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!

 

 

 


 
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.

Listen here

 

 

 

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.”
 

Latest Podcast Guest: Tax Attorney John Richardson

 

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.

cross-posted from Brock.

Rettig

Politico announced Trump’s nomination Of Charles P. Rettig, including the following excerpts:

Rettig, who specializes in settling complex tax disputes between his taxpayer clients and authorities like the IRS, known as tax controversies, has for more than three decades represented clients before the IRS, the Justice Department, state tax authorities and other jurisdictions.

Rettig is no stranger to the Washington tax policy community. Many IRS officials would be familiar with him because of tax litigation in which he’s been involved.

Rettig’s nomination would break a nearly two-decade practice of naming commissioners from the general business world, a trend that began after the IRS Restructuring and Reform Act of 1998. Prior to that, commissioners generally had tax backgrounds.

 
Continuing with the conversation from Media & Blogs thread, I see many mentions of the fact that his firm represented some 100 UBS clients (which may be why some of his articles concern the OVDP). I am trying to locate some actual court cases but the site that keeps coming up in references seems to be down. He also clearly, is respected for his work representing clients by his peers:

TaxControversy360

Rettig would also oversee the implementation of tax reform. Rettig has been a friend and mentor to many of us in the tax controversy bar over the years, and we are encouraged by the selection of someone from the private bar to the post.

Given he is a tax litigator, I don’t expect he would support a change to RBT (hope I am wrong about that) but some of his comments certainly suggest he understands what has happened and that our situation is very different from that of U.S. residents with foreign accounts.

Forbes IRS FBAR Streamlined Procedures Revisited, Am I Non-Willful

If, as some believe, the Streamlined Procedures are being used to entice unsuspecting taxpayers into placing their head onto the FBAR chopping block, the government should be held accountable. However, if, as most believe and our experience seems to support, the Streamlined Procedures were designed to provide not quite willful taxpayers an opportunity back into compliance through a simplified and expedited process, the IRS should respect the vast majority of Streamlined submissions (and requests for transitional treatment) and move on.

Forbes IRS FBAR Voluntary Disclosure Program Taxpayer Interviews

It should be anticipated that the IRS will pursue examinations of the amended returns of taxpayers residing in the United States in some manner. It remains uncertain whether the IRS would or could effectively pursue those residing outside the United States in any realistic manner. It should also be acknowledged that there remain viable alternatives to the OVDP, including the voluntary disclosure practice of the IRS set forth in Internal Revenue Manual (IRM) 9.5.11.9 [see Example 6(A)], Section 4.01 of the Criminal Tax Manual for the U.S. Department of Justice, and Section 3, Policy Directives and Memoranda, Tax Division of the U.S. Department of Justice.

Certainly, given the complexities of the Internal Revenue Code, other relevant statutes and life in general, many of the indiscretions associated with an income tax return or FBAR are anything but willful or intentional and definitely not fraudulent or criminal in nature. In these situations, an interview of the taxpayer and/or their return preparer can lead to an extremely quick and reasonable resolution.

Forbes articles

Many, many articles penned by Mr. Reddig are available via SSRN and listed here.

Bubblebustin asked for this post to be based upon this paper. Unfortunately the most we can offer is the link and a few excerpts. Strongly suggest everyone read this particular article- Why the Ongoing Problem with FBAR Compliance? from the Journal of Tax Practice & Procedure, August-September 2016, published by CCH, a part of Wolters Kluwer.

A major point in the article is when government is trusted, is seen as legitimate, compliance tends to be a result. It probably does not help that the IRS emphasizes submissions coming from OVDP and Streamlined will be examined “in an effort to uncover leads for criminal prosecutions.” Mr. Rettig is also aware that eighty percent of non-resident filers will have no U.S. Tax Liability. Though again, that is a reference to income tax and does not cover some of our worst grievances.

Potential government actions should consider the
impact
on those six-plus million U.S. people (and their
advisors) sitting in the bleachers domestically or in various
foreign countries trying to determine how best to pursue
some form of voluntary compliance, expatriation or to
possibly just continue sitting in the bleachers … “History
repeats itself because no one was listening the first time.

 

 

cross-posted from citizenshipsolutions

by John Richardson

Update January 2018: This post has been updated with some new links and discussion

Part I is here.

Part II is here.

*****

PART III

Legal Status of Citizen vs. The Engagement Required By Citizenship

Is the “legal status” of being a citizen sufficient? Is there a difference between the “legal status” of being a citizen and the “voluntary engagement” that is required by “true citizenship”? The “legal status” of being a citizen may NOT be voluntary. But, the voluntary engagement required by “citizenship” is voluntary.

The legal status of “citizen” vs. the voluntary engagement of “citizenship”

There is a difference between the “legal status” of being a citizen and the voluntary engagement with the community that is required for meaningful “citizenship”. To put it another way: Citizenship involves more than the “legal status” of being a citizen. As President Obama said in his 2013 State Of The Union Address:
 

“We are citizens. It’s a word that doesn’t just describe our nationality or legal status. It describes the way we’re made. It describes what we believe. It captures the enduring idea that this country only works when we accept certain obligations to one another and to future generations; that our rights are wrapped up in the rights of others; and that well into our third century as a nation, it remains the task of us all, as citizens of these United States, to be the authors of the next great chapter in our American story”

It is clearly true that many people born in the U.S. and NOT living in the U.S., have the “legal status” of being a citizen, but have not accepted the voluntary engagement that is required for meaningful “citizenship”. The story of London Mayor Boris Johnson (who was born in the U.S.) is a case in point.

Does the “legal status” of being a citizen justify imposing taxes on a person who does NOT live in the country?

The U.S. currently takes the position that the “legal status” of being a citizen is sufficient to impose taxes on a person who does not live in the U.S. Some of those with the legal status of U.S. citizen were born in the U.S. (making them 14th amendment citizens) and some were born outside the U.S. (making them citizens by an Act of Congress). There are many categories of people born in the U.S.

Five Possible Categories of Those Deemed to be U.S. Citizens Abroad and Their U.S. Connection

Those Born In The U.S. – 14th Amendment Citizenship – Who at a young age are taken by their parents to live outside the United States

The vast majority of U.S. citizens acquired U.S. citizenship because they were born in the U.S. The U.S. is aggressively taking the position that the following types of people, born in the U.S., but residents in other countries, with no economic connection to the U.S. are required to pay taxes to the U.S.:

A. Border babies: Those who were born in the U.S. and returned to Canada within months. (If their parents were Canadian citizens those border babies (who were dual citizens from birth) can renounce their U.S. citizenship without paying an Exit Tax. If their parents were U.S. citizens (meaning the children were not a dual citizens from birth) they are NOT permitted to relinquish U.S. citizenship without being subject to the Exit Tax.)

B. Children born in the U.S. who permanently left the U.S. with their parents as children (before reaching the age of majority) and who never returned to the U.S. They have never worked in the U.S. and have no connection to the U.S.

Members of Group A or Group B do not have and have never had a “voluntary connection” to the U.S. that could convert their “legal status” of citizens to the “voluntary acceptance” of the obligations of “citizenship”. Their birth in the U.S. and their moving from the U.S. were the results of decisions made by their parents. It’s hard to see how the “legal status” of being a U.S. citizen, is sufficient to require the payment of taxes to the U.S. Surely a demonstration of a “voluntary connection” to the U.S. should be required before an obligation to pay taxes is triggered.

Those born outside the U.S. – They choose neither their parents nor where they are born

C. In certain cases, the children of U.S. citizens who are born outside the U.S. are considered to be U.S. citizens. Examples include (but are not limited to), those born in Switzerland to U.S. parents. U.S. laws for the transmission of citizenship from U.S. citizen parents to children born abroad, have a long and complicated history. In fact – “American Citizens Abroad” – was founded to facilitate the acquisition of U.S. citizenship for children born abroad to U.S. citizen parents.

It is clear that that those born outside the U.S. have no connection whatsoever to the U.S. At most they have a connection to a U.S. citizen (that may or may not have a connection to the U.S.)

Those who choose to leave the United States as Young Adults Adults

D. U.S. citizens who were “Born In The USA” but who moved to other nations as young adults (not forced to move with their families), have developed their careers outside the U.S., married, had children and raised their families outside the U.S., done their financial and retirement planning outside the U.S., never had an economic connection to the U.S., and whose lives are have become citizens of their countries of residence.

Many in this group may have left the U.S. under unclear circumstances. Some may have left the U.S. with the intention of returning, some with no thoughts on whether they would return, and some with the clear intention of never returning. Regardless of their intention when leaving the U.S., many gradually become citizens (in a legal and voluntary sense) of their new countries and gradually lost any connection to the U.S. that they may have had.

Members of this group (especially in Canada and Western Europe) fully consider themselves to be primarily citizens of their new countries and no longer U.S. citizens. Example: “You know you are Canadian when you start rooting for Canada over the U.S. in hockey.”

Adults who moved from the USA with the intention of returning to the United States

E. U.S. citizens who move outside the U.S. for short periods of time with the full expectation and understanding that they are returning to the U.S. They live outside the U.S. as Americans and typically neither become citizens of their country of residence, nor disconnect from the U.S. In other words, they are truly “U.S. citizens abroad”. Their situation is very different from those described in Categories A, B, C and D. They have more than the “legal status” of being U.S. citizens. They have a voluntary connection to the U.S.

Citizenship-based taxation and a voluntary connection to the U.S.

It is clear that many of those with the “legal status” of U.S. citizen (Categories A, B, C, and D) do NOT have the “voluntary” (or any other) connection to the U.S. that could reasonably justify U.S. taxation.

The fact that those in Category (E) have a voluntary connection to the U.S. does NOT mean that good tax policy would subject them to U.S. taxation. It does mean that (if citizenship requires a connection to the United States that this is the group which might be subject to “citizenship-based taxation”).

Therefore a “Voluntary connection” to the U.S. is a necessary but NOT a sufficient condition for the taxation of Americans abroad

Is “citizenship-based taxation” justified even with respect to Americans abroad who DO have a voluntary connection (Category E) to the U.S.? It’s hard to understand the justification. No other country imposes taxes on its citizens abroad. Americans abroad already pay taxes in their country of residence. No scholar has ever explained exactly what it is about a “voluntary” connection to the U.S. that justifies taxation. Life is full of “voluntary connections” that do NOT require the payment of taxes. What is it about a “voluntary connection” (by way of citizenship) to the U.S. that means Americans abroad should be taxed at all, or (worse yet) taxed according to the same rules as U.S. residents?

 

cross-posted from citizenshipsolutions

by John Richardson

Update January 2018: This post has been updated with some new links and discussion.

Part I is here.

*****

We are witnessing what McGill law professor Allison Christians once referred to as the “Story of The Century“. To borrow from Professor Christian’s post:

The US is right now imposing enormous penalties and unleashing general chaos on people living in other countries with US citizenship, both by newly enforcing long-ignored rules and by layering on top of these rules a new and more draconian layer of enforcement. The chaos comes in the form of fear-inducing, devilishly complicated and duplicative paperwork, and penalties, most of all penalties, and it is being piled on to millions of people around the world, many of whom, like Cruz, are very possibly only beginning to understanding that citizenship status is mostly conferred upon rather than chosen by individuals.

Ted Cruz should consider himself very lucky. The Canadian citizenship he claims he didn’t realize he had, doesn’t carry any punishment IN CANADA for his failure to recognize it. Moreover renouncing Canadian citizenship, if he really intends to follow through on that promise, will be relatively simple, cheap, and painless other than any damage (if any) to his US political career. (Interestingly Australian Green Party Senator Larissa Waters was forced to resign because she was born in Canada and still (although she was unaware of it) held Canadian citizenship.

Not so if Mr. Cruz he had lived his life in Canada with his current apparent dual status. US citizens abroad now understand that discovering ties to the US means discovering a world of obligations and consequences flowing from citizenship that one was expected to know and obey. Ignorance of the law being no excuse, the punishments range from the merely ridiculous–many times any tax that would have ever been due–to the infuriating: life savings wiped out and many future tax savings sponsored by your home government, such as in education or health savings plans, treated as offshore trusts and therefore confiscated by the US. Moreover there is no ready escape hatch for the newly discovered and unwanted US citizenship: five years of full tax reporting compliance must be documented, appointments must be made with officials, fees must be remitted, interviews must be conducted, and in some cases exit taxes must be paid. If some in Congress get their way, renunciation could even mean life-time banishment from the US someday soon.

In the grand scheme of things Ted Cruz’s citizenship is a non-story. But for what it illustrates about citizenship-based taxation, it could be the story of the century.

The Debate – Taxation Based On The “immutable Characteristic of Place of Birth”

In May of 2014 I presented a paper at the “Reinventing Citizenship” Conference hosted by Alternative-Academia and run in Toronto, Canada. The Conference was approximately two weeks after the Toronto Conference on Citizenship-based taxation organized by American Citizens abroad.

The paper I presented at the Alternative Academia conference was influenced by the Michael Kirsch Bernard Schneider debate held in Toronto on May 2, 2014. The May 2 conference was a great success. Among other things, it spawned the New York Times op-ed by David Kuenzi discussing the absurdity of the FATCA rules as applied to Americans abroad.

As might be expected my paper focused on Citizenship-based taxation in general and the question of what kind of “connection” (voluntary or otherwise) to the United States must be established to justify the taxation of a U.S. citizen residing outside the United States.

The complete paper may be read here:

Taxation of Americans Abroad in the 21st Century

Toronto – Conference on U.S. Citizenship-based taxation – May 2, 2014

“Citizenship does reflect a voluntary identification with society – Professor Michael Kirsch”

On May 2, 2014, the first ever conference on U.S. citizenship-based taxation took place on the campus of the University of Toronto. The conference – sponsored by ACA Global Foundation – featured a debate between Dr. Bernard Schneider (who opposes citizenship-based taxation) and Professor Michael Kirsch (who supports citizenship-based taxation). Both Dr. Schneider and Professor Kirsch have authored leading papers on this topic. There was general agreement that a discussion of U.S. citizenship-based taxation necessitated a discussion of (at least) the following two issues:

1. Whether it is appropriate to use citizenship as a criterion for the imposition of taxes under any circumstances (can the U.S. levy taxes on its non-resident citizens on income that is not earned in the U.S.?); and

2. If the U.S. can levy taxes on its citizens who do NOT live in the U.S., are there limits to how far this taxing power can extend? At what point does something cease to be a tax and become a form of “life control”? (In addition, at the present time, the U.S. taxation of its citizens abroad amounts to a tax on the country where the U.S. citizen resides. The days of the world accepting that the U.S.has the right to tax its citizens in any way that it chooses are numbered.)

I was the moderator of this fascinating debate. Significantly, both scholars seemed to agree that (with respect to the second question) the practical application of U.S. citizenship-based taxation was excessive and unworkable. In other words, if U.S. citizenship-based taxation can be justified at all, the current U.S. rules of U.S. citizenship-based taxation are too onerous and excessive in their reach. (Those who doubt or don’t understand the practical reality of U.S. citizenship-based taxation are advised to reread the opening paragraphs in the Introduction to this paper.) Commentary on the conference from third parties may be found here and here.

This conclusion is not surprising, given that U.S. citizenship-based taxation in practice results in disadvantages which include:

– U.S. citizens abroad being subjected to significant double taxation (Social Security taxes in some countries and the Obamacare Surtax)
– U.S. citizens abroad being subjected to taxation on things that are exempt from tax in their country of residence (example the principal residence)
– U.S. citizens abroad being disabled from effective retirement planning if they live outside the United States (the prohibition on foreign mutual funds, life insurance policies, etc.)
– U.S. tax rules being used as a mechanism to control the activities of its citizens abroad (for example U.S. citizens who marry non-U.S. citizens are subjected to problematic tax consequences)
– U.S. citizens abroad being subject to “reporting requirements” (including but not limited to the FBAR) that impose limitations on their professional mobility (the requirement to report on non-U.S. business partners)
– U.S. citizens who relinquish their citizenship are potentially subject to “Exit Taxes” on assets acquired with money earned in their country of residence
– The effect of taxing U.S. citizens abroad, is that capital is siphoned from their country of residence to the U.S. To put it another way: to tax the U.S. citizen abroad, is to tax the country in which he lives.

Where the scholars disagreed, was on the first question:

Is it appropriate to use citizenship as a criterion for levying taxes at all?

When considering the appropriateness of using “citizenship” as a criterion for levying taxes one must ask the question:

What is it about citizenship that makes it an appropriate criterion to impose taxes?

 

cross-posted from citizenshipsolutions by John Richardson

Update January 2018: This post has been updated with some new links and discussion.

Prologue – The “Story Of The Century

Since July 1, 2014, the United States via threats threats of the FATCA Sanction, has begun a “world wide hunt” for people born in the United States
(or are otherwise deemed to be “U.S. tax subjects”). A compilation of my posts describing the mechanics, effects and costs of FATCA and the FATCA IGAs is available in “The Little Red FATCA Book“. FATCA has spawned litigation against both the U.S. and Canadian Governments. A discussion of the “Alliance For The Defense Of Canadian Sovereignty” FATCA lawsuit against the Government of Canada is available here. Some thoughts on the “U.S. FATCA Legal Action” lawsuit against the U.S. Government are here. Both lawsuits have been vigorously defended by the respective Governments. The U.S. lawsuit may have reached the end of its viability (lack of standing and various procedural issues). The Canadian lawsuit continues.

With respect to those “Born In The USA”, the U.S. legal “claim of tax jurisdiction” is two-fold:

1. Those born in the United States (unless they have relinquished U.S. citizenship” for both tax and nationality purposes) are U.S. citizens.

2. Citizens of the United States are subject to the provisions of the Internal Revenue Code regardless of where they live in the world. The Internal Revenue Code (“IRC”) includes but is not limited to the obligation to pay taxes according to U.S. tax rules. The “IRC” also includes a wide range of “penalty laden reporting requirements“. The “IRC” also strongly discourages (through penalties and sanctions) participation in non-U.S. pension plans, non-U.S. investments (including non-U.S. mutual funds), the use of “non-U.S. business corporations” and (incredibly) non-U.S. spouses. (Even the divorce of a U.S. citizen and non-citizen is likely to be significantly more expensive.) As a result, the “extra-territorial application of the “IRC”) has the effect of exercising U.S. “control” over the lives of it’s citizens who do NOT live in the United States. Therefore, it is clear that the “extra-territorial” application of the “IRC” both (1) imposes the full force of the “IRC” on the resident/citizens of other countries and (2) has the effect of imposing the U.S. cultural values mandated in the “IRC” on those other countries. One can identify a list of the “10 Commandments” which are imposed on Americans abroad in an FBAR and FATCA world.

(Note that with the exception of U.S. citizens and “permanent residents”, as per Internal Revenue Code Sec. 7701(b), an actual physical connection to the United States is required to establish U.S. tax residency.)

As the article referenced in the above tweet makes clear, many people “claimed” by the United States as “tax residents”have never had any connection to the United States except that they were born there. The article includes:

Awad Al-Zahrani, whose son has US citizenship, said he would give it up.

“My son got the passport since he was born there while I was studying in the country back in 2000. At the time, the Saudi embassy had told me that it would not be a problem for him to hold two passports. Now that we have to pay taxes, though, we’ll be giving the US passport up.”

Abdulrahman Al-Habib, head of journalism studies at KAU, argues that Saudis who were born in the US should be exempt from paying taxes.

“We should establish a unified center to help Saudis clear their former tax registers,” he said.

US Consul-General Todd Holmstorm,however, confirmed that US citizens should pay income tax and called on their international counterparts to help them eliminate tax evasion.

“The tax law is designed to combat evasion through increasing transparency in the financials of US taxpayers,” he said.

Mr. Holmstorm’s bio indicates that his career has had a Canadian connection in Ottawa, Canada. His comments in the above article imply that he believes that those (1) born in the U.S. who (2) do not live in the U.S. and (3) do not pay taxes to the U.S. are guilty of “tax evasion”. Strong language indeed. Yet, these are his words which clearly reflect the attitude and policy of the U.S. Government.

 
 

 

NB: While ADCT respects ACA’s positions and appreciates their lobbying efforts, this post in no way serves as an endorsement of their submission regarding RBT.

It bears repeating that no group approached Congress during the tax reform process and specifically requested RBT. Many chose to support RO’s effort (TTFI) assuming it more likely to succeed given Congress was clearly intent upon changing corporations to a territorial model.

ACA’s approach to RBT has been described by some as CBT with a carve-out (for those who are already compliant). It does not address the issues of Accidental Americans; becoming compliant for the express purpose of renunciation, etc.
 
 

TAX REFORM BILL AND AMERICANS ABROAD: WHAT HAPPENED? WHAT’S NEXT?
 

by Charles M Bruce
ACA’s Legal Counsel and Of Counsel to Bonnard Lawson-Lausanne

with contributions from Jonathan Lachowitz, Chairman, ACA, Marylouise Serrato,
Executive Director, ACA, and Jacqueline Bugnion, Former Director, ACA.

On the day President Trump signed the The Tax Cuts and Jobs Act (TCJA) , Mr. Bruce issued this letter (found on the ACA website).

EXCERPTS:

What happened?
 
Changes in the basic rules for Americans abroad were not made.
There are strong indications that Congress will soon return to the subject of tax law changes to make corrections in what was done and to address issues that were postponed. A couple of days ago Chairman Brady said, “I’m going to recommend that we do have some form of tax reconciliation in future budgets because there are still areas of the tax code I think . . . can be improved, including retirement savings, education, and streamlining,” Brady said. “And we had a number of good ideas from our members we weren’t able to accommodate. Plus, I think we’ll have to continue to modify the international code over time.”

What has not changed?
 

  • The basic foreign earned income and housing cost amount exclusion (FEIE) has not changed
  • The 3.8% net investment income tax to fund Medicare and The Affordable Care Act, remains in place and continues to apply in a way that, for Americans abroad, exposes them to double taxation because they are not allowed to credit foreign taxes against it.

 
There are some serious problems.
 
(a) The new participation exemption system adversely affects Americans abroad by not providing the dividends received deduction and yet taxing an individual on the deemed distribution.

(b) Special reduced rates for so-called “passthroughs” do not benefit Americans abroad that earn from a passthrough foreign income.

(c) Foreign real property taxes can no longer be deducted under the Act.
 
What are the good points?
 
Overall, the visibility of the subject of taxation of Americans abroad has greatly increased. The House Republican Blueprint for tax changes, developed early on, said that legislators would consider “appropriate treatment of individuals living and working abroad in today’s globally integrated economy.” Ways and Means Chairman Brady said that Congress is thinking about changes in the way American individuals abroad are taxed. Lawmakers, he added, take seriously the call for a shift from a citizen-based income tax system to a residence-based system that would only tax people on the income they earn in the U.S. Finance Committee
Chairman Hatch’s corporate integration proposal called for reconsideration of the taxation of nonresident citizens. Individual Members, such as, Representative Holding (Republican-North Carolina), have said that changing the way Americans overseas are taxed is high on their list of priorities. Late in the process, there was a very good floor colloquy between Representative Holding and Chairman Brady on the need to take up this subject afresh in the near future.

One of the most positive things that happened was that ACA successfully developed the best, most comprehensive baseline set of data for detailing the taxation of Americans abroad. This baseline information did not previously exist. It required five months of work by ACA and its independent revenue estimator, District Economics Group (DEG). Utilizing this information, ACA has been able to greatly refine its description of a possible approach to changes in the law and
to run revenue estimates. All of this shows that enactment of RBT can be made revenue neutral. This is an extremely important outcome. ACA has always said that for RBT to be adopted, it must be revenue neutral, tough against abuse, and fair for everyone, meaning among other things that no one would be worse off. ACA’s numbers-crunching shows that RBT can be adopted and the, at the same time, section 911 can be left in place.
 
What’s next?
 
Congress did not consider RBT and reject it. It’s noteworthy that no Member or committee arrived at the point where an RBT/territoriality-for-individuals proposal was put by a Member on the table, drafted in legislative language and “scored” for its revenue effects.Republican interest groups, as well as other groups such as Democrats Abroad, AARO, and FAWCO, all talked with many Members and “knocked on many doors”. They deserve great credit for their efforts……. However, the big, high-visibility subjects, including changes in the international tax rules for corporations, commanded most of the attention of decision-makers.Also, the approaches to these subjects, including the various versions of proposed changes in the corporate tax rules, resulted in a constantly changing landscape and made it difficult to insert residency-based taxation alongside them.
The effect of work on the other subjects can be seen from the fact that many effects on Americans abroad were simply overlooked or not fully appreciated until very late in the game, if it (sic) all.

ACA believes that Members, including Chairman Brady, Chairman Hatch, Representative Holding, and others, are sincere in saying that they want to change the tax rules for Americans abroad. We don’t think they would’ve made the statements they did if this was not the case.

In light of what was not addressed in TCJA and some of the overlooked outcomes, ACA strongly believes NOW IS THE TIME FOR CONGRESS TO HOLD HEARINGS ON THE TAX TREATMENT OF AMERICANS ABROAD. These can lay out the existing rules, including the rules added by TCJA. The Joint Committee on Taxation, the lead committee on matters having to do with tax, can construct its own baseline for dealing with the subject. ACA is making the results of the ACA/DEG study available. Hearings can also identify the key topics, including, for example, treatment of tax havens, various anti-abuse topics, etc. All the interested parties can present their views. It’s an opportunity for everyone generally to “get on the same page” or say why they choose not to be on that page. Of course, there will be differences in opinion as to what changes should be made. ACA suggests that the hearings be held by the Ways and Means Subcommittee on Tax Policy. It looks to Members, both Republicans and Democrats, who have historically taken an interest in the subject to support hearings.
 
*******
 
On the Transition Tax:

The Merry-go-Round of Unintended Consequences
No Evidence of Intent to Apply the Transition Tax to Small Business Corporations of #Americansabroad
ADSC-ADCT Letter to US Congress
Seven Simple Points to be made re Transition Tax and CFCs
It’s the Subpart F Rules Stupid

ACA Papers:

submission to the Senate Finance Committee April 2015

Side-By-Side Analysis: Current Law; Residency-Based Taxation

Representative Holding’s comments: