA, enough harm has been done.
If you distill it, a law that forces people to give up their citizenship and rights under great duress, cannot be fair by any measure.
Thank you for the opportunity to comment. Name withheld – apologetically.
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