Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part II


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?