Tag: U.S. tax compliance

The Repatriation tax and the 962 Election for Americans with a U.K. corporation

by Monte Silver
reprinted with permission of the author

The U.S. 2017 tax reform has made it very problematic for an American residing in the UK to conduct business through a UK corporation. Operating through a UK corporation exposes the expat to two new taxes: Repatriation and GILTI. This article will discuss the little known 962 election, how it can be used to reduce Repatriation tax liability, and some issues that must be considered before doing so.

A numerical example is helpful. An American living in the UK has been operating a CPA sole practice or family restaurant for 30 years through a wholly owned UK company. After paying UK corporate income tax on profits over the years, the company has $500,000 in retained earnings in its bank account, which the expat is counting on for retirement. Under the Repatriation tax, the expat is now personally liable for $87,700 (17.54% * $500,000) of that amount.

How is this tax paid? In eight annual payments, with the first payment of 8% (or $7,016) being due June 15, 2019 (as a result of the extension achieved from the U.S. Treasury).

Let’s assume that the expat has no personal foreign tax credits to use to offset to the Repatriation tax. In other words, in previous years the expat has already used all personal income tax paid in the UK to offset U.S. income tax.

Section 962 of the U.S. Internal Revenue Code (“IRC”) may help. Section 962 allows the expat to be treated as a corporation for a specific year (say in 2017) solely for purposes of the Repatriation tax (and other Subpart F income which taxpayers rarely have).

Why does this help? Simple. If we assume an average UK corporate tax rate of 20% over the past 10 years, then approximately $100,000 ($500,000*1.20%) of UK corporate tax has been paid. As the UK corporation never owned U.S. taxes, it never utilized these taxes as credits on any U.S. corporate tax return.

And if the expat utilizes the 962 election in 2017, there are two potential benefits: (1) ability to use the corporate taxes paid in the UK to offset the Repatriation tax, and (2) enjoy the lower corporate Repatriation tax rate.

In the real world, situations are rarely black and white – i.e. lots of corporate credits but no personal credits. For example, if the expat has some personal tax credits available, the point at which the 962 election becomes beneficial requires analyzing different numerical scenarios, taking into account many factors, such as gross-up rules under section 78. However, in cases where the UK corporation has a significant pool of unused tax credits and the expat has none, the 962 election may make sense.

The remainder of the article will discuss one significant landmine that may arise when using the election. And it is important to state until now, 962 has rarely been used, so there may be others:

Post-2017 distributions. What happens when the UK corporation finally distributes the $500,000 to the expat? If no 962 election was made, no additional U.S. tax is paid by the expat (IRC 959). UK tax, however, may be due. And if 962 election was made? Bad news: all the distributions out of the accumulated earnings, beyond what was paid on the Repatriation tax, are subject to U.S. tax (IRC 962(d))! Ouch. At what rates? Most likely personal marginal rates. Double ouch.

An example will help illustrate this. In the above example, if no 962 election is used and no personal tax credits are available, the expat would be liable for $87,700 in Repatriation tax, but no more U.S. tax would be due upon distributing the $500,000. But under 962, let’s assume that the $100,000 in corporate tax credits eliminated any Repatriation tax liability. Upon distribution of the $500,000, the expat would pay U.S. taxes at the marginal rate, or as much as $185,000 ($500,000 * 37% – the highest marginal rate). Triple ouch!

Does 962 make sense? It may in the following three situations, but careful analysis is required: (1) When the UK corporate tax credits far outweigh the personal income tax credits available, and/or (2) when the expat has no plans to withdraw the money in the corporation, and/or (3) the UK taxes due at the time of distribution may render any U.S. additional taxes minimal.

In summary, in planning around the Repatriation tax, the 962 election is an option. However, careful analysis is required to achieve the best results under U.S. and UK tax law. A totally different analysis exists for the 962 election with regard to GILTI in 2018 onward.

Nothing herein shall be deemed legal advice
American Tax Solutions

If you Decide to Comply, DON’T choose a Homelander Tax Compliance Professional

I was very surprised to receive the following email on Friday evening. I cannot recall ever getting anything like this before. I will not identify the author because it is not proper to publicly share an email without the permission of the sender. It is not anyone I have ever heard of before and I doubt any of you have either. It took me a while to decide if I would answer or not. I tried to put my reaction aside after all, why be surprised that a tax compliance professional would demonstrate so little awareness outside of his/her experience. In the end, I simply could not ignore how I felt. I replied and have decided to publish the email without naming its author and my response.

I wish I had pointed out to this person that technically, due to the Canadian IGA (or likely any Model I agreement), that there are no harsh penalties that have been implemented. A professional who is truly conversant with this situation should have stated this better. Does such a statement show a conscious attempt to confuse the expat, assuming penalties from FBAR, OVDP etc will come to mind? Could it be a reference to the idea that Form 8938 is a harsh penalty all on it’s own? (As a matter of torture, most definitely….) Or is the practitioner just sloppy? (Maybe we could get this person to rule on all the “plain language” misapplications we hear of….retroactive 877A, anyone?).

I also wish I had challenged the statement that “the program is working.” There is nothing to suggest that the majority of non-resident (or resident, for that matter) Americans have become compliant. The numbers quoted in the statistics for the OVDP are nowhere near 9 million and we know some of those who came forward are Homelanders. For some interesting figures regarding compliance please see Professor William Byrnes’ “Is FATCA Much Ado About Nothing“? . Prof. Byrnes states “The IRS War on the FBAR is simply not working.” (“The IRS received 807,040 FUBARS FBARs in 2012; compliance with FBAR filing appears to be declining.”) Every tax compliance professional should be required to read this report. It would go a long way in curtailing the inflammatory language we experience, intended to confuse & frighten and assumes we are all idiots.

I also should have challenged the nonsense about ICE not allowing visas of former citizens being allowed to enter the U.S. This amounts to the usual threat of the Reed Amendment. Does ICE have the power to override the State Department?

I am simply astonished at the arrogance of this person. What to say of the obvious limited exposure of such an “expert.” (I have never heard anyone suggest that there are bank problems in Canada). Mentioning OVDP and not Streamlined. Who on earth does this person think he/she is?

My USC/resident-CPA sister strongly suggests I complain to the appropriate accountancy board.

And the unmitigated gall of implying I should send clients………good gawd………

*******

(emphases are mine)

If this is the Patricia Moon who has given up her US citizenship because of FATCA, then this is for you. I have seen your “protests” regarding FATCA and filing US tax returns. You stated that you were delinquent in your filings, and that you caught yourself up and then renounced your citizenship.

You are one of the very reasons that FATCA with its harsh penalties was implemented. I have been practicing in the international tax area, specializing in US expatriates, for over 31 years. I am the chairman of a state CPA Society’s International Tax Committee, and have an international reputation in this area. Over my 31 years’ time I have prepared and/or reviewed several thousand tax return. I have seen dozens of people such as yourself , people who are American citizens, and enjoy the benefits of being an American citizen, while failing to fulfill the obligations that come with citizenship – namely filing a US tax return and paying any tax due. One cannot enjoy the benefits of American citizenship without complying with the responsibilities.

Since FATCA has been implemented, there have been citizens such as yourself who have renounced their citizenship. I understand from a couple of US Customs & Immigration attorneys that I work with that ICE often won’t allow visas to come back to the US, sometimes even for vacations, to former US citizens. However, a much larger number of persons have come forward and are now filing tax returns and complying with the responsibilities of being a US citizen.

So the law has worked. It is accomplishing its intended goals. I personally have worked with several formerly noncompliant individuals to “get them legal” through the Offshore Voluntary Disclosure Program.

Staying legal is not a difficult process. It requires filing a US tax return every year. Often there is no tax due from it, as the foreign tax credits and the foreign earned income exclusion will reduce or eliminate the tax on all but US-sourced income.

Giving up citizenship is a drastic step when compliance is so easy. It is like amputating your arm because you have a hang nail.

And, from my experience, most larger banks WILL continue to work with Americans abroad. Very few are closing American accounts. In Canada, for example, I know that BMO Harris actually promotes accounts for Americans. I have several clients in Canada who bank with them. RBS Bank, Banque Scotia, TD Mortgage Corporation, Canadian Imperial Bank of Commerce, and many others.

Just my thoughts. Feel free to give my name to any individual who wants to become legal, but does not want to go to the extreme that you did.

Thank you.

*******

My response:

Your email is extremely offensive and demonstrates that you understand this situation from one point of view and one only.

Perhaps you are unaware of the fact that the large majority of expats living outside the US for decades were simply unaware of any requirement to file taxes and information returns. The U.S. made no attempts to educate or notify people of these requirements. Surely you have known people who were “non-willful.” I certainly hope you did not put any persons such as these in the OVDP/OVDI.

Your comment “You are one of the very reasons that FATCA with its harsh penalties was implemented” is curious, given I did not owe any tax. I was a stay-at-home mother with an annual income that never exceeded $11,000 CAD from doing the books for my husband’s company. An annuity inherited from my parents was transferred at a later time and I most certainly paid the tax that was due.

As to “I have seen dozens of people such as yourself, people who are American citizens, and enjoy the benefits of being an American citizen….”

  • I had not lived in the United States for thirty years and was/am a law-abiding, tax compliant citizen/resident of Canada
  • I was not “enjoying the benefits of being an American citizen”
  • If you are referring to having the right of return, there is nothing particularly unique there; the majority of countries on earth allow their citizens to return
  • And I certainly am in no need of the Marines coming to save me in Canada (a “benefit” that one would have to pay for, were it even relevant to those living in first-world countries).

If by “benefit” you mean having access to “the greatest country on earth” I will tell you that a component of renouncing involved my observations about Abu Gharib, Guantanamo, the assassination of American citizens by drone without due process and other actions that frankly made me ashamed to have ever been an American citizen. In other words, your assertion that my renunciation was “like amputating your arm because you have a hang nail” simply does not cover all that was involved. Not the least of which, was my Canadian family and how they felt about the effect of U.S. policy on their lives. My husband resented any account information being turned over to FINCEN (given the fact it was his money)and it was a huge issue in the marriage.

I have remained active in this movement having renounced over 6 years ago. I don’t gain anything personally by volunteering a huge portion of my life to this. I am fully conversant with what is required regarding compliance. It is not always simple and it is very expensive. You fail to mention facts such as:

  • the U.S. would expect capital gains tax on the sale of our personal residence for a gain greater than $250k
  • the U.S. treatment of Canadian mutual funds as PFICs is particularly punitive and would require 8621 every year
  • the U.S. insistence that my country’s tax-deferred vehicles designed to help save for education, disability and non-RRSP uses are foreign trusts requiring 3520 and 3520A every year; all of these plans mirror similar programs in the US (529s, ABLE and Roth IRAs)
  • had I been signed on my husband’s company (I wasn’t) we could have found ourselves subject to an annual 5471 and the particularly abusive Transition Tax

I personally have no desire whatsoever to go to the United States. I don’t care what CBP and ICE do. It doesn’t frighten me at all. A Canadian does not need a visa to visit the U.S. anyway.

None of us have ever claimed that obtaining bank accounts or mortgages is difficult in Canada. This is a situation that primarily affects Europeans and it is very, very real. I know many people who have been severely impacted by it. It was perversely disingenuous for Judge Rose claim in the Bopp FATCA ruling, that this was not due to FATCA but to independent action of the banks.

Over the years I have encountered many people such as yourself, who seem to think they are entitled to inflict their opinions and judgments about character based upon presumptions made about U.S. expectations. I wonder if it could ever occur to you that there are other places and people in the world who do not base the value of their existence upon opinions such as you have expressed. I find it difficult to believe you would end asking me to send you clients. I trust this will be the end of any communication.

Regards,

Patricia Moon
Secretary-Treasurer
xxx-xxx-xxxx
Alliance for the Defence of Canadian Sovereignty &
Alliance for the Defeat of Citizenship Taxation

Solving U.S. Citizenship Problems – London U.K. – March 7, 2018

 

WEDNESDAY MARCH 7, 2018 LONDON UK
7:00 – 9:00 pm

Are you a US citizen living abroad?

Should the U.S. be able to tax the residents and citizens of other countries?

What factors are involved; how do I make a reasonable decision about what to do?

  • How will recent Tax Reform affect my situation?
  • What do I do if I have never filed an FBAR?
  • I am an “Accidental American” – do I really have to comply with all these requirements?
  • Should I register my children with the State Department?
  • I am self-employed; do I have to worry about this Transition Tax?

Please register in advance/obtain details by email: nobledreamer16 at gmail dot com
 
JVENUE near Russell Square Station
ADMISSION: £10
WHO: John Richardson, B.A., LL.B., J.D., is a dual Canadian-American residing in Toronto. He is a lawyer focusing on the unique problems of non-resident US citizens. He is a member of the bars of New York, Massachusetts and Ontario. He is the co-chair for the Alliance for the Defence of Canadian Sovereignty as well as the Alliance for the Defeat of Citizenship Taxation.
He has been at the forefront of the expatriate movement since 2011 and has engaged extensively in a worldwide educational outreach directed toward “US Persons” via seminars, interviews, and blogs.

Information presented is NOT intended or offered as legal or accounting advice specific to your situation.

 

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

What is Tax Residency? – Episode 1 with John Richardson & Olivier Wagner

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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.

 

 

NO Evidence of Intent to apply the “”Transition Tax” to Small Business Corporations of #AmericansAbroad

 

It appears that we are very likely at a breaking point in this intolerable situation faced by expatriates as regards U.S. application of citizenship-based taxation. Tax reform does not happen often. It is critical that relief for expats occur in the current legislation. Many of us simply will not be around in 30 years for the next shift. It will be completely unacceptable if there is no transition (at the very least) to territorial taxation for individuals. Some people may be forced at this point to renounce if only to put a stop on future tax liability. Some will not choose to become compliant simply because it is expensive, they have no ties to the U.S., no intent to go there, etc.

In addition, there is a very dangerous aspect (the “transition tax”) that appears in both the House and Senate bills; it is arguable that it does NOT apply to small corporations owned by US citizens residing outside the United States. The biggest danger here, is that it may remain unclear. We have seen what has happened in a number of situations when this is the case. Some examples are:

1) People who relinquished citizenship decades ago (and who do not have a CLN) have been told they are still U.S citizens. Not by the State Department, not even by the IRS. And not even by the banks per sé. It is the position of many members of the tax compliance community. This is completely unacceptable and no expat should accept such a conclusion without investigating the citizenship aspects of the situation.

2) Accidentals have been told the same thing; they are Americans and must become tax compliant. Again, not directly by the US government (as in “coming after them) but by members of the tax compliance community. This is also unacceptable and no one should become compliant without a complete examination of whether it is in his/her best interests (or not).

3) People who did NOT belong in the OVDP/OVDI programs were put there by tax professionals with hideous and tragic results. The law says one has to file, nowhere does the law say one had to enter one of those programs. If anybody should have known that, it would be the tax compliance community.

4)The IRS has not given a ruling on whether or not 877A is to be applied retroactively. This is another area where tax compliance professionals have decided it is the law. This is definitely NOT in the best interest of anyone renouncing their citizenship and most definitely should not be applied to anyone who renounced/relinquished before it became law.

5)One of the most egregious and limiting situations involves owning foreign mutual funds. There is nothing to support the practice of treating non-US mutual funds as PFICs. Again, guess who insists on this treatment?

All of the above points are as unacceptable as is a lack of change for Americans abroad in tax reform. We have had enough.
 
THIS HAS TO STOP
 
We, as a community, have to make a conscious decision that what they say does not apply to us, is not in our best interests. The application of U.S. law outside of its borders is highly questionable, and should not override the laws of the countries we are residents of. (The IGAs do not represent approval/acceptance of US policy; they are merely proof of what happens when the US threatens to destroy the economies of other nations). “It’s U.S. law.” This is always the argument used to justify application of these ridiculous actions, often with absurd results. Penalties, FATCA “outing” us, application of the Reed Amendment (or worse, the ExPatriot Act if it ever passes)- all can be quite frightening if applied as the tax community claims. Yet there is nothing to suggest that these things are realities. The only people who have been harmed by these things are the ones who are/or tried to comply.

It is time to resist not only the idea that U.S. law should run our lives but also, that the tax community should determine what courses of action we should take. We need to be consistent in our message on this, on FB, in tweets, blogs etc. No more. No more. No more…………

**********

Shortly before the House of Representatives released the Markup for H.R. 1 a Canadian tax lawyer Max Reed authored an article (also here ) claiming that:

New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.
Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill.
It is unclear what, if anything, will be enacted. However, US citizens in Canada – particularly those that own a business – should pay close attention as their tax situation could get significantly worse. Renouncing US citizenship may become an increasingly attractive option.

There has been much discussion of whether or not this is going to happen (assuming a tax reform bill containing these measures actually is passed).
A very good argument for why this should NOT apply to #AmericansAbroad is
here.

The following comment appeared today on Brock. It reiterates the position that the “transition tax” cannot be viewed as applying to Americans abroad who own small corporations. We can expect that tax professionals are going to claim it does. Start now to learn why it doesn’t make sense and why no one should listen to the notion they owe a tax to the US based upon this new “tax reform.”
 
USCitizenAbroad
November 14, 2017 at 7:16 pm
 
@ Patricia Moon

With respect to the discussion of whether there is a tax on the retained earnings of Canadian Controlled Private Corporations:

First, pick this discussion of the changes to the territorial tax system for corporations at the 35 minute mark here:

https://www.finance.senate.gov/hearings/continuation-of-the-open-executive-session-to-consider-an-original-bill-entitled-the-tax-cuts-and-jobs-act

There is NO evidence of any intention to apply the “transition tax” to anything other than large corporations and certainly not to small business corporations owned by Americans abroad.

Second, an interesting summary was published by the Toronto law firm Oslers which talks about U.S. tax reform and makes NO reference to a possible tax on the retained earnings of CCPCs.

TaxAuthorities/US Tax Reform for Busy Canadians

Note no mention that this could affect CCPCs owned by Canadians:

” Foreign minimum tax – Current taxation of “Foreign high returns”:

Under this provision, a U.S. parent corporation would be subject to
current U.S. taxation (at the new 20% rate) on 50% of its controlled
foreign corporations’ (CFCs’) “high returns.” Tax would be required
to be paid on these imputed income streams regardless of whether the
corresponding earnings were actually distributed to the U.S. parent.
“Foreign high returns” are the excess of the CFC’s net income over a
baseline return (7% plus the federal short-term rate) on the CFC’s
adjusted tax bases in depreciable tangible property, reduced by
interest expense included in the CFC’s net income. “Foreign high
returns” would be defined to exclude certain types of income (including
“effectively connected income,” income from the disposition of
commodities produced or extracted by the taxpayer, and income subject
to tax at an effective rate of at least 18%). This provision, which
cuts against the theory of a “pure” territorial tax system, was
designed to counterbalance incentives that may otherwise linger for
U.S. companies to locate high return generating assets/activities (like
intangible property) in offshore locations.”

My feeling is that regardless of the language that this was not intended to apply to Americans abroad.

What should be done:

The danger is that the compliance community will make the law by interpreting this to apply beyond its obvious intention. The obvious solution is to NOT use the services of any tax firm who interprets the law as applying to CCPCs. After all, it was the compliance firms who created the notion that Canadian mutual funds are PFICs.

Testimony: Green Card Holder Victim Of FATCA After Failing To Return Expired Card

cross posted from Tax Connections

Original Statement on April 9, 2015

Submission to the United States Senate Finance Committee
International Tax

To anyone who doesn’t really understand the fear and frustration of FATCA and the insanity of the US tax system:
 
I am not and never have been American. I don’t live in the USA and I have no financial connections to the USA.

However, many years ago I got a green card when I married an American. We lived in the so-called, Land of the “Free”, until we decided to move permanently to my home country to care for my elderly parents.

A year or so after my return to my home country my green card expired, became null and void, but I didn’t know I was supposed to return it to USCIS along with an I-407 form. (Green cards don’t come with a set of disposal instructions.) Years later when I found out about this I searched for days to find that old green card and then I sent it away. It was received (according to the mail trace) but never officially acknowledged and there were no replies to my follow-up inquiries.

This left me trapped in a perpetual state of deemed US “personhood” which comes with onerous US tax filing and now highly intrusive FATCA reporting too. The threatened penalties for not filing FBAR (FinCEN114) forms are staggering. They would exceed my life savings (mostly a modest inheritance from my non-American parents). If I lose my life savings to the IRS I could end up on welfare and that would not be fair to taxpayers here in my home country.

What did I take from the USA when I left? I took savings of less than $5K and a gain of less than $75K from the sale of the house we built with our own labour and paid for entirely from the savings I brought with me from my home country (no mortgage on that house). All of this was reported to the IRS and taxed appropriately.

What do I get from the USA? Absolutely nothing – NO right to return to the USA to live or work; NO US Social Security because I have never had US income; NO rescue by US marines in a disaster; NO US vote; NO representation in the US Congress; and since I haven’t visited the USA in almost 20 years (and never will again), NO benefit from the USA’s infrastructure. I do not want any of those things anyway.

What do I want from the USA? I want to be left alone so that I can lead a normal life without the stigma of being called a “US person for tax purposes” (and ONLY tax purposes).

What’s the biggest irony of my whole situation? Well, my husband is no longer American since he recently relinquished his US citizenship. He now has a priceless piece of paper called a CLN (Certificate of Loss of Nationality) which means he can open and retain bank accounts here with no intrusive FATCA reporting.

Meanwhile I, who never was American, will have to live with uncertainty for the rest of my life. If my bank finds out about my past connection and failed disconnection to the USA, it will report me and my accounts to my country’s tax agency which will forward that information to the IRS. And then … well I shudder to think.

Some Americans may hate me for saying this but I have no love or respect for what the USA is doing with its irrational citizenship-based tax system and now its FATCA overreach. These same Americans might even laugh and gloat about how I became trapped as a “US person for tax purposes” but at least my husband, an upstanding citizen, has escaped the clutches of the USA. He did so with no regrets and when his CLN finally arrived he felt nothing but relief. I and my country are proud and pleased to have him. His warm and welcoming citizenship ceremony here in my, now OUR, country was one of the best days of both of our lives.

Neither of us is “un-American” but we are “non-American” and we cannot fathom why the USA will not graciously let its people go.

Anonymous

After Five Decades of Abuse, Enough is Enough!

 
cross-posted from Brock
Posted on February 12, 2012 by Just Me
 
Forget about the notion that CBT has been with us since the Civil War. Forget about the absurd conclusion of Cook v Tait. The real beginning of our story started 55 years ago on October 16, 1962. This was the beginning of the U.S. government’s campaign of punishment for Americans who dare to live abroad.

Many people have often said that the only way to get the U.S. to understand our situation is to focus not on harms, or fairness, or Constitutionality. Doing that just fuels the clichés and “alternative facts” about all the fatcats abroad, cheating on taxes. Instead, as Roger Conklin tried to do, the Congress, new Treasury Secretary Mnuchin and POTUS should realize that these policies have resulted in a trade deficit for 55 years.

Finally, it merits at least some mention that fifty years ago, before these extra fiscal and financial reporting burdens were put on the shoulders of overseas Americans, and while they were still fully able to compete with the citizens of other countries in the same foreign markets, the United States had enjoyed more than sixty-seven years of unbroken trade surpluses with the rest of the world. During the subsequent decade, after this new toxic tax burden was imposed on those living and working abroad, the U.S. foreign trade position began to weaken, as many had predicted, and a trade deficit appeared for the first time in the 20th Century in 1971. As the tax burden on overseas Americans became increasingly heavy and increasingly incomprehensible, these deficits soon became a permanent fixture of U.S. trade performance, and we are now in our 36th straight deficit year with the cumulative amount of these trade deficits now exceeding $8 trillion.

It is not very obvious so far that the current Administration in Washington , despite the enthralling campaign promises that were made in 2008, has any serious interest in leveling the worldwide playing field for trade. The results for the first eleven months of 2011 already show an impressive deficit for this most recent year of more than $500 billion, which is the worst trade performance of the last three years, and this deficit still grows each and every day at a rate in excess of $1.5 billion. The aggregate trade performance for the first three years of the current administration is now a negative $1.4 trillion! (Update: Year over year, the trade gap for 2011 was up 11.6% to $558 billion.)

This history of the sad and incomprehensibly self-destructive behavior of the United States during the past 50 years, which is unique among all of the major trading nations of the world today, is well worth reading and contemplating.

As has been stated many times before, major world powers don’t always decline due to destruction coming from outside. They sometimes infect themselves with terminal obsessions from within that, alas, seem to then become incurable. This doesn’t have to happen this time to Uncle Sam, but to avoid it something rather urgent needs to be done before it becomes too late.

This is something our oft-criticized fellow expats at ACA understood and have fought for decades. Andy Sundberg is the author of the report which comprises the main portion of this post. Read the entire report and decide if all coming to this situation in the last five years understand the history of this problem better or are entitled to criticize other actions in hindsight. In a recent private email group discussion, a story that came out might offer a useful perspective:

A teacher once told me he was curious why geese always flew in a “V.” So he looked it up and found that the one in the front led until he no longer could and he moved to the back being replaced by the next and so on. In that way they reached their destination.

So no matter whether you come from ACA 50 years ago, or DA, or RO, or AARO, FAWCO, Brock 5 years ago or American Expatriates 3 years ago, we are all trying to get tax reform in order to right this situation once and for all. Each has a part to play in this unfortunate situation. This is much more in keeping with this post’s resolution:
 
So Let Us Now All Rise Up, Join Together to Throw off These Shackles, and Take Appropriate Action to Prepare for a Much More Positive Future for All of Us, our Heirs and for Our Country.
 
 

“ENOUGH IS ENOUGH”

AFTER FIVE DECADES OF ABUSE

IT’S TIME FOR A CHANGE

  

THIS COMING OCTOBER WE WILL MOURN

THE 50TH ANNIVERSARY

OF THE DEATH OF

A LEVEL PLAYING FIELD

FOR OVERSEAS AMERICANS

AND NOW IT’S TIME TO GET IT BACK

 

Reproduced by permission of Andy Sundberg, Fellow and Secretary, the Overseas American Academy , Geneva , Switzerland , 16 January 2012. Continue reading “After Five Decades of Abuse, Enough is Enough!”

Why is the United States imposing an “Exit Tax” on the Canadian pensions of Canadian citizens living in Canada?

cross-posted from citizenshipsolutions


by John Richardson

This post is based on (but is NOT identical to) a July 17, 2017 submission in response to Senator Hatch’s request for Feedback on Tax Reform

“Re the impact of the S. 877A “Exit Tax” on those “Americans living abroad” who relinquish U.S. citizenship:

Why is the United States imposing an “Exit Tax” on their “non-U.S. pensions” and “non-U.S. assets”? After all, these were earned or accumulated AFTER the person moved from the United States?”

Part A – Why certain aspects of the Exit Tax should be repealed

In a global world it is common for people to establish residence outside the United States. Many who establish residence abroad either are or become citizens of other nations. Some who become citizens of other nations do NOT wish to be “dual citizens”. As a result, they “expatriate” – meaning they relinquish their U.S. citizenship. By relinquishing their U.S. citizenship they are cutting political ties to the United States. They are signalling that they do NOT wish the opportunities, benefits and protection from/of the United States.

Yet Internal Revenue Code S. 877A imposes a separate tax on “expatriation”. The “expatriation tax” is discussed in a series of posts found here.

Specific examples of HOW the “Exit Tax Rules” effectively confiscate pensions earned outside the United States are here.

Assuming, “covered expatriate status” and NO “dual-citizen exemption to the Exit Tax“, the S. 877A “Exit Tax” rules operate to:

  1. Virtually “confiscate” non-U.S. pensions that were earned
    when the individual was NOT a United States resident; and
  2. Allow for the retention of “U.S. pensions” which were earned
    while the individual WAS a resident of the United States.

(One would think that the result should be THE EXACT OPPOSITE!”)

Specific request: The S. 877A Exit Tax should be repealed. If the United States is to impose a tax on expatriation, the tax should not extend to “non-U.S. pensions” earned while the individual was NOT a U.S. resident. Furthermore, the tax should NOT extend to “non-U.S. assets” that were accumulated while the individual was NOT a U.S. resident.

But, that’s assuming that the United States should have ANY kind of “Exit Tax!”

Continue reading “Why is the United States imposing an “Exit Tax” on the Canadian pensions of Canadian citizens living in Canada?”

Topsnik 2 : Green Card Expatriation And The Exit Tax

 

reposted from Tax Connections Blog

Written by John Richardson | Posted in International

John Richardson
 
 

Introduction – Introducing Gerd Topsnik

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of long term resident applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of resident in the second country, that one cannot use that treaty to defeat the long term resident test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are alive and well and that the 5 year certification test must be met to avoid non-covered status.”

Topsnik may or may not be a bad guy. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.

This is part of a series of posts on: (1) tax residency, (2) the use of treaty tiebreakers when an individual is a tax resident of more than one jurisdiction and (3) how to use treaty tiebreakers to end tax residency in an undesirable tax jurisdiction.

This is the second of the two Topsnik posts. Topsnik 1 focused on the tax residence of Green Card Holders.

This post – Topsnik 2 – focuses on the expatriation of Green Card Holders and under what circumstances and in what manner they may be subjected to the S. 877A Exit Tax. The text of Topsnik 2 is here:

TopsnikOpinion2016

The Teachings of Topsnik 2

Green Card Holders ARE U.S. tax residents

Once again, the case confirms that one does NOT abandon the Green Card simply by moving from the United States. The Green must be either taken away by the Government, abandoned by the Green Card Holder, or be the result of a treaty election.

Tax Residence: The case confirms that the U.S. Germany Tax Treaty (as is true of all other treaties) requires that one be a tax resident, as defined by the treaty, to get any benefits of a treaty.

These benefits of being a tax resident of Germany (as defined by the treaty) potentially INCLUDE:

the right to be treated as a tax resident of Germany as well as being treated as tax resident of the United States
the right to use the tax treaty tie breaker (assuming that he is a tax resident of both countries) to make him ONLY a tax resident of Germany
the right to have the years that he is a tax resident of Germany NOT count toward determining whether he is a long term resident of the United States (Internal Revenue Code 877(e)(2)
Topsnik was not a tax resident of Germany as defined by the U.S. Germany tax treaty.

Applicability of the S. 877A Exit Tax:

Abandoning the Green Card by filing the I-407 is an expatriating act. Because, Topsnik was NOT a tax resident of Germany as defined by the tax treaty, he could NOT argue that he was NOT a long term resident (within the meaning of Internal Revenue Code 877(e)(2). As a result, Mr. Topsnik’s (1) expatriating by abandoning his Green Card, coupled with (2) the fact that he was a long term resident, meant that he could prevent the S. 877A Exit Tax ONLY if he was NOT a covered expatriate.

The failure to certify 5 years of tax compliance is a sufficient condition for being a covered expatriate:

Subparagraph (C) provides that a person is a covered expatriate if such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.

Notice 2009-85, sec. 8, 2009-45 I.R.B. at 611, explains that for purposes of certifying tax compliance for the five years before expatriation pursuant to section 877(a)(2)(C):

– 21 All U.S. citizens who relinquish their U.S. citizenship and all longterm residents who cease to be lawful permanent residents of the United States (within the meaning of section 7701(b)(6)) must file Form 8854 in order to certify, under penalties of perjury, that they have been in compliance with all federal tax laws during the five years preceding the year of expatriation. Individuals who fail to make such certification will be treated as covered expatriates within the meaning of section 877A(g)

Because Mr. Topsnik was a covered expatriate he was subject to the S. 877A Exit Tax:

All of the property that he owned on his date of expatriation was deemed to have been sold on the day before his expatriation. This resulted in an Exit Tax payable to the IRS.

IRS Notice 2009-85 is NOT a regulation and is therefore NOT binding:

Section 877A(i) provides that the Secretary shall prescribe regulations as may be necessary and appropriate to carry out the purposes of the section. Such regulations have not been yet been provided. Instead, the IRS has promulgated guidance regarding this section in Notice 2009-85, 2009-45 I.R.B. 598. We are not bound by Notice 2009-85, supra, see Compaq Computer Corp. v. Commissioner, 113 T.C. 363, 372 (1999), but it is an official statement of the Commissioner position and we may let it persuade us, see Nationalist Movement v. Commissioner, 102 T.C. 558, 583 (1994), 37 F.3d 216 (5th Cir.1994).

Summary

The 2016 Topsnik decision reminds us tax residence in both countries (as defined by the treaty) is necessary to invoke treaty tiebreaker rules. In addition, in order to avoid covered expatriate status (making one subject to the S. 877A Exit Tax) one must file Form 8854 certifying 5 years of tax compliance

Furthermore the case reminds us that the S. 877A Exit Tax is real, alive, well and brutal confiscatory.