About seven million American expatriates — nearly a million in Canada — are going through tax hell because of a sudden Congressional interest in catching tax cheats, and America’s unique citizenship-based income tax policy.
American Citizens Abroad (ACA) has called on the United States to end this citizenship-based income tax policy and tax based on residence like the rest of the world. It points out that Americans living and working in other countries pay taxes in those countries, usually at significantly higher levels than U.S. “homelanders.” The ACA is getting the Congressional brushoff – polite conversation, “I feel your pain, but nothing doing.”
But what if other countries fight fire with fire and emulate America’s citizenship-based tax policy, demanding tax compliance from America’s approximately 50 million immigrants?
For the sake of argument, let’s see what might happen if Kenya did that:
The Oval Office phone rings, and is picked up by the 44th president of the United States. White House Chief Counsel Kathryn Ruemmler says, “Mr. President, we have a problem with Kenya. Or more specifically, you have a problem with Kenya.”
“Go on,” President Obama replies.
“Well sir, because your father was born in Kenya, for a brief period back in the 1960s you were actually a Kenyan citizen as well as an American. An accidental Kenyan.”
“Yes,” says the president, “But that was very short-lived. As Kenya achieved independence from Great Britain, it voided those citizenship rights.”
“Correct,” says Ruemmler. “But a month ago the Kenyan Supreme Court overturned that, and all those revoked citizenships have been retroactively re-instated. Our Supreme Court took similar action years ago in a case brought forward by a Canadian, ruling that the State Department can’t take away an American’s citizenship without due process.”
“OK,” says the president. “But so what?”
“Well sir, the Kenyan IRS (KIRS) wants you to file tax returns for the last six years, and provide the Kenyan state department with a list of all your bank account balances. It’s all under Kenyan legislation, including something called the Foreign Unknown Bank Account Report, or FUBAR. After that, you must continue filing annual tax returns and FUBARS for as long as you remain a Kenyan citizen.
“But it gets worse. Because you are a late filer, you are subject to fines for those FUBARS up to 50% of the total value of all the accounts, per year, for as long as you are out of compliance.”
“But, but,” splutters the president. “How can they justify going after my savings accounts. I mean those are joint accounts with Michelle. They can’t go after her half, can they?”
“If your name is on the account, KIRS says its all yours. Now, we’re looking into having your name taken off those accounts and just leaving them in Michelle’s name – that might work. You two gettin’ along OK? But there’s more; it’s “all” accounts over which you have signing authority. As far as we can tell, you’ve got signing authority over the entire US of A. They can calculate penalties on annual revenues.
“Enough,” says Obama. “I want an immediate appointment at the Kenyan Embassy to formally renounce my Kenyan citizenship to stop this BS.”
“A renouncement done for tax purposes won’t be recognized until you’ve paid an exit tax,” Ruemmler explains. “Again, sir, they have mirrored the rules we passed in 2008 in the HEART Act. Their exit tax is 30% of your total assets – money, property, investments. We’re a little nervous about where they might go with that one.
“You have to pay your fair share of Kenya’s taxes before you can renounce. Now there is a bit of a break here. Kenya’s Foreign Earned Income Exclusion deducts the first $95,000 annually. Unfortunately, you make $400,000 and you’ll have to pay both US and Kenyan income tax on $305,000. Oh, and you’ll have to pay Kenyan tax on all your investment income. And you have to pay it all in Kenyan shillings – they won’t accept US dollars.
“So what if we just tell them to stick it where the sun don’t shine” Obama asks.
“You’d be subject to arrest on tax evasion in Kenya. We’re also a little nervous that KIRS might hire US legal counsel and try to slap a lien on the White House. Oh, one more thing, if you stonewall them they’ll use their version of FATCA — the Key Account Formulation Kenya Act, or KAFKA, to order your banks to declare you recalcitrant and close out all your accounts.
“I probably don’t have to remind you that this is an election year, and I’m sure the Republicans would structure some attack ads that label you a Kenyan tax cheat. You can expect this to cost you several hundred thousand dollars, but we still think your best option is to come clean. You can’t thumb your nose at the taxman, sir.”
Now, that little fantasy isn’t going to happen – much as I wish it would. Even if Obama’s Kenyan citizenship was still valid, Kenya – like the rest of the civilized world bar one – taxes people who live there, not people who were born there and left, or are “accidental” Kenyans like the president once was.
In pursuit of so-called tax cheats, the U.S. government is now terrorizing its entire expatriate community worldwide. The scenario I painted with President Obama is being played out for real with ex-Americans. The Foreign Account Tax Compliance Act, currently going through the implementation phase, demands that all foreign banks tell the IRS who among their account holders are Americans – or “US Persons” as the IRS likes to call them (they want former green card holders, too).
These people are not tax cheats, yet they are universally being treated as criminals. They used to be sympathetic Americans for the most part; now they are flocking to consulates and embassies all over the world to begin the relinquishment/renunciation process so they can get the U.S. taxman off their backs once and for all. It’s that or risk financial ruin.
If every other nation implemented citizenship-based taxation and followed it up with its own FATCA, global tax chaos would ensue. For example, more than one million Canadians are living in the U.S., and would not be very happy if Canada Revenue Agency hunted them down in California and hit them with a bill for back taxes. This is not an outlandish suggestion; in order to get other nations to cooperate with FATCA the U.S. is offering reciprocity — you know “I’ll show you mine if you show me yours. ”Five European nations, including the U.K., have signed on and others are negotiating.
If other nations parrot U.S. tax policy, President Obama might not be on Kenya’s list, but nearly 50 million other residents of America would be on somebody’s list, and I bet there’d be some very high profile folks fingered. Consider what kind of cash outflow from the U.S. would result if 50 million immigrants, some of them well-to-do, suddenly had to start filing tax returns and paying taxes to a plethora of other countries.
The rest of the world fully understands how hard it is to get the U.S. to admit it made a mistake, and to do something quickly about its byzantine tax policy. Perhaps the quickest way to get relief for millions of expatriates worldwide is for Kenya to step up and do the right thing — go after that accidental Kenyan in the White House, reinstate his lapsed citizenship, and give him a tax bill. The world would be ever-grateful.
Don Whiteley is a Vancouver-based writer.
(This article appeared first in the Vancouver Sun and is reproduced here with the permission of the author).