The following was submitted in the form of a comment:
I’d like to have some opinions about the bill that I’m writing to replace citizenship with residence-based taxation. Maybe someone could move this to a different page if it gets too long. By the way, I’m about one third of the way through with the relevant sections in the Internal Revenue Code.
1. To define residence, I am using the current substantial presence test with all of its rules and exceptions. This is the definition that is currently used for foreigners without a green card, so I am just applying it to everyone. I am also adding an exception to consider US government or military employees abroad as residents, because their salaries are sourced in the US and they would pay higher taxes if they were considered nonresidents. I am also adding that US citizens and permanent residents who don’t satisfy the substantial presence test may elect to be treated as residents for tax purposes by simply filing the normal resident tax forms (1040). I understand that there are some cases where this may be beneficial, and I don’t want to increase taxes on anyone.
2. Because some people may elect to be treated as US residents even if not acually residing in the US, I am keeping the foreign earned income exclusion and the exclusion of income from US possessions available. It may be hard for you to imagine, but there are situations where using the exclusions is better than being a nonresident. For example, this occurs for those residing in a low-tax country or US possession who have income from US sources and a low total income.
3. To be consistent with the concept that citizenship should not be used for taxation, I am removing the requirements that certain dependents be “citizens or residents”. If I changed the requirements to only “residents”, some people might not be able to claim dependents that they currently claim, and again I don’t want to increase taxes on anyone.
4. Also to be consistent with eliminating the use of citizenship, I am repealing the sections that allow higher taxes on those whose country of citizenship or residence impose higher taxes on Americans. (I don’t think this provision has ever been used anyway.)
5. Again to be consistent, I am removing the requirement that the spouse be a US citizen for the estate tax exemption. I am also allowing the exemption from US estate taxes to all residents of US possessions, not just who were born there.
6. I was trying to restructure the exit tax based on termination of residence, but I decided to repeal it completely. My understanding is that the main reason for the exit tax in the US is not to collect revenue on unrealized gains, but to penalize rich people who renounce US citizenship to avoid taxes, because certain dual citizens, permanent residents with less than 8 years of residence, any residents only by virtue of the substantial presence test, and any people not considered “rich” are exempt from it, while those who do not certify current tax compliance are not exempt even if not “rich”. The whole idea of renouncing citizenship because of taxes does not exist in a residence-based system. One could argue that taxes would then be a motivation for terminating residence, but I’m not aware of any US state that imposes an exit tax. Some countries have foreign exchange control but not an exit tax per se. As far as I know, only Canada has a real exit tax, and the Netherlands can only impose it under a treaty with the new country of residence. I also don’t agree with taxing unrealized gains because they are not final and could decrease, just like what happened to Eduardo Saverin’s Facebook shares. Besides, the gains may be taxed by the new country of residence once realized; if it doesn’t tax capital gains, it probably collects more revenue from other taxes or other sources instead, or it spends less. Likewise, I decided to repeal the estate tax on inheritance from “covered expatriates”.
7. I am getting tempted to include in the bill a complete repeal of FBAR, FATCA and even the whole estate tax. It’s very easy to write “section #### is repealed”. But those are separate issues and I guess I shouldn’t try to fix everything, I don’t even know if my bill will be introduced at all. I think it’s better leave the unconstitutionality of the FBAR penalties for the courts to decide, a repeal of FATCA for the banks to lobby, and a repeal of the estate tax for the Republicans in Congress. Citizenship-based taxation is the issue that no one else cares about.
@Just Me, Thanks for the update. The proposal looks much better now, with residential taxation by default. I still don’t like the idea of the “departure certificate” or the exception of tax havens, but those are details.
@Mark Twain, The previous proposal was similar, but it maintained citizenship-based taxation by default with a rather complicated option for Americans abroad to be treated as nonresident aliens for tax purposes. The current proposal is more simple.
*I also think if necessary to raise revenue the departure tax should apply to everyone not just “covered” expatriates as in Canada and Australia. I am not sure that needs to be in the proposal at this point but it should definately be ready to be thown in. Most countries have a process of being able to obtain a certificate of tax “Residency” in that country including the US. I am trying to think of other countries that have a “Departure” sailing permit. The US already does this for resident aliens.
http://www.irs.gov/Individuals/International-Taxpayers/Form-6166—Certification-of-U.S.-Tax-Residency
http://blog.apostille.us/wp-content/uploads/2012/12/IRS_Form_6166_S_Corp_Sample_Old.jpg
@Tim, You can suggest that to ACA, but I don’t think that would be necessary at all. Personally, I don’t want to propose anything that would cause anyone to pay more taxes or file more paperwork. Regarding the “sailing permit”, one of my suggestions is to actually abolish it for foreigners too. It’s an obnoxious little requirement created in 1921, unenforced and useless. Even the name is an anachronism, and senator Daniel Patrick Moynihan (D-NY) already proposed abolishing it in 1995.
@all- Right off I can’t say that I care at all for any of the rules surrounding the “departure certificate”. I think that as long as you are compliant with your U.S. filing obligations at the time of departure that that should be enough to qualify you as a non-resident. The two year waiting rule should be abandoned. I don’t like having to have a travel document that proves I may engage in the buying and selling fo financial assets. I don’t like the idea that a departure certificate is basically only good for the country in which you live at the time the certificate is applied for and obtained. The requirement that you would have to obtain a new certificate every time you move into a new country seems to me just to be an elaborate way for you to help the U.S. government track you.
If I don’t live in the U.S. I don’t believe that the U.S. has a vested interest in knowing everywhere I am living outside of the U.S. The only evidence that the U.S. needs for knowing whether or not I am working and living in the U.S. is whether or not my U.S. employer has filed a W-2 for me, whether or not there has been any activity with regards to contributions to my Social Security account and any financial reporting forms that a U.S. domiciled financial instituiton may have reported to the IRS.
The tax haven provision is also not comforting. I object to the thought that the safety of my financial life is ultimately up to the IRS. The definition of what kind of taxing regime and what country is a tax haven is completely up to the IRS. True residency based taxation is not referenced at all by the tax practises of any other country. Pure residence based taxation is characterized by solely making reference to the tax jurisdiction under which the income was generated. Anything less just gives the U.S. Congress and its Treasury the opportunity to play games. In theory there is nothing that can stop the U.S. from declaring all nations to be tax havens, which is exactly what we have now.
I believe that if there is going to be a departure tax that it should apply ONLY to U.S. based financial assets. My reason for this is because if there are any foreign financial assets they were acquired in one of two ways. My first reason is that if the U.S. person worked abroad, the financial assets would presumeably have been paid for mostly in with the local currency as the primary form of compensation or purchased by the contributions of the local employer. My second reason for not including foreign assets is that even if the foreign assets were bought with U.S. dollars those asset were bought with “after tax” dollars and therefore all liabilities have been fulfilled. This means that the person should be free to take his/her after tax money anywhere he/she desires.
I guess that what I am basically arguing for is a strict territorial tax system under which everything that is associated with citizenship based taxation would simply be a bad memory.
@recalcitrantexpat, I agree with everything you wrote. It seems to me that ACA came up with this “departure certificate” idea so the US could keep taxing its citizens who live in tax havens. I don’t agree with this notion. Each country is sovereign to decide how it’s going to tax its people and spend their money, so if a country wants to tax only consumption or have a low income tax, that’s its own choice and the US should respect that. And as you wrote, the requirement that US citizens report to the IRS every time they move to another country sounds like the IRS would still be checking on them.
Italy and Spain have similar provisions, but they are not indefinite. Italy taxes its citizens who move to tax havens only until they show that they no longer have significant ties to Italy, and Spain taxes them for five years after they move to a tax haven. France also has a similar provision but only for its citizens in Monaco, and with Monaco’s consent through a treaty. Still, I don’t agree with the idea.
The OECD used to maintain an infamous “black list” of tax havens, and Spain and Italy’s lists were based on that. However, throughout the years the OECD kept removing jurisdictions from the list after they agreed to its standards of cooperation, to the point that the list got empty in 2009, as it remains today. So as far as the OECD is concern, tax havens don’t exist. Lists of tax havens are also notoriously subjective, incorrect, incomplete and outdated. For example, Italy lists Aruba (maximum income tax rate of 59%, third highest in the world), Switzerland (42%) and Taiwan (40%) as tax havens, Spain lists Fiji (31%) and the US Virgin Islands (40%), both list Grenada (30%) and Liberia (35%), and neither lists Kuwait, Qatar or the Vatican City (no income tax). If the US suddenly decided to list Switzerland as a tax haven, the whole plan would backfire for ACA.
I totally agree with your reasoning regarding the exit tax. If it has to exist at all, it should only apply to US financial assets, and that was already the case before 2004. It looks like the US just wants to make sure that people who create a big fortune in “tax-deferred” items like capital gains in the US can’t avoid tax on these items by leaving the country.
you brought up the same things I saw when I read it. ACA is trying to be pro Active and address the paranoia of the lawmakers—which instead multiplies their paranoia.
As Shadow Raider has also learned through experience—-giving too detailed suggestions detracts from the message.
I know someone who got on the Telephone today with a human rights person inside the Moderaterna (The moderately right party, who Control the Swedish parliament). He stated that Sweden will NOT be doing anything that Changes existing Swedish data protection or discrimination laws!!!!!!
As a result, US persons in some form such as ACA might also be getting a lead into the discussion.
*Do not necessarily assume what you heard means Sweden will not sign an IGA. The IGA’s are specifically designed in a European context to get around human rights and data protections laws. In fact I put heavy odds on Sweden following Denmark and Norway to be one of the NEXT countries to sign an IGA ahead of Germany, France, Canada etc.
No assumptions made, hence someone needs to speak with them. THe alternative is to complain about it after the decision is finalized.
Yesterday I had a meeting scheduled with Robert Cogan, legislative director of representative Diane Black (R-TN), but he was unavailable so I ended up talking to another assistant, Tucker Brown. He does not handle tax issues and was not familiar with the subject at all, but paid close attention, asked questions and took notes. He thanked me for the information and said that he would pass it to Robert Cogan.
Next week I have a meeting scheduled with Nick Karellas, assistant of representative Lynn Jenkins (R-KS).
Diane Black and Lynn Jenkins are both in the Ways and Means committee.
Representative Andy Harris’s (R-MD) assistant just informed me that she spoke with him about the subject, that he supports abolishing citizenship-based taxation, that he would like me to try to get a member of the Ways and Means committee to introduce a bill, and that he would cosponsor it.
Excellent progress you’re making, Shadow Raider. Thanks for what you’re getting across to those you’ve contacted in Washington, DC. Amazing advocate you are.
@calgary411, Thank you.
I changed my presentation, with more and updated information.
https://docs.google.com/file/d/0B7VqDyDIAgW2aWc0cFBhR1ZQNFU/edit
I also replaced my bill draft with a list of suggestions, which I think this is much easier to understand. At the end of the file I summarized the suggestions by order of importance in my opinion.
https://docs.google.com/file/d/0B7VqDyDIAgW2X2JRSC1GS1otZDg/edit
Comments are welcome.
Super Kudos. THere is one US person working successfully.
@Mark Twain, Thank you.
Today I met with Nick Karellas, assistant of representative Lynn Jenkins (R-KS). He said that he was interested in the subject and knew about it to some extent. He was familiar with FATCA and even Cook v. Tait. He asked about tax treaties and I explained about the saving clause. He said that he was impressed with my presentation and list of suggestions, and asked me to send it to him.
@Shadowraider,
Job well done! Your presentation is excellent with the recent modifications you made. You’re off one heck of a good start.
Excellent presentation, Shadow Raider. I persevered until I finally clicked on “open this content in a new window” and got the presentation. You’ve done so much work for the concise presentation and in drafting the suggestions document. It looks like your work is getting attention — as it should. Thanks for all you’ve done.
US tax reform: 11 working groups to watch, but don’t get your hopes up
US tax reform is so big and so bad it needs 11 working groups to handle it all! From the Camp/Levin press release:
Each of the 11 groups will review current law in its designated issue area and then identify, research and compile feedback related to the topic of the working group. The working groups will be responsible for compiling feedback on its designated topic from: (1) stakeholders, (2) academics and think tanks, (3) practitioners, (4) the general public and (5) colleagues in the House of Representatives. Once the work of those groups has been completed, the Joint Committee on Taxation will prepare a report for the full Committee, due by April 15, 2013, that describes current law in each issue area and summarizes the other information gathered by the Committee Members.
And the 11 working groups and their chairs (R) and vice-chairs (D) are:
Charitable/Exempt Organizations–David Reichert (R-WA), John Lewis (D-GA)
Debt, Equity and Capital–Kenny Marchant (R-TX), Jim McDermott (D-WA)
Education and Family Benefits–Diane Black (R-TN), Danny Davis (D-IL)
Energy–Kevin Brady (R-TX), Mike Thompson (D-CA)
Financial Services–Adrian Smith (R-NE), John Larson (D-CT)
Income and Tax Distribution–Lynn Jenkins (R-KS), Joseph Crowley (D-NY)
International–Devin Nunes (R-CA), Earl Blumenauer (D-OR)
Manufacturing–Jim Gerlach (R-PA), Linda Sanchez (D-CA)
Pensions/Retirement–Pat Tiberi (R-OH), Ron Kind (D-WI)
Real Estate–Sam Johnson (R-TX), Bill Pascrell, Jr. (D-NJ)
Small Business/Pass Throughs–Vern Buchanan (R-FL), Allyson Schwartz (D-PA)
Read more at Allison’s blog above.
Anyone familiar with “Lift America”?
http://www.liftamericacoalition.org/about-us/
@SwissPinoy,
I’m not, but from what I read, I am sure the Tax Justice folks would not like them…
As I’ve written in other threads, I’m starting another round of meetings with congressional assistants. This time I’m focusing only on the FBAR, as I see it as the main part of the whole problem of citizenship-based taxation and it also affects immigrants. Focusing on the FBAR also avoids the heated subject of taxes and the Ways and Means and Senate Finance committees, which already seem to be considering residential taxation. It is also a lot easier to deal with than the Internal Revenue Code and tax reform.
I just got my first meeting scheduled, with an assistant of representative Spencer Bachus (R-AL). Until last year, he was the chairman of the Financial Services Committee, which has jurisdiction over the FBAR, and now he is “chairman emeritus”.
@Shadow Raider, thanks for mentioning the impact to immigrants. This is really appreciated.
@ Shadow Raider
May the Brock Force be with you. I’m sure you know you have our total gratitude for bravely entering those long corridors and advocating for us. It must feel lonely there but we are with you in spirit.
@Shadow Raider, as I posted in another entry, the article from Amy Feldman shows how we’re cornered.
http://isaacbrocksociety.ca/2013/01/28/the-perils-of-overseas-tax-disclosure-an-immigrants-story/
We need to become compliant, but the only option offered by the IRS is financial suicide.
A good article for the representatives to read.
And @Shadow Raider…
If you are focusing on the FBAR in your rounds, why not raise the question as whose form is it anyway? The IRS or FinCen? They are putting out different instructions these days about the coming mandatory electronic filing.
@YourVoiceAtIRS So what is the story? Mandatory electronic FBAR or NOT? Can’t IRS & FINCEN agree? Whose form is it? http://intltax.typepad.com/intltax_blog/