Category: Tax Residence

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer – Part 4 -Conclusion

cross-posted from citizenshipsolutions.ca

Part F – A “U.S. citizen” cannot use a “tax treaty tie breaker” to break U.S. “tax residence”. How then does a “U.S. citizen” cease to be a “U.S. tax resident”?

Q. I am a U.S. citizen. I do not live in the United States. I live in Canada. I am a Canadian citizen. How do I stop being subject to the all of the FBAR and other reporting rules, tax rules (including PFIC), life restrictions and inability to effectively invest and plan for retirement imposed by the Internal Revenue Code?

A. You relinquish U.S. citizenship. Please note that a “renunciation” is one form of “relinquishment”. In general, the date of relinquishment of U.S. citizenship is more important than the form of relinquishment of U.S. citizenship. A Certificate of Loss of Nationality (“CLN”) may or may not (depending on the date of relinquishment) be necessary to cease to be subject to U.S. taxation.

Q. In simple terms, where do I get information about the process of renouncing U.S. citizenship?

A. You can start here.

Q. What are the tax consequences of relinquishing or renouncing U.S. citizenship?

A. The Internal Revenue Code describes the tax consequences of relinquishing/renouncing U.S. citizenship. See Internal Revenue Code S. 877A (the “Exit Tax” rules).

Part G – How a “permanent resident” of the U.S. – AKA “Green Card Holder” – ceases to be a U.S. tax resident

Q. I understand that IF I am a U.S. “tax resident” then I may be able to use a “tax treaty tie breaker” to NOT be treated as a U.S. “tax resident”. But, how do I cease being a U.S. tax resident period?

A. The definition of “residence” for tax purposes is NOT the same as the definition of “residence” for immigration purposes. In fact it is possible to have lost the right to live permanently in the United States, but still be treated as a “resident for tax purposes.” “Residence for tax purposes” is defined in Sec. 7701(b) of the Internal Revenue Code and is discussed in the Topsnik case. Most “lawful permanent residents of the United States” cease to be “tax residents” of the United States by either (1) Filing Form I-407 or (2) Filing a “tax treaty election”. You are advised to seek professional advice on the best way to proceed.

ATTENTION!! A permanent resident of the United Sates AKA “Green Card Holder” does NOT cease to be a U.S. “tax resident” by simply moving from the United States to another country. One must take specific steps to sever “tax residency” with the United States.

Part H – Are you, or have you ever been a U.S. citizen or Green card holder? Sometimes it’s not what it seems.

Q. Are you a “U.S. Person” for FATCA purposes?

A. See the articles referenced in the following two tweets.

Conclusion …

The receipt of a FATCA or “CRS” letter is a frightening thing. Take a deep breath. Deal with it rationally and logically. If you are NOT a U.S. citizen you are probably NOT a “tax resident” of more than one country. On the other hand, if you are a “U.S. citizen” …

How would you go about “Solving this problem of U.S. citizenship”?

or maybe this

(For an interesting article on the “Possible Meghan Markle U.S. Tax Chronicles” by Helen Burggraf read here).

I am available on a “consultation basis” to help you sort out your “Tax Residency” in a FATCA and CRS world.

John Richardson

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer – Part 3

cross-posted from citizenshipsolutions.ca

Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way

Q. What is the criteria that different countries use to define who is a “tax resident” of the country?

A. The circumstances that constitute “tax residence” will differ from country to country. Generally speaking “tax residence” is based on definitions of (1) “residency” (deemed and actual), (2) “domicile” and (3) (in the case of the United States and Eritrea) “citizenship”. Note that different countries may define “tax residency” differently.

Q. How can I learn the definition of “tax resident” for the OECD countries?

A. In an earlier post about “OECD tax residency” I referenced the following chart which summarizes the definitions of “tax residency” in OECD countries. (I suggest that you use these definitions as a “start” to your research and not as the “last word”.)

Q. What is the significance of the “OECD” and why does “OECD tax residency” matter?

A. About the “CRS”: “OECD” tax residency matters because the “OECD” has implemented what is called the “Common Reporting Standard” (“CRS”). The purpose of the “CRS” is to require members to exchange information about the existence of financial accounts, owned by individuals in countries where they do NOT have “tax residence”. For example, if a “tax resident” of Germany had a bank account in Canada, then the German Government would want to know about it! Ultimately this is to ensure that all “individuals” pay their “fair share” of taxes. (By the way, the salaries of OECD employees are generally tax exempt. See an interesting post by Dan Mitchell on the OECD. Seems pretty clear that if OECD employees do not pay tax, that they are not paying their “fair share”.)

Q. About FATCA: Tell me more about the requirements to be a “tax resident of the United States”.

A. The United States has a system of “deemed tax residency”. In other words, the rules are very clear. At a minimum both U.S. citizens and “permanent residents” of the United States (“Green Card Holders”) are U.S. “tax residents” (Note that unless you are a U.S. citizen or “permanent resident” – a physical presence in the United States is necessary make one a U.S. “tax resident”. Here is a post I wrote describing what it means to be a “tax resident of the United States“.

Q. Tell me more about the requirements to be a “tax resident” of Canada.

A. The definition of “tax resident” in Canada includes both “deemed tax residency” and “tax residency based on facts and circumstances”. Here is a post I wrote describing what it means to be a “tax resident of Canada“.

Q. What about South Africa? The way that South Africa imposes taxation on its expats has been in the news lately. Can you tell me about the definitions of “tax residency” for South Africa? Is it true that South Africa is considering “citizenship-based taxation” just like the United States has?

A. No, South Africa has NOT considered “citizenship-based taxation”. But, it doesn’t require much to meet the test of “residence” for tax purposes in South Africa. To understand the “South Africa issue”, see:

Part 1: South Africa is NOT attempting to compete with the USA by enacting “citizenship-based taxation”; and

Part 2: The problem is NOT “worldwide taxation”. The problem is imposing “worldwide taxation” on people who don’t live in the South Africa or the USA and are “tax residents’ of other countries

Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?

Q. I am a U.S. citizen and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?

A. Absolutely, positively NOT. U.S. citizens CANNOT use a tax treaty to break “tax residence” with the United States. The reason is that almost all U.S. tax treaties includes what is called a “savings clause“. The purpose of the “savings clause” is two-fold:

First, to ensure that U.S. citizens can never (without relinquishment or renunciation) cease to be U.S. tax residents; and

Second, to force other countries to agree that the U.S. can impose U.S. taxation (according to U.S. tax rules) on people who are actual residents of those other countries (because those residents are deemed to be U.S. citizens). To understand how this impacts the lives of U.S. citizens living outside the United States see: “How to live outside the United Staes in an FBAR and FATCA world“.

Q. I am a U.S. “permanent resident” (Green Card Holder) and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?

A. Yes, the “savings clause” does NOT apply to Green Card holders. A “Green Card holder” is a “tax resident” of the United States. Therefore, a “Green Card” holder who actually lives in Canada and is a “tax resident” of Canada, may use a “tax treaty tie breaker” to cease to be a U.S. tax resident. But, this decision must be made VERY CAREFULLY because the use of the “tax treaty tie breaker” by a Green Card Holder “may” have the following NEGATIVE implications:

On the other hand, there are many reasons why a Green Card Holder might want to use a “tax treaty tie breaker” to cease to be a “tax resident” of the United States. These reasons include (but are not limited to):

Note: If you are a Green Card holder, the decision to use a “tax treaty tie breaker” should be made only after consultation with an appropriate advisor! I am not kidding! The fallout from making this election can be enormous!

Q. I am a “tax resident” of Canada. I am not a U.S. citizen. I am a pure Canadian! Can I use a “tax treaty tie breaker” to break “tax residence” with another country!

A. Thankfully (as long as you are a “Tax resident” of both Canada and that other country), the answer is YES! Canada (apparently) has more than 90 tax treaties that include a “tax treaty” tie breaker provision. Here is a post that describes how the “tax treaty tax tie breaker” can be used to break “tax residence” with another country.

John Richardson

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer Part 2

cross-posted from citizenshipsolutions.ca

Part B – The Combined FATCA/CRS Letter

This letter is particularly worrisome for Canadian residents (whether Canadian citizens or not) who were either born in the United States or are (otherwise) U.S. citizens or U.S. permanent residents (AKA Green Card Holders). Could this mean that they would be required to apply for a U.S. Social Security number?

What follows is a sample letter …

Dear Valued Customer:

We appreciate our relationship with you and we are committed to informing you about matters that affect you. We are writing today to inform you that changes have been made to the Canadian Income Tax Act (Part XVIII and Part XXIX), requiring TD to provide information about customers who have a tax residence in other countries to the Canada Revenue Agency (CRA). The CRA may then share information with other countries through existing provisions and safeguards under the Tax Convention.

To comply with this legislation, we have reviewed our records (eg. address) in order to identify customers who may be residents of other countries for tax purposes.”

Part C – “Tax Residency 101”: It’s about where you should be paying your taxes

Some Question and Answer …

Q. I don’t want to listen to the above interview. What is meant by “tax residence” or “tax residency”?

A. At the risk of oversimplification, your “tax residence” AKA country of “tax residency” is usually (with the exception of the United States which also imposes taxation based on citizenship) the country where you live or have another type of connection. It’s the country that has the right to impose taxation on your “worldwide income” BECAUSE you live in or have a sufficient other connection to the country. For example, if you live in Canada, sleep in Canada, work in Canada, raise your family in Canada, have a Canadian drivers license in Canada, etc. – you are a ““tax resident” of Canada“. For most people, “tax residency” is a “common sense” concept. It’s like this:

“I am subject to taxation on my “worldwide income”* in Canada because I live in Canada”.

or

“I am subject to taxation on my “worldwide income”* in ________ because I live in _______”

(*Most countries impose taxation on the “worldwide income” of their “tax residents”. A small number of countries impose “territorial taxation” on their “tax residents”. “Territorial taxation” is where a country imposes tax on ONLY the income sourced in the country of residence.)

Q. Does this mean that ONLY my country of “tax residence” can impose taxation on me?

A. No. Every country has the primary right to impose taxation on income sourced in that country. Maybe you receive income which is “sourced” in another country. Maybe you own property in another country. In these cases you might be subject to tax in the countries where you own the property or receive the income. In general, if you are not a “tax resident”, you would be taxed in another country ONLY on the income sourced in that other country. On the other hand, your country of “tax residence” would impose taxation on ALL of your income wherever its source.

Q. Is it possible that I could actually meet the conditions to be a “tax resident” of more than one country?

A. Absolutely yes! Different countries have different rules for determining tax residency. There is no reason why a person could not meet the definition of “tax resident” in more than one country. In fact, it is very possible that one could be a “tax resident” of more than country. (This is the reason for the existence of “tax treaty tie breaker” provisions.)

Q. If I meet the conditions to be a “tax resident” of more than one country, will I really be treated as a “tax resident” of more than one country?

A. Yes. Although it is possible to meet the definition of “tax resident” for more than one country, most countries have tax treaties that (1) identify those “instances” where an individual is a “tax resident” of more than country and (2) use the tax treaty to deem the individual to be a “tax resident” of only one country. It wouldn’t be fair for an individual to be treated as a “tax resident” of more than one country, would it? (U.S. citizens living outside the United States are always tax residents of the United States even if they are also “tax residents” of another country.)

Q. What do you mean by “unless you are a U.S. citizen”? As a “U.S. citizen” am I a “tax resident of more than one country?

A. Well, if you are a “U.S. citizen” (or Green Card holder) you are ALWAYS a “tax resident” of the United States. It doesn’t matter whether you actually live there or not. As long as you are a U.S. citizen, you are subject to the full force of the Internal Revenue Code. This includes a variety of “Taxes, Forms and Penalties”. It includes a number of very specific reporting requirements including (but not limited to): FBAR, Form 8938, Form 3520 and Form 5471. For this reason, it is very difficult for a U.S. citizen to move from the United States, become a “tax resident” of that other country and engage in effective financial and retirement planning. See for example:

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

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


Q. I understand that as a “U.S. citizen” I am always a “tax resident” of the United States. But, if I move to Canada, does that mean that I am a “tax resident” of Canada too?

A. Absolutely YES!!! You are an American. “To whom much is given, much is expected.” U.S. citizens living in Canada (who meet the definitions of Canadian “tax residency”) are ALSO “tax residents” of Canada (or any other country where they may live). In other words, U.S. citizens living abroad are generally “tax residents” of at least two countries! How cool is that?

John Richardson

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer – Part 1

cross-posted from citizenshipsolutions.ca

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer

Introduction – So, what’s this “tax residence” stuff about? What does “tax residence” mean?

In 2014, as people started to receive “FATCA letters” I wrote a lengthy post describing “What to do if you receive a FATCA letter“. Information exchange under the Common Reporting Standard “CRS” has begun in 2018. As a result, I am writing this post which is to explain what the CRS is and how it relates to the FATCA letter. It is important to understand that the “CRS letter is actually a combined “CRS/FATCA” letter which is more likely to be received than the original FATCA letter. I urge that those who have received a letter of this type to read this post PRIOR to seeking professional advice!!!

You are reading this post because you have received a letter from your bank that is asking you to identify the countries where you are a “tax resident” and/or whether you are a “U.S. Person”.

The purpose of this post is to help you understand:

– why you are receiving the letter
– what the letter means
– what is the meaning of “tax resident”, “tax residence” and “tax residency” (terms which are used interchangeably)
– why “tax residency” is important to you
– the significance of being a U.S. citizen or Green Card holder
– how to identify where you may be a “tax resident”

Why are you receiving this letter?

The letter is intended to fulfill the bank’s due diligence obligations under both the OECD Common Reporting Standard (all countries of “tax residence” except the United States) and FATCA (whether you are a “tax resident” of the United States).

In other words, the letter is for the purpose of satisfying bank “due diligence” under two separate reporting regimes – FATCA and the OECD Common Reporting Standard “CRS”

This is long post which is broken into the following parts:

Part A – How does FATCA differ from the “CRS”?
Part B – The Combined FATCA/CRS Letter
Part C – “Tax Residency 101”: It’s about where you should be paying your taxes
Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way
Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?
Part F – A “U.S. citizen” cannot use a “tax treaty tie breaker” to break U.S. “tax residence”. How then does a “U.S. citizen” cease to be a “U.S. tax resident”?
Part G – How a “permanent resident” of the U.S. – AKA “Green Card Holder” – ceases to be a U.S. tax resident
Part H – Are you, or have you ever been a U.S. citizen or Green card holder? Sometimes it’s not what it seems.
Continue reading “So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer – Part 1”

U.S., U.K., Canada, Australia and Netherlands form international tax enforcement group

According to an article by Michael Cohn in Accounting Today, a multi-lateral tax enforcement group has been formed. TThe Joint Chiefs of Global Tax Enforcement (or J5 for short), intend to “collaborate in fighting international and transnational tax crimes and money laundering.”

Membership of the J5 includes the heads of tax crime and senior officials from Internal Revenue Service Criminal Investigation (IRS CI), Her Majesty’s Revenue & Customs (HMRC) in the U.K., the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), and the Dutch Fiscal Information and Investigation Service (FIOD).

Leaders of the group met Thursday in Montreal to formulate their plans. The J5 plans to work together to gather and share information and intelligence, as well as conduct operations and build capacity for tax crime enforcement officials. Areas of focus include cybercrime and cryptocurrency, data analytics, and enablers and facilitators of tax crimes. The alliance will concentrate on building international enforcement capacity, as well as enhancing operational capability by piloting new approaches and conducting joint operations, to bring perpetrators who enable and facilitate offshore tax crime to justice

While it sounds like the planned operations will be aimed at bigger fish, what will be interesting to see is how Canada and the Netherlands proceed. Both countries have Mutual Collection Assistance provisions in their tax treaties with the U.S. (as do France, Sweden and Denmark) that indicate they will not collect from their own citizens if they were citizens when the tax was incurred. And of course, in the case of Canada, no collection of FBAR penalties. Unless I misunderstand, it sounds like the J5 intend to move into enforcement, which sounds like collection to me.

It appears that in addition to provisions in any number of DTA’s, we now have several “information exchange” programs/policies/statutes such as Foreign Account Tax Compliance Act (#FATCA) , the Common Reporting Standard (#)CRS and the OECD’s CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS . It is difficult enough to read ONE treaty and comprehend what is covered. How is one to evaluate ALL of the aspects that are touched upon by these different programs?

Up to now the one principle that protected one from extraterritorial collection was the revenue rule. A
paper I came across years ago (dated 2004) by Professor Vern Krishna was already predicting the fall of the “revenue rule.” This paper was written a few months after the U.S. passed the American Jobs Creation Act, (see page 154 from link) while removing the issue of intent* to avoid paying tax when renouncing, also created the notion of “tax citizenship.” When relinquishing or renouncing, the requirements of notifying the State Department and filing information with the IRS were added to the process. Four years away from the H.E.A.R.T. Act (the Exit Tax 877A) and 6 years from
H.I.R.E. Act ( FATCA).

In tax law, absent special enforcement treaties, sovereign countries do not enforce the revenue laws
of other countries (the “revenue rule”).

To overcome this rule, many countries negotiate bilateral treaties for information disclosure and
mutual enforcement assistance to counter tax evasion.

In theory, the common law revenue rule reflects the principle that a country has exclusive
sovereignty over its tax policy. However, Lord Mansfield’s rule has limited scope in a world of
increasing regulatory supervision and information exchange between countries on money
laundering and terrorism financing.

The traditional rule that a country will not enforce the revenue laws of another country
and that no country is under an obligation to disclose financial information to foreign governments is very much on its way to extinction.

What do you think? Will all these actions eventually result in a system where there are no privacy laws concerning one’s finances, every bloody dime one earns will be owed to someone as tax?

*****

*removed the intent issue of renouncing for tax purposes by establishing 3 tests (income, asset, certification of tax compliance for 5 years on form 8854) to determine

What is Tax Residency? – Episode 2 with John Richardson & Olivier Wagner

 
“Tax residence American style” AKA : Imposing “worldwide taxation” on those with @taxresidency in other countries

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. At the 38 minute mark, we talk about how to describe U.S. “tax residence”.


INTERVIEW HERE