Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!

cross posted from citizenship solutions
    by John Richardson

I suggested to John that some might not understand why a similarity between OVDP and the Transition Tax was being made. He asked me to introduce the post to make sure it was clear that the U.S. government has demonstrated that confiscation is the name of the game (NOT tax).

Some of you may wonder why a connection is being made between the OVDP program and the Transition “Tax.” The reason is very simple. We need to change the language. We need to call it what it really is. In the beginning, people were too frightened to understand what the OVDP really was. It took years before it was clear it was nothing less than confiscation. Fortunately, we knew prior to the passage of the Tax Jobs Cut Act that the Transition “Tax” was a blatant confiscatory provision.

The “Offshore Voluntary Disclosure Program.” An “amnesty” program. Nine years and many destroyed lives have exposed it for what it really was. No one could really have considered it “voluntary.” The IRS and the tax compliance community certainly presented as one’s only option. In 2011, we did not have the advantage of what we know now; the limitations of being discovered, the extremely difficult/unlikely ability of the IRS to collect. People who had no tax liability among other atrocities, were fined from 20 – 27.5% of their assets. There was no taxable event. This revolved around not filing a piece of paper. FBAR. An appropriate term used was “The FBAR Fundraiser.” Another word would be confiscation. IOW, OVDP was NOT about TAX.

Some words have powerful associations. Sometimes those associations grow into clichés. We are all familiar with the association that anyone who has left America is rich has done so to avoid tax. We have been working at this since late 2011. Seven years. No amount of trying to educate via comments on online articles etc. has put a dent in this erroneous and damaging perception. Recently, some of us have started replacing “citizenship taxation” with “non-resident taxation.” Non-resident taxation describes what it really is and dissociates from the idea that a patriotic citizen (American) should pay it. It appeals to the notion that reasonable people accept i.e., that one pays taxes (only) where one lives. It may take time but the value of changing the language in this situation, is obvious.

To refer to this new requirement as a “tax” is to immediately justify it as being reasonable. Take the Canadian government for example. It’s position is that the U.S. has the right to tax it’s own citizens and that Canada has no business interfering with that. Thus the IGA. Nevermind that the majority of the people affected are Canadian citizens and residents FIRST.

So what’s wrong with the term “Transition Tax?” As we all know, any expat with a “foreign” corporation will be unable to transition to a territorial system as will major multinationals . So to call it a “transition” is completely erroneous. As for “tax”, a general notion is that a tax is connected with delivery of services or benefits i.e., there is some relationship between the exchange of income for services. It is nothing short of bizarre to levy a 30-year retroactive tax on a group of people who were not residents, nor receiving anything in exchange for surrendering a considerable portion of what is primarily, their retirement pensions.

A phrase John has used repeatedly to describe the Transition “Tax” is “the confiscation of the retirement pensions of the citizens and residents of other countries.” That’s what it really is. Like the OVDP, it is a punitive tool that destroys the lives of long-term expats. We need to get that message across.

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    by John Richardson

Introduction

This is the fifth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by tax paying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.

The purpose of this post is to argue that (as applied to those who do not live in the United States) the transition tax is very similar to the OVDP (“Offshore Voluntary Disclosure Programs” which are discussed here. Some of initial thoughts were captured in the post referenced in the following tweet:

The first four posts about the “transition tax” were:

Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”

Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”

Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!

Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of “Homeland Americans” to the treatment of “nonresidents”

*A review of what what the “transition tax” actually is may be found at the bottom of this post.

This post is for the purpose of the arguing that, as applied to those who live outside the United States, payment of the “transition tax” in 2018, is the financial equivalent to participation in 2011 OVDI (“Offshore Voluntary Disclosure Program”.

 

Seven Reasons Why The U.S. Transition Tax as applied to “nonresidents” is similar to the “Offshore Voluntary Disclosure Program As Applied To “Nonresidents” Continue reading Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!

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

 


 

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

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

by John Richardson

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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!