The GPO has just published the full text of Schumer’s proposed Ex-PATRIOT Act (S. 3205). The act creates the new category of “specified expatriates” (a subset of 877A(g)(1)’s “covered expatriates”) and gives rules for determining who is a “specified expatriate”. It then imposes a tax of 30% on U.S. capital gains of “specified expatriates”, and makes them inadmissible to the United States.
The first thing to note about the Ex-PATRIOT Act is that it would close the Reed Amendment “relinquishment loophole”. The 1996 Reed Amendment added INA 212(a)(10)(E), which states:
(E) FORMER CITIZENS WHO RENOUNCED CITIZENSHIP TO AVOID TAXATION
Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.
(I wrote a Wikipedia article about the Reed Amendment for those who would like more background.) The plain language of the Reed Amendment alone (without delving into the legislative intent) would not seem to make relinquishers inadmissible. In contrast, the Ex-PATRIOT Act retains the title of that paragraph of the INA, but changes the body significantly: Timmy Geithner rather than Eric Holder would be empowered to exclude people from the U.S., and it would no longer matter whether you gave up U.S. citizenship by relinquishment or renunciation:
(i) IN GENERAL- Any alien who is determined by the Secretary of the Treasury to be a specified expatriate is inadmissible.
(ii) SPECIFIED EXPATRIATE- In this subparagraph, the term `specified expatriate’ has the meaning given that term in section 871(a)(2)(C) of the Internal Revenue Code of 1986.
(iii) NOTIFICATION OF EXCEPTED INDIVIDUALS- The Secretary of the Treasury shall notify the Secretary of State and the Secretary of Homeland Security of the name of each individual who the Secretary of the Treasury has determined is not a specified expatriate under section 871(a)(2)(C)(ii) of the Internal Revenue Code of 1986.
The other crucial part of the act is the definition of a “specified expatriate”
(C) SPECIFIED EXPATRIATE-
(i) IN GENERAL- For purposes of subparagraph (A), the term `specified expatriate’ means, with respect to any taxable year, any covered expatriate (as defined in section 877A(g)(1)) whose expatriation date (as defined in section 877A(g)(3)) occurs after the date which is 10 years prior to the date of the enactment of this subparagraph.
(ii) EXCEPTION- An individual shall not be considered a specified expatriate if such individual establishes to the satisfaction of the Secretary that the loss of such individual’s United States citizenship did not result in a substantial reduction in taxes.
This is a much tighter standard than the old procedure (I believe prior to 2004) under which former citizens could apply to the IRS for a ruling that they had non-tax reasons for giving up citizenship (see here for details). Instead it presumes you are guilty, and the only way to prove your innocence is to demonstrate that your tax bill did not go down. There are many countries with lower tax rates than the U.S. which also do not permit dual citizenship. An American who settled in one of those countries, achieved career or entrepreneurial success (or even just bought a house in the middle of a downturn and then waited a decade while real estate went up and the U.S. dollar went down), and then naturalised so he could vote on issues in the place where he lived, could become a permanent exile from the U.S.
Furthermore, the Ex-PATRIOT Act provides no exception for naturalised citizens returning to their country of origin after retirement, Americans who married non-Americans and settled abroad, or any of the other dozens of legitimate non-tax reasons that people would leave the United States. The only exceptions are those provided in 877A: people who were dual citizens at birth, or people who renounced U.S. citizenship within six months of turning 18 and did not live in the U.S. for more than 10 years.
And let’s not forget that “covered expatriates” are not just rich people. There is a third category of covered expatriate which everyone forgets about, besides those meeting the asset test or tax liability test: “877(a)(2)(C) covered expatriates”, ordinary emigrants who missed out on some of the IRS’ countless forms in their years of leading ordinary financial lives overseas, and thus cannot honestly check the Form 8854 box certifying that they have complied with all their tax obligations in the past five years. They too could become “specified expatriates” at Geithner’s whim.
Good article from the G&M and the comments, as many as I have read, make me proud that Canadians get it, they really get it. Now, if we could just make Americans get it too …
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Pretty good op-ed on Forbes by Jon Matonis, “Banishing Facebook’s Eduardo Saverin Harms US More”
“Banishing individuals because they are successful and because they freely seek countries with reduced taxation appetites sends the wrong message to the remaining U.S. citizens still stuck on the ‘reservation.’It says that you are only as good as the tax revenue that you produce.”
Thanks outraged. The final sentence says it all: “Saverin is savvy and unfortunately the senators are nothing short of myopic in their world vision.”
Excuse my ignorance here…but have to ask.
As far as i can tell, Eduardo Saverin has stated that he has complied with all tax obligations prior to his renunciation..
This would mean that, in a nutshell, he has already given the IRS there share of his net worth above the 2 mil threshold less the 625k.
Having said that, is it save to assume in this discussion that they are looking at his potential earnings form the Facebook IPO?…money that has not materialized as of yet?
If they are, then they are changing the rules once the game has started.
@mach73- that is exactly what they are looking for, future capital gains tax that he could have paid based upon post IPO price.
There are many things that they don’t figure into the benefits that Mr. Saverin has left behind such as Facebook itself. The company now employs thousands of people many of whom are highly paid. The U.S. also ignores the value that Facebook gives everyday in the form of FREE service to its users, etc.
What Schumer is basically arguing for is that the U.S. had some kind of property right in Facebook that was located in Mr. Saverin’s stock ownership. To me it sounds like Socialism for the government’s benefit.
They are very short sighted and unjust.
@mach73, “If they are, then they are changing the rules once the game has started.”
They have in the past and they will in the future.
The Senators are showing they have no respect for the rule of law, the laws they themselves created.
If the lawmakers don’t respect the laws, why should anybody else?
I think they’re terrified that a guy would pay hundreds of millions of dollars just to get rid of his US citizenship. That sends a very clear message to the wealthy in the world who might be thinking of moving to the States, don’t do it!
@mach: Not only do they want to change the rules once the game has started, they want to rewrite the rules on the games they have already lost.
As I understand it, they now want to review whether anyone who expatriated in the last 10 years did so for tax reasons (to be determined, I believe, by IRS). If so, they want to apply the new rules to them.
Why are we surprised? Isn’t that exactly what they are trying to do to those of us who became citizens elsewhere 30, 40, 50 or 60 years ago with the clear understanding we were “permanently and irrevocably” relinquishing US citizenship?
They see no problem with changing the rules of the game when they are losing–or even when they have already lost. That’s what they consider fair play.
How thoroughly desperate they’ve become. They should be embarrassed by their own behaviour.
@OMG: They give new meaning to the expression “It’s all in how you play the game.”
Ok, but this 30% tax is placed on capital gains from US source income ONLY…..right? Therefore If Mr. Saverin decided to start another website that was equally as successful as FB….( whilst residing in Singapore)…, then the IRS cannot touch that money….correct?
If so, why would ANYONE want to invest in the United States?
You would either have to be crazy…or…
Accept the fact that once you are in, you are locked in as the price is to high to check out…., with respect to US source income.
@Mach: That’s my understanding too. The 30% is only on US source income. I’m sure they’ll try to find a way of expanding that too, but I think it would be far more difficult for them. But then, whoever imagined we would be facing what we are facing with FATCA threatening private banking services around the world. Or in some countries, “US persons” not even being able to have a bank account because of demands of US government.
I believe Saverin has said one of the reasons he renounced was because he wants to invest in Asian start-ups and the tax laws of the US restricted his abilities to do this.
Your conclusions and mine are the same. Petros says is best: “Get your ass and your assets out of the U.S.”
This is kind of like watching a toddler throwing temper tantrums and wearing himself out. You know there’s nothing you can do to make him stop. He’ll eventually get tired and go to sleep.
OMG: Unlike a small child throwing a temper tantrum, US has always had an abundance of stamina in its hissy fits.
This is off topic but we are over 600,000 hits.
Time to send an email to these clowns asking when is the democratic party going to stop attacking us?
Forbes as another decent op-ed
Roger should like this one!
“If Eduardo Saverin did renounce his U.S. citizenship to avoid higher taxes, he should be praised, not criticized. He has only done what millions of Americans do when they move to low-tax states. That potential for outmigration should force politicians to keep taxes low and competitive”
Thank you for this write up and for the excellent Wikipedia article on the Reed amendment.
The issue is not high taxes. The issue is what is done with it. People in Sweden and Norway love their high taxes as it provides them with economic and social security. High taxes in the USA is used to maintain its empire and the rich laughing all the way to the bank!
I was sent this information from the Economic Intelligence Unit: Top 10 Fully Democratic Countries of 2011, based on the Overall Democracy Index.
Canada is nr 8; the Netherlands nr 10 and the Nordic countries are in the top 4! The US is not in the top 10.
Interesting information Joe. Unfortunately, the report mixed up some information–it gave the capital of Finland as Ottawa, the capital of Canada as Bern and the capital of Switzerland as Helsinki. Sounds like someone is really trying to move us to a global village.
I’m sure this report ticked off USA. Canada scored a 10 for civil liberties (as did Australia, New Zealand, Sweden and Norway). I wonder what the G20 protesters in Toronto last year and the and Quebec student demonstrators this year think about that score.
Phone appointment lasted all of 8 minutes. The interview focused on my ties to the UK and my likelihood of returning to the States. She asked if i was doing it under duress, and I said only the duress the USG puts me under with laws like FATCA making it impossible to live abroad. She seemed – if not sympathetic – receptive to my points.
I stayed away mostly from tax compliance issues mainly because I didn’t want to muddy the waters with any implication of tax avoidance – which is not what I’m doing.
She was also genuinely surprised that I was ex-Navy, at which point I pointed out how difficult the decision was for me emotionally. Which, I believe, pretty much confirmed to her my sincerity in renouncing.
Anyway, I have my face to face in London on wednesday next week. I shall be posting a full account of both appointments on my blog, in the mean time I’m going to attempt a media semi-blackout until then.
Thanks for all the well-wishing. It has meant a lot to me that there are others out there going through similar.
By the way, she told me that it takes 4-6 weeks to get the CLN back usually.