cross posted from citizenship solutions

In an earlier post I explained why the Canada Revenue Agency assisted the IRS in collecting a $133,000 U.S. dollar penalty on a Canadian resident. The bottom line was that he was presumably NOT a Canadian citizen and therefore did NOT have the benefits of the tax treaty. This post is to explain where the penalty came from in the first place.

Will you walk into my parlour?’ – #Americansabroad and IRS “amnesty” offers in the 2009 #OVDP

It has been widely reported that a U.S. citizen residing in Toronto, Canada since 1971, paid a $133,000 U.S. dollar penalty for failing to file IRS forms disclosing that he was running a business through a Canadian corporation. How did this fly get caught in the spider’s web?

The Spider and the Fly is a poem by Mary Howitt (1799–1888), published in 1829. The first line of the poem is “‘Will you walk into my parlour?’ said the Spider to the Fly.” The story tells of a cunning Spider who ensnares a naïve Fly through the use of seduction and flattery. The poem is a
cautionary tale against those who use
flattery and charm to disguise their true evil intentions.

More here


The Court ordered (May 31, 2017) that Plaintiffs provide:

This is an update on our FATCA IGA legislation lawsuit in Canada Federal Court.

Additional personal, detailed documents related to their financial affairs. [Our litigators felt that this request was not relevant to the lawsuit or of tenuous relevance to the issues raised in the action, but Court disagreed.] Plaintiffs have now provided to the Defendants the financial documents and the Court has ruled that these documents will be kept confidential.; and

A list of harms that the Plaintiffs know and allege have already occurred or certainly will occur. [Description of harms that might occur will be provided in a later submission.}

The harms listed in the submission are generally those detailed by the Witnesses. I am not going to provide the names of the Witnesses associated with their particular situations, but show below a brief summary of some of their harms without names disclosed.

SELECTED HARMS:

Harm associated with sharing of account information with United States. Plaintiffs allege that financial accounts of Canadians have been shared with United States and that this constitutes a harm. However, with one exception (name of person who received confirmation of turnover from Revenue Minister listed in document) Plaintiffs have no direct knowledge whether their own account information has been turned over nor do they know names of those who have had their accounts turned over — that information is in Canada’s possession.

To the extent that these financial documents have been turned over, Plaintiffs allege that this violates their right to the security of person shrined in section 7 of Charter and the protection of Canadian sovereignty, and is a violation of section 15 of Charter.

Other Witness and Plaintiff harms (not all Witnesses or harms are listed below):

Business Person who is Canadian and U.S. citizen. Would-be Canadian partners are unwilling to have potential financial and shareholder information disclosed to U.S.

Canadian and U.S. citizen harmed by U.S. IRS PFIC costs taxing away gains. To eliminate harm she had to spend monies to renounce U.S. tax citizenship. Suffered psychological harm when filing forms with FINCEN, knowing possibility of large fines if there were ever to be an erroneous mistake. She feels as if she is guilty of a crime she has not committed until proven innocent.

Canadian and U.S. citizen on disability harmed by U.S. person-hood. On disability benefits, can’t afford to become IRS compliant or renounce U.S. tax citizenship. Not being compliant with IRS exacerbated psychological harm associated with precarious financial situation. This has created conflict within family as he is unable to speak to family member about situation without family member becoming upset.

Canadian citizen mother trying to protect incapacitated son deemed only by the U.S. to be U.S. tax citizen. She has suffered psychological harm insofar as she has had her peace of mind taken away and has difficulty carrying on with normal life because she is unsure of her son’s well-being in future after she passes away. Has resulted in breakdown of relations within family.

Pure Canadian spouse of Canadian citizen who is deemed to be a U.S. person only by the U.S. Spouse received bank letter asking citizenship question on account with U.S.-tainted wife. This places spouse at disadvantage compared to those not married to persons deemed to be U.S. citizens.

Canadian citizen and formerly person deemed to be a U.S. citizen. Business partners expressed feelings that she compromised their business by sharing financial information with U.S. To escape harm she paid the costs to renounce U.S. citizenship. Feels that Canada has treated her as second class citizen.

Canadian citizen deemed ONLY by U.S. to be U.S. citizen having entity account. As part of the roundup in Canada of all Canadian citizen “entity” account holders who have U.S. taint, she received letter from bank asking for information on citizenship…

No CLN, we freeze your account Canadian citizen – deemed by U.S. to be U.S. citizen. It is sometimes claimed that Canadian financial institutions do not freeze accounts if there is a FATCA problem. Not true. This unfortunate Canadian citizen had her account frozen because her proof of no U.S. taint was not good enough: She lacked a CLN (Certificate of Loss of Nationality) that her bank required.

Infant receives request from bank to provide information on birth place and U.S. citizenship in order to continue holding account. [Self-explanatory.]

Other: Psychological harms are mentioned including feeling betrayed by the Canadian government, stress and frustration associated with the financial harm, and harm by simply not knowing whether or when their financial account information will be shared with the United States.

—– The brave Plaintiffs and Witnesses are my heroes for standing up for Canada and its sovereignty. I thank the other Canadians who also bravely volunteered, but were not selected.

—– NEXT STEP: In oral testimony Plaintiffs will be examined by Government attorneys, beginning with Gwen at the end of this month…

Cross-posted from citizenshipsolutions

by John Richardson

The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians
 

 
The reality of being a “DUAL” Canada U.S. tax filer is that you are a “DUEL” tax filer

“It’s not the taxes they take from you. It’s that the U.S. tax system leaves you with few opportunities for financial planning”.

I was recently asked “what exactly are the issues facing “Canada U.S.
dual tax filers?” This is my attempt to condense this topic into a short answer. There are a number of “obvious issues facing U.S. citizens living in Canada.” There are a number of issues that are less obvious. Here goes …

There are (at least) five obvious issues facing “dual Canada U.S. tax filers in Canada”.

At the very least the issues include:

1. The requirement to pay taxes to both the U.S. and Canada

– Double Taxation: for example, the 3.8% Obamacare surtax on Investment Income

– U.S. taxation on things that are NOT taxed in Canada (example: sale of principal residence and investment income earned inside Canadian Controlled Private Corporations) and phantom capital gains caused only by exchange rate fluctuations

– U.S. punishment/deferral penalties (Interest on tax deferral) on Canadian mutual funds – have you ever heard of a PFIC?

In many cases, the “foreign tax credit rules” will mitigate the impact of potential double taxation. That said, it is very common for “dual filers” living in Canada to be required to pay taxes to the United States. Furthermore, double taxation (because of the “savings clause“) is generally NOT eliminated by the Canada U.S. Tax Treaty. U.S. citizens are NOT generally allowed to benefit from the treaty.

2. The reporting requirements

The United States requires its “citizens” to file detailed reports disclosing financial assets. While a “dual filer” living in Canada is required to report very little information to the Government of Canada, the USA requires a massive amount of information about Canadian assets to be reported to the IRS on an annual basis. There are severe penalties for the failure to report on these assets. You may have heard of FBAR, FATCA form 8398, Form 8621, Form 3520 and 3520A and more. Those who have a Canadian Controlled Private Corporation are required to file Form 5471 (a form that requires more disclosure about their Canadian Controlled Private corporation than is required on A CANADIAN tax return!). Note also that there are circumstances where income earned by the company is attributed to the U.S. citizen individual (and must be reported as income on the U.S. return)!

By the way, forms 8621 and Form 5471 have to be filed even if a tax return is not otherwise required!

U.S. citizens have ZERO financial privacy!

3. The direct costs of U.S. tax compliance

U.S. tax returns (including satisfying the “reporting requirements”) can easily exceed 100 pages and can cost thousands of dollars to prepare. Of course, the costs are significantly less for those who have “simple lives” and few assets. U.S. tax returns are NOT simply an extension of a Canadian tax return. Those who complete their U.S. tax returns based ONLY on their Canadian tax returns are making a mistake. U.S. tax returns need to be considered separately and must take into account items that are “taxable or reportable events” in the USA but are not reportable or taxable in Canada.

4. U.S. tax rules that directly impact the marriage between a U.S. citizen and non-citizen

With a bit of advance planning you can “work around” these areas. That said, a “non-U.S. citizen spouse” is considered to be an “alien” and an opportunity for income and assets to slip away from the U.S. tax system.
It is common for U.S. citizens living in Canada to use the “married filing separately” category which is extremely punitive. Interestingly, this is a “built in tax” on the marriage between a U.S. citizen and an “alien”.

5. The Opportunity Cost – by far the biggest cost

U.S. citizens resident, are deprived of many of the “normal” financial and retirement planning opportunities available to other Canadians. This is NOT immediately obvious. That said: it is the single biggest cost of being a “dual Canada/U.S.filer”.

Why this so – Let me explain …

Canada is a country with very high tax rates. It’s very hard to “save and get ahead” in a country with a high marginal tax rate that “kicks in” at a relatively low level of income. Canada has a brutally efficient system of tax collection. In addition to paying taxes on income that are (in general) higher than in the United States, Canada has a VAT (which is NOT recognized for purposes of the U.S. “Foreign Tax Credit” rules).
Furthermore, Canada does NOT have generous “Social Security Type”
programs. Canada Pension Plan and Old Age Security are NOT income replacements but are supplements to income. Therefore, (and financial literacy should be a required skill) it is ESSENTIAL that Canadian residents engage in intelligent, purposeful and effective retirement planning. Much of financial planning is based on the tax consequences of various transactions.

Intelligent, purposeful and effective retirement planning for Canadian residents

At the risk of oversimplification most Canadians employ some or all of the following …

Employee pension plans:

Examples include the pension plans offered by teachers, public employees, etc. Fewer and fewer Canadians have access to these kinds of plans. Fewer and fewer Canadians have access to these lucrative arrangements.

Availability to U.S. citizens in Canada: The U.S./Canada tax treaty does allow for favorable treatment of Company pension plans for U.S. citizens in Canada. The U.S. Canada tax treaty is particularly favorable in this regard. In contrast, consider the U.S.
Australia tax treaty which does NOT afford similar U.S. tax treatment to Australian pensions.

__________________________________________________________________________________

Individual Tax Deferral Opportunities in Government registered plans:

Examples include: RRSP, TFSA, RESP, etc.

Availability to U.S. citizens in Canada:

RRSP – yes
TFSA – no tax deferral and fully taxable RESP – no tax deferral and fully taxable

The income earned inside the TFSA and RESP will be taxed directly to the U.S. citizen. There may also be additional (expensive) “reporting requirements” with respect to these investments.

__________________________________________________________________________________

The Use of a Canadian Controlled Private Corporation (an opportunity that may be coming to an end FOR ALL PEOPLE with the current Liberal Government):

Availability to U.S. citizens in Canada:

  1. Clearly No. The growth of investment income inside the
    corporation is attributed to the shareholder and subjected to
    punitive taxation. This destroys the opportunity to use the
    Canadian Controlled Private Corporation as a retirement planning
    vehicle.
  2. Clearly No. The “reporting requirements”
    reflected in Form 5471 are tremendously expensive and penalty
    laden.
  3. Clearly No. U.S. citizen shareholders of
    Canadian Controlled Private Corporations are NOT entitled to the
    Canadian “lifetime” capital gains exemption on the sale of the
    shares of the CCPC.
  4. Possibly No. Canadian tax planners plan the
    payment of dividends to shareholders in a way that results in
    minimization of taxes paid at the Shareholder level. This is the
    direct result of Canada’s system of giving shareholders tax
    credits for certain taxes paid by the corporation. The dividends
    are subject to full U.S. taxation on the U.S. return.
  5. Possibly No. In theory dividends from a
    Canadian Controlled Private Corporation are possibly (depending
    on your interpretation of the Canada U.S. tax treaty) subject to
    the 3.8% Obamacare surtax.

There is no “Clearly Yes”. It’s complicated! I have seen very knowledgeable and competent advisors argue over whether U.S. citizens in Canada should make use of Canadian Controlled Private Corporations.

__________________________________________________________________________

Individual stock and investment portfolios:

Generally, this would include individual “debt” (think GICs) and “equity” (think individual stocks).

Availability to U.S. citizens in Canada:

Yes absolutely available. The dividends, interest and capital gains are subject to “normal U.S. taxation”. The U.S. tax owed will be reduced by the tax paid in Canada.

___________________________________________________________________________

Canadian Pooled stock and investment portfolios:

In general, this means “Canadian mutual funds”.

Availability to U.S. citizens in Canada:

No. Canadian Mutual funds are considered to be PFICs under U.S. law and are subject to taxation at rates that can approach 100%.

___________________________________________________________________________

Principal residence AKA The tax free sale on a principal residence (very popular in larger Canadian cities):

Availability to U.S. citizens in Canada:

Yes and No. U.S. citizens in Canada are required to pay capital gains taxes on the sale of their principal residence. (There is currently a $250,000 USD exclusion).

____________________________________________________________________________

Conclusion:

U.S. citizens in Canada are simply NOT able to take advantage of the retirement and planning opportunities available to their neighbors. The problem of the U.S. tax system for U.S living in Canada should be characterized as:

“It’s not the taxes they take from you. It’s that the U.S. tax system leaves you with few opportunities for financial planning”.

This is the primary reason why for U.S. citizens living in Canada:

All Roads Lead To Renunciation!

John Richardson

The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians

_________________________________________________________________________________________

Some additional reading:

How To Live Outside the United States in an FBAR and FATCA world – The 10 Commandments

How To Live Outside The United States In An FBAR And FATCA World

Life in The “Penalty Box”: U.S. Citizens and Green Card Holders Living Outside The United States

Part 1 – Life In The “Penalty Box” – U.S. Citizens And Green Card Holders Living Outside The US

The following two comments appeared on a post at Isaac Brock “Refreshing: @SophieintVeld calls EU answer to plight of #AccidentalAmericans “bullshit”

Perhaps one of the difficulties countries experience, that of “standing up to the United States” could be mitigated if citizens and residents of those countries stopped calling themselves “Americans.” Certainly if one does NOT believe him/herself to be American, one would not describe oneself as such. Why allow American law define one’s nationality particularly when doing so allows the U.S.to supersede the laws of the country one resides in?

*******

by USCitizenAbroad

cross posted comments from the Isaac Brock Society

Watched the video a second time today. The time has come to RETIRE the term “Accidental American”. The tern suggests that the petitioner “JR” and others like him are “Americans” of any kind at all. He is NOT an American of any kind and neither is a single person who was born in the USA, left the USA as a child, and has never held himself out as a U.S. citizen. He is a “carbon life form” who is simply being claimed by the United States as U.S. property. Nothing more and nothing less.

What FATCA is about is:

FATCA is about the United States unlawfully laying claim to the citizen/residents of other nations as “tax slaves” and as “weapons”, to attack the economies of other nations, by extending its tax base into other nations. The simple “FATCA Of The Matter” is that, for the U.S. to claim that a citizen and resident of another nation, is a U.S. citizen (against that person’s will), has evolved into an “Act of War” against that nation – what the petitioner calls the “weaponization of nationality”. For the USA to call a citizen/resident of another nation a U.S. citizen is to say to that nation:

That “carbon life form” is our property and we will use our property as a way to extract rents from your economy. (If you use OUR property you must pay us rent.)

It seems to me that countries around the world must do the following:

1. Protect their own citizens from the United States. It’s quite simple really. They should simply say:

So, sorry but “JR” is a resident of our nation and a citizen of our nation. The USA is free to call him anything they want when he is in the USA, but when he is in our nation he is to be treated as a citizen of our nation and accorded all the rights to which citizens of our nation are afforded. We do understand that Americans do NOT have rights (because this is necessary to preserve their American freedoms), but in our nation our citizens have rights and they have equal rights. For example: As Prime Minister Justin Trudeau of Canada has said – “A Canadian is a Canadian is a Canadian“ (Of course Justin means only “certain Canadians” are really Canadians, but I digress ….)

We (nations of the world) have no opinion, with respect to those Americans, who are in our country, but are not citizens of our nation (the “Homelanders Abroad” type). But our citizens have the full rights of citizenship when in our nation.

We will NOT allow them to be treated as your “property”, when they are living as citizens on “our property!”

We know, that for Americans, the concept of human “rights” is “very deep”, but trust us, “human rights” can exist.

Countries simply cannot allow the United States to claim their citizens as U.S. citizens!

Bottom line: Under no circumstances can the USA be permitted to claim the citizens of other nations (residing in those nations) as U.S. citizens when they are resident in our country.

2. If these European (and other) countries are NOT willing to defend the rights of THEIR citizens, then they should simply agree, that they are nothing but U.S. property and deport (return) them to the United States.

The battle cry should become:

“Defend or deport”.

*****

Adding to the previous comment:

There is a continual focus on:

“Are you or have you ever been a U.S. citizen?”

That’s fine, but the focus needs to change to:

“Who may determine the citizenship of an individual? How is that citizenship to be determined? Under what circumstances can a citizen and resident of country A, be claimed as a citizen of country B”

To date, the world has deferred to U.S. law to answer the question of whether someone is a “U.S. citizen”. I believe that is the wrong question. It leads to absurd results and it allows U.S. lawyers to effectively impose unwanted U.S. citizenship on people with no U.S. connection. The question is whether Country A has to accept a citizenship claim by Country B with respect to a citizen/resident of country A.

(The idea that the USA can impose citizenship on a person born outside the USA is laughable. Yet, U.S. lawyers swear it is true. To say that the USA can impose U.S. citizenship on a person born outside the USA is to say that the USA can use any person of USC parents as a weapon against the economy of another nation.)

The narrow question in a new FATCA world should be:

Can a second country decide the citizenship of a person who is a citizen/resident of a another country? Interestingly the United States is, in certain circumstances, willing to apply its own legal standards, to determine whether someone is or is not a citizen of another country.

See:

In addition, although not determinative of the question, the following information from the State Department is interesting:

Dual Nationality

Section 101(a)(22) of the Immigration and Nationality Act (INA) states that “the term ‘national of the United States’ means (A) a citizen of the United States, or (B) a person who, though not a citizen of the United States, owes permanent allegiance to the United States.” Therefore, U.S. citizens are also U.S. nationals. Non-citizen nationality status refers only individuals who were born either in American Samoa or on Swains Island to parents who are not citizens of the United States. The concept of dual nationality means that a person is a national of two countries at the same time. Each country has its own nationality laws based on its own policy. Persons may have dual nationality by automatic operation of different laws rather than by choice. For example, a child born in a foreign country to U.S. national parents may be both a U.S. national and a national of the country of birth.

A U.S. national may acquire foreign nationality by marriage, or a person naturalized as a U.S. national may not lose the nationality of the country of birth. U.S. law does not mention dual nationality or require a person to choose one nationality or another. Also, a person who is automatically granted another nationality does not risk losing U.S. nationality. However, a person who acquires a foreign nationality by applying for it may lose U.S. nationality. In order to lose U.S. nationality, the law requires that the person must apply for the foreign nationality voluntarily, by free choice, and with the intention to give up U.S. nationality.

Intent can be shown by the person’s statements or conduct. The U.S. Government recognizes that dual nationality exists but does not encourage it as a matter of policy because of the problems it may cause. Claims of other countries on dual national U.S. nationals may conflict with U.S. law, and dual nationality may limit U.S. Government efforts to assist nationals abroad. The country where a dual national is located generally has a stronger claim to that person’s allegiance.

However, dual nationals owe allegiance to both the United States and the foreign country. They are required to obey the laws of both countries. Either country has the right to enforce its laws, particularly if the person later travels there. Most U.S. nationals, including dual nationals, must use a U.S. passport to enter and leave the United States. Dual nationals may also be required by the foreign country to use its passport to enter and leave that country. Use of the foreign passport does not endanger U.S. nationality. Most countries permit a person to renounce or otherwise lose nationality.

Information on losing foreign nationality can be obtained from the foreign country’s embassy and consulates in the United States. Americans can renounce U.S. nationality in the proper form at U.S. embassies and consulates abroad.

I’ve received a request from our fellow expats-in-peril Association des Américains Accidentels to search for documents to help them in their litigation.

As of this week, we have hired a lawyer to get a legal opinion re: FATCA.

One of the angle we are pursuing is non reciprocity. Under the French Constitution (article 55) a treaty which is not reciprocal becomes null and void, as simple as that. We are presently looking for all documents written par the IRS/Treasury to US Senators or any other documents emanating from the US Treasury which point to the fact that the US has no intention of making FATCA reciprocal.

We are now in full gear and our aim is to make FATCA null in void in France and perhaps at the European level too. (it is another avenue we are exploring too)

In advance many many thanks,

Eric and Fabien

I have already sent them the letter from Mark Mazur (then Assistant Secretary of Treasury for Tax Policy) to Senator Rand Paul dated Oct 10, 2012.

Please help their legal challenge: Let’s Unite to Defeat FATCA

 

Cross posted from the Renounce U.S. Citizenship blog.

The above tweet references a post written four years ago in June of 2013. The post predicted that at some point the United States would require disclosure (in addition to FATCA (Form 8938) and FBAR (FinCen 114) and other forms) the email accounts used by Americans abroad.


That post concluded with my prediction:

The purpose of FBAR and FATCA is to …

Provide the U.S. with information that is outside of its jurisdiction. In other words, the U.S. has no legal right to the information. Therefore, by threatening “life altering” penalties, the U.S. forces its citizens to provide this information to the U.S. government.

If the contents of bank accounts is important, then the contents of an email account would be even more valuable.

You heard it here first:

The next information return that the U.S. will require is the:

Foreign Email Account Report” – FEARBar for short!

Congress will (like FATCA) unknowingly pass the general legislation (slipped in as part of a Hiring Act) and authorize the IRS to specify the contents of the return. What an Orwellian World!

FEARBar coming to an information return near you!

Continue reading “#FEARBar (“Foreign Email Account Report”) update – All indications lead to reporting #offshore email accounts”

cross-posted from the citizenshipsolutions blog

by John Richardson

**********

Prologue:U.S. citizenship is not as attractive as it was

One benefit of U.S. citizenship: If one is a U.S. citizen then one cannot be deported from the USA

Some Green Card holders become U.S. citizens. Some do NOT become U.S.
citizens. Many of those Green Card holders become U.S. citizens in order to avoid the possibility of deportation. Deportation results in expatriation and can (among other things) subject the unfortunate Green Card holder to the S. 877A Expatriation Tax, which can result in significant confiscation of assets. In fact, the S. 877A Expatriation Tax discourages people from seeking Green Cards in the first place. That said, it is only Green Card Holders who are “long term residents” who are subject to the Exit Tax.

The plight of Mr. Morales-Santana: No U.S. citizenship = the possibility of deportation

The facts as described by the court:

In 2000, the Government sought to remove Morales-Santana based on several criminal convictions, ranking him as alien because, at his time of birth, his father did not satisfy the requirement of five years’ physical presence after age 14. An immigration judge rejected Morales-Santana’s citizenship claim and ordered his removal. Morales­ Santana later moved to reopen the proceedings, asserting that the Government’s refusal to recognize that he derived citizenship from his U. S.-citizen father violated the Constitution’s equal protection guarantee.

Continue reading “Morales-Santana: SCOTUS Makes it Harder for People Born Abroad to U.S. Citizens to Become U.S. Citizens”

 

Every now and then, we all need a good laugh. Instead of posting a mind-boggling account of the never-ending misery of being a U.S. expat abroad, here is something completely different. Enjoy!

reposted from Isaac Brock Society
Posted on March 13, 2012 by Eric

*******

Recently, reports have surfaced that drug dealers are abandoning the U.S. dollar in favour of a cleaner, more liquid medium of exchange.

Tide has become a form of currency on the streets. The retail price is steadily high — roughly $10 to $20 a bottle — and it’s a staple in households across socioeconomic classes. Tide can go for $5 to $10 a bottle on the black market, authorities say. Enterprising laundry soap peddlers even resell bottles to stores. “There’s no serial numbers and it’s impossible to track,” said Detective Larry Patterson of the Somerset, Ky., Police Department, where authorities have seen a huge spike in Tide theft. “It’s the item to steal.” …

Continue reading “Congress to introduce Foreign Washing Machine Compliance Act (FWMCA) to fight offshore abuse of Tide Detergent”

 

 

Profesor Paul Caron, on his TaxProfBlog posted the following article:
CONSIDERING “CITIZENSHIP TAXATION”:
IN DEFENSE OF FATCA
20 Fla. Tax Rev. 335 (2017):
by Young Ran (Christine) Kim

 

If any description could possibly be demonstrated over & over in this piece it would be the term “offensive.”  I confess to a hard-edged bias against academia, likely for the same reasons as most people; i.e., the rather noticeable and consistent lack of everyday common sense. Even in my own field (piano performance, where a doctorate is called a DMA not a Phd) there is a prevalence of people who may be perfectly schooled in the accuracy of Baroque ornaments, precise methods of articulation in Classic-period pieces or any number of other tedious accomplishments yet their actual playing (which is the whole point of a performance degree vs an academic one) is so devoid of vitality and inspiration it is enough to make one weep. I don’t know if the same exists in all disciplines but one thing that does apply here is a complete (and I mean complete) lack of awareness on the part of the author, of the harshness of how these theories play out on the lives of REAL people. What would make much more sense would be to address these problems head-on rather than justify “concepts” through a lot of theoretical jargon.

 

The following comment says it well:

 

The people affected by “citizenship-based taxation” are U.S. citizens and Green Card holders who live outside the USA and are “tax residents” (and often citizens) of other nations. The paper discusses (sort of) “citizenship-based taxation” as an abstract concept without considering the brutal effects that it has on the people subjected to it. The acknowledgement of the difficulties with pensions, retirement planning, foreign spouses, mutual funds, CFC rules, etc. (the reality of citizenship taxation) is most notable in its absence. And no, FBAR and Form 8938 (as obnoxious as they may be) are reporting requirements and not the specific tax rules (PFIC, etc.) that affect Americans abroad. I suspect that this paper will be subjected to the criticism that it so richly deserves.

Posted by: John Richardson | May 26, 2017 1:14:02 PM

While this criticism can be equally leveled at the members of Congress who passed FATCA, the Treasury Department personnel who wrote the regulations and last but not least, the heartlessness of many tax compliance practitioners, there is something especially repugnant about those pontificating from their ivory towers, proclaiming that FATCA, citizenship-based taxation, global transparency and all the rest of it, are worth the grief being caused.

Ms Kim indicates her paper finds its origins in Ruth Mason’s recent article, Citizenship Taxation, [89 S. Cal. L. Rev. 169 (2016),

A major difference between the two is that Ms Mason basically sees citizenship taxation in a negative light while Ms. Kim attempts to find it as a natural basis to support FATCA.

She addresses three main arguments; the fairness argument, the efficiency argument and the administrative argument.
 

I.) THE FAIRNESS ARGUMENT

 

Individual taxpayers’ obligations to file Foreign Bank Account Reports (FBAR) or report under the Foreign Account Tax Compliance Act (FATCA) are not seriously onerous. The fact that citizenship taxation along with FBAR and FATCA enhances global transparency further supports the case for citizenship taxation……..because the rules have been improved through various exceptions and substantially high reporting threshold amounts.

Ms. Kim asserts that the obligation to file FBARS is not “seriously onerous.” The very real threat of a non-willful penalty of $10,000 per account per year (or worse for “willful) is certainly enough to strike the fear of God in even the most reticent individual. The idea that this reality is not considered when evaluating FBAR is beyond reasonable. Articles about FATCA often cover only the reporting done by the FFI’s. However, the other component is the requirement to file 8938’s which duplicate information from the FBAR and can incur serious penalties. The average person is not able to complete an 8938 and will have to pay to have a professional do it. Nowhere in this article does the author address the issue of compliance costs for individuals which can easily be $2500 a year for someone owing no tax and involve 50 or more pages of returns. Not onerous? Furthermore, there are simply NO FIGURES yet, to make any claim that FATCA “enhances global transparency.” Professor William Byrnes describes
the oft-quoted figure of $10 billion. This amount has absolutely NOTHING to do with FATCA; it is largely comprised of penalties and interest collected through the OVDI programs (and does not even represent actual tax recovered). While the FATCA thresholds are higher, please, the threshold for FBAR remains at $10,000, the same figure when the Act was created in 1970 – 47 YEARS AGO!
 

FOCUSING ON THE ABILITY TO PAY PRINCIPLE

First, consent theory argues that taxing nonresident citizens is justified because retaining citizenship represents consent to such taxation.

 
One cannot consent to something one doesn’t even know about. Is the author completely unaware of the history underlying the persecution of expats once Treasury/Justice went after the Swiss banks in 2008? There are still likely more Americans abroad who remain unaware of the obligation to file taxes and worse yet, the oppressive information returns with penalties simply for not filing a piece of paper (i.e. no tax due). For those who do know and who retain citizenship, keeping it is much a matter of confusion and fear and could hardly be described as “consenting to taxation.”

 

Second, benefit theory attempts to justify citizenship taxation as an obligation of nonresident citizens in return for the benefits they receive from the government.

This argument is so ridiculous at this point it is hard to believe it remains part of the discussion. Cook v Tait is nearly 100 years old and does not address the large changes globalization has produced. There is the endless  nonsense of hearing how “The Marines will come to rescue you,” after which you receive a full bill. How many living in first-world countries have any need for “rescue?” And last but not least we “owe” the U.S. for consular services (for which we pay, dearly in the case of renouncing – $2350 or $50 USD to notarize a single page). All tiresome and nowhere near justifiable for being taxed “the same” as Homelanders.

 

Third, social obligation theory

the underlying assumption of this theory is that people have an obligation to pay taxes to support the members of the society to which they belong in accordance with their ability to pay taxes, which should be measured by their worldwide income.

I remember my reaction to Prof Michael Kirsch’s comments (at the ACA Program in Toronto, May 2014, “CBT vs RBT”)regarding polity and such. It seemed ridiculous to me to consider those of us living outside the United States as being a member of that society in any meaningful way. In my own life, now 35 years outside the U.S.(over half my life), the only times I identified as a “member ” of U.S. society was when defending against strong anti-American sentiment (the first few years away) and national tragedies such as 911. I cannot see any way that those infrequent occurrences defined me as being an American more than being a Canadian.  I would say a more meaningful and valid way to apply the social obligation theory is whether or not I support policies that promote the social welfare of those around me, whether or not I give the homeless guy I see everytime I go to the bank, a bit of money so he can buy some lunch. IOW, except in an idealistic or nostalgic way, one can really only measure his/her “social obligation” based upon what they come face-to-face with, i.e., where they live.

 

Due to the different factors affecting the ability to pay, such as difference in the standard of living or amenities between places, “it would be fairer to calculate a person’s ability to pay by reference to the place where she lives rather than to the place where she holds her citizenship.”

“actually tax them alike,” which would require the repeal of the foreign-earned income exclusion and the allowance of unlimited foreign tax credits, including foreign consumption taxes, as well as the implicit taxes and subsidies to compensate the differences.

 

While all expats readily understand the reality that they are NOT “taxed the same” as Homelanders, the idea of being able to adjust all these factors to the number of foreign countries with all the differences in structure etc., absolutely discourages any realistic notion that this could ever be accomplished. Current retirement-oriented plans such as the Australian Super; the lack of recognition of tax-deferred vehicles registered by governments being treated the same as their US equivalents; requiring capital gains tax on the sale of principle residences which are tax-free in the countries where they are located ; and above all else, the obscene “savings clause,” all speak to the built-in bias the US has for anything “foreign” and its pronounced tendency to punish people for making use of non-US instruments. Add the effect of the Patriot Act, which makes it impossible to even open a US account with a foreign address and a non-resident American understandably lacks the will to try and weave one’s way through all these complicated, impossible-to-delineate requirements and procedures. The fact that the IRS does not clarify ambivalent sections such as §877A as well as the fact that no two compliance professionals can be counted on to give the same opinion is proof positive that disparate tax systems simply cannot be adjusted “fairly.”
 

when its critics condemned the new obligations to file FBARs and FATCA as an excessive compliance burden for nonresident citizens created by the Bank Secrecy Act.

There are no “new” obligations to file FBARs; they have been required (and unenforced) since 1970 and are part of Title 31. FATCA was NOT created by the Bank Secrecy Act. It comprises part of the H.I.R.E. Act (2010) and is part of 26 U.S.C. § 1471–1474, § 6038D.

II.) THE EFFICIENCY ARGUMENT

citizenship taxation may distort both Americans’ and non-Americans’ citizenship decisions, is not convincing

American citizenship renunciation rate is not particularly serious compared to other countries

residence-based taxation confronts an additional hurdle on top of enforcement difficulties: determining the residence of the individuals. Determining residence by considering all facts and circumstances creates problems beyond enforcement difficulties. The facts-and-circumstances test itself contains inherent problems when compared to a bright-line test

….and to what extent renunciation is treated as immoral and/or illegal, and so on.

The idea that citizenship taxation does not affect the decisions of Americans abroad concerning their citizenship is patently absurd. Without question, citizenship taxation IS THE MAIN REASON anyone renounces. Not because of tax per sé (don’t even think of trying to scare with the Reed Amendment) but rather, due to all the complications of trying to match two different tax systems. Add the non-financial issues such as the stress on marriages (to “aliens”), passing U.S. citizenship on one’s children, etc. etc. It has become a nightmare not worth living and something to escape if one can.

Ms. Kim devotes a long section to establishing the idea that the renunciation rate of U.S. citizens is “not particularly serious.” Again, we have someone indicating that unless the numbers are large, whether compared to that of other countries, the proportion of renunciations to the numbers of those abroad or to the number of entering immigrants, there is nothing being lost here. If that is the case, then the U.S. has virtually nothing to lose by simply letting these people go without all the forms, swearing under penalty of perjury and so on. One might occasionally consider that Americans abroad were once the best ambassadors the country could have. Now those tables are turned and some are more anti-American than any “alien” could ever be. Nothing like betrayal to warm the heart.

Regarding determination of residency, it is interesting that all 191 other countries of the world are able to surmount this difficult obstacle, which will be even more pronounced once CRS is operative. The “bright line test” which I presume means using citizenship rather than residency to base reporting on, is not truly useful given the fact that only the U.S. (Eritrea does not count) does this. When a U.S. citizen is living abroad with dual citizenship, with no determinant indicia, ask any bank how easy it is to establish whether or not one is a U.S. citizen. If it were clear, one would not see so many institutions refusing to serve Americans.

The Expatriation Act of 1868 gives all Americans the right to give up their citizenship if they so desire. It is not an issue of illegality. When a country treats its own citizens in the manner we have experienced from 2009 onwards (particularly the Accidental Americans who are not American in any normal understanding of the term), who is there to even suggest renunciation is immoral?

III.) THE ADMINISTRATIVE ARGUMENT

ENFORCEMENT DIFFICULTIES

Citizenship taxation has been criticized as difficult to enforce on nonresident citizens abroad….Determining residence by considering all facts and circumstances creates problems beyond enforcement difficulties

Next to failing to point out the outrageous 30% withholding “sanction” inflicted on every other country of the world, this has to be the weakest argument in this paper. The fact that the U.S. cannot effectively collect anything outside of the country is the number one reason people feel safe in remaining “under the radar.” After the initial scare of 2009/2011 seeing that the people hurt the worst were those who tried to do the right thing, people started considering the reality that being identified (“caught”) may amount to virtually nothing for a number of reasons. First of all, the majority of expats who are not compliant are NOT wealthy tax cheats with foreign accounts in order to deprive the U.S. of tax revenue. They are first of all, compliant where they live, which speaks volumes. Secondly, they have these “foreign” accounts in order to live their lives. This is in no way comparable to Homelanders who are guilty of tax evasion when they stash money in tax havens (and let’s not forget Delaware, Nevada, South Dakota and Wyoming, shall we?). The Revenue Rule still stands; even the 5 countries with Mutual Collection Agreements (Canada, Denmark, Sweden, France and the Netherlands)WILL NOT collect on those who were citizens of their countries at the time the tax was incurred. Canada WILL NOT collect FBAR penalties. With regard to fear about crossing the border, if one is not in the U.S. system, there is nothing for the IRS to report to DHS or CBP etc. All these things may change over time but as it stands now, the most IRS can do to most people, is send them a letter asking them to pay. EXACTLY WHAT IS THE POINT OF HOLDING ON TO CBT IF THERE IS NO WAY TO COLLECT?

Is the Compliance Burden Actually Onerous?

the IRS has provided the OVDI that a U.S. taxpayer can utilize to avoid criminal sanctions for the failure to report the existence of, and income earned on, a foreign account on tax returns as well as for the non-filing of the FBAR. In exchange for avoiding criminal sanctions, taxpayers will generally be subject to a 27.5% penalty on the highest aggregate value of their undisclosed offshore assets.86 In addition, for non-willful violators, IRS provides Streamlined Filing Compliance Procedures (SFCP), a program that was expanded in 2014 to cover a broader spectrum of U.S. taxpayers residing abroad and to provide penalty relief. Therefore, nonresident citizens who no longer have a strong economic and social connection with the United States or happenstance Americans are no longer likely to be subject to the severe FBAR penalties.

To suggest that OVDI and Streamlined “make everything alright” is to avoid the real issue altogether which is that citizenship taxation is simply wrong. No other country on earth “claims” its citizens for life. (Eritrea does not count). No other country on earth taxes its citizens after they abandon residence. No other country on earth applies an Exit Tax on assets that were acquired prior to obtaining residence in that country. There are reasons why no other countries do any of the things associated with citizenship taxation. It’s high time the United States stop this appalling abuse of human rights.

THIS ARTICLE FURTHER AIMS TO DEFEND the administrability of citizenship taxation in conjunction with the Foreign Bank Account Reports (FBARs) and the Foreign Account Tax Compliance Act (FATCA).

FBAR-absolutely not the way it is being conceived of now. FBAR, created in 1970 was aimed at uncovering money being laundered in smuggling, the drug trade and terrorism. It also was not originally conceived of being applied to those outside the U.S. Once the DOJ/Treasury departments went after the Swiss banks, they realized they could stretch the intent of FBAR to apply to non-resident Americans and the penalty regime thickened.

The criticism… has continued even after the U.S. government committed to enter into Intergovernmental Agreements (IGAs) in an attempt to address those concerns

A huge oversight on the part of the author. FATCA was without question an extraterritorial imposition on other countries. Only the United States would be as uncivil as to suggest imposing a 30% withholding charge on their allies and trading partners. The U.S. appeared not to understand that other countries could not comply even if they wanted to as privacy laws prevented the level of reporting required by FATCA. Banks would be sued were they to comply. To suggest that the US committing to the IGAs was a gracious act is revolting. Under the guise of being rooted in tax treaties, the IGAs simply bypassed what should have been required; that Congress ratify such agreements and implement legislation to do so. There is nothing in FATCA that warrants the creation of the IGAs. The U.S. downloaded ALL of the costs of compliance to the other countries. There is no mention of any penalties for the U.S. failing to comply. The U.S. made only the vaguest promises of reciprocity. It is simply unbelievable that the immorality of taking capital out of other nations is considered acceptable by the United States.

IV>) FATCA:MERITS AND CONCERNS

The OECD’s AEOI and the U.S. FATCA are two important developments, but FATCA plays a more important role.
First, FATCA provided critical momentum
Second, FATCA facilitates multilateral implementation of AEOI by creating an extensive network with more than 100 countries in the world, at the center of which is the United States.

This is unsubstantiated nonsense. First of all, it is bizarre to say FATCA “plays a more important role” Who gains from FATCA other than the United States? So far, nobody. The United States is at the Center of AEOI/CRS? The US has not even signed on to CRS. There are huge differences that matter greatly. The OECD AEOI/CRS agreements are determined by the countries involved; the terms of residency are established by those exchanging the information. FATCA is vastly different in that the United States alone determines who is/is not a “US Person” “US Citizen” irrespective of the status of such a person to the other country. And so far, the U.S. is not “paying its fair share” by requiring its banks to implement the same systems and legislation required (imposed) by FATCA. The IGAs do not constitute “acceptance” by other countries. To think otherwise is ridiculous. One could not possibly view such stipulations as reasonable.

criticism that…. FATCA exposes taxpayers’ private information to potential abusive use by foreign tax authorities.

This is a matter of real concern to Americans abroad living in some of the more troubled areas of the world-or those living Colombia in South America and particularly in some of the Middle East countries. Ironically enough, the U.S. has had some of the worst breaches of security and leakage of private information; certainly this is disturbing and worrisome.

Ms. Kim’s discussion of the Bopp FATCA lawsuit I will leave to someone else.

Second, opponents of FATCA and EOI argue that an EOI system removes a country’s unilateral control over its own tax policy, resulting in the forfeiture of sovereign autonomy. Although such argument has withered since the U.S. government entered into IGAs with other countries, it was strongly asserted by Canadian opponents of FATCA when the IGA Implementation Act included in Bill-31 was debated in Canadian Parliament.

How outrageous to suggest a foreign country does not have the right to have unilateral control over its own tax policy. The proof is in the pudding. The U.S. would never allow the equivalent. The IGA’s are the proof.
I have watched the video of the Canadian FINA hearings on FATCA many, many times. It is not possible to convey the absolute disgust we have for the majority Conservative government which minimized completely, the capitulation that occurred with the implementation of the IGA. It was nothing more than protecting the banks, without any regard to the effect it would have on Canadian citizens resident in Canada.

However, a government’s control over its tax policy is more severely harmed when a country segregates itself from the global community and loses the ability to enforce effectively its own tax laws against its taxpayers with interests in foreign jurisdictions

More unsubstantiated nonsense. This is an opinion completely unsupported up by any facts.

A Case for American Exceptionalism

conclusion, if FATCA makes the world better off by enhancing global transparency on tax information, then this may serve as another support for citizenship taxation, as well as an example of constructive exceptionalism.

While all of us raised in America understand unconsciously what exceptionalism is, it truly takes living outside the country to appreciate how incredibly arrogant and offensive it is. It is questionable whether FATCA “makes the world better off….” that a questionable tenet should “serve as a support for the imposition of citizenship taxation.” It is nothing short of reprehensible that the author should suggest what the U.S. has done is “constructive” or in any way justifies the gross aberration of power demonstrated by the creation of FATCA.