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.
@ShadowRaider..
There is a very interesting comment by KPMG at the IRD web sight. It sites what I call “creeping NZ Citizenship-like taxation.” It is in a bullet on page 3. I fear, rather than America adopting RBT, more and more will go the NZ route.
@Em, Would you like me to ask them if I can record the audio of the meeting? If they allow, I can do that and later post the audio here.
My nationality proposal wouldn’t do anything for green card holders. US law assumes that they are living in the US, because otherwise they lose the green card. I know that many do live abroad and travel to the US once a year to “maintain” the status, but this practice is not really allowed so I prefer not to mention it to Congress. And green card holders can already choose to be taxed as nonresident aliens if they live in a country with a tax treaty, but again they risk losing the green card if they do that. So even RBT would not really solve their problem.
In my opinion, the green card should be just a permission, not a requirement, to live in the US. I don’t understand the logic of the requirement. But that’s another subject, and I don’t want to diverge.
@George, Thanks.
@bubblebustin, I didn’t abandon RBT, but I don’t think there is anything else I can do about it right now. So I decided to try something different in the meantime. I don’t know if it will work, but I’m just tired of waiting for Congress to respond.
I liked your idea about the world map with decreasing populations. I did a wild extrapolation of the current exponential trend and arrived at the “estimate” that Americans abroad will be “extinct” in 15 years. I may add that to my presentation later.
@Just Me, New Zealand is not “moving closer to a citizenship basis of taxation”. KPMG is exaggerating. The example in your link clearly says that the person had ties to New Zealand, and it was just for the first 4 years of absence. This has nothing to do with citizenship, it’s a termination of residence that took a while to complete.
Once in a while I hear that a country is thinking about adopting CBT. Last year it was France. I easily disregard such fears, because the vast system of tax treaties today makes it practically impossible. Renegotiating every tax treaty would take an enormous amount of time, and the other countries would also have to accept the change.
@ Shadow Raider
RE: recording –YES PLEASE! — if you can. Thanks for the additional green card information. Many, many years ago in all my naivety I thought that thing was just permission to work in the USA and never associated it with citizenship or nationality. It said “Resident Alien” so if anything I associated it with alienation — you are here, you can work, you cannot vote, you WILL pay taxes, you are not one of us, you are alien.
@Shadow Raider,
On slide number 8, it may worth considering to include lots of double taxation due to mismatches between tax systems.
For example, CFC rules make it impossible to own a small business abroad, tax deferral of foreign pensions is not recognized, interest and dividends (all passive income) is double taxed, there are many restrictions on investments for Americans abroad, many countries have high consumption taxes (VAT is 20% in most of Europe) etc, etc.
AARO has a good table on its website:
http://www.aaro.org/taxation
The FEIE is only good for people who earn income abroad, but don’t save, invest or plan for retirement. For long term expats who build lives outside the homeland, the FEIE is not of significant value.
The situation for Americans living outside the US is far more difficult than most homelanders realize.
@Shadow Raider
Thank you for considering my idea. Americans abroad should be extinct in 15 years you say? I wonder how most lawmakers would think about that.
I suppose that the next few year’s renunciation data will give us a better idea of the maximum the consulates can process, should they not increase manpower or streamline the process along the way. Is there any limit to how long they can make people wait to renounce?
@bubblebustin, I’m not aware of a time limit to process renunciations, but I think that if the numbers keep increasing, they will simply hire more consular officers. That’s what they did when visa requests increased a lot in some countries. They don’t need to ask for funds because more requests mean more fees, proportionally.
I retract my “estimate” of 15 years. It was an invalid extrapolation with few data points. It’s like saying that if you saw 1 bird yesterday and 3 birds today, in 15 days you will see 14 million birds.
@ShadowRaider, it seems that green card holder get all the disadvantages and none of the benefits of US citizenship. If they leave the US, not only are they subject to the same exit tax as if they were nationals, but they loose their green card.
If one is expected to live most of his working life in the US and potentially retire abroad, would you recommend seeking citizenship? What is the rationale for keeping the green card?
@noone says
**What is the rationale for keeping the green card**
Because they also have a life in the US. Even when they retire back in their home country… in the US… taxes are still paid on what is in the US & they don’t get rid of everything when they leave… children, grandchildren, relatives & friends are in the states. I know some retirees who split their time between more then 2 countries & having a green card allows them to come in & out without a visa or time limit. No one thought it was such a big thing until this crap & never even thought of the tax issues cause we paid each country what was made in that country… why no citizenship… to me & my family… there was no reason to get one… what was the advantage? None… no matter where we were… we were all proud canadians… plus to be honest… its safer not to be american
I can’t see any good reason to keep a green card after returning back to where a person came from If you for a visit you can do so using your foreign passport. It is much simpler than renouncing citizenship, as long as your assets and income tax level do not throw you into having to pay that tax.
If you come expecting someday to go back home, it is probably better to never become a citizen, but stay here with a green card and then cancel it with Homeland Security when you leave to move back “home” Children born while you are here will be US citizens automatically. Whether or not they will also be citizens of the green-card holder’s country depends on the Nationality Laws of that country.
Shadow Raider,
Good luck with your presentations. Such good work.
One point that might be mentioned is the lack of education — in US schools as an important part of the curriculum and in complete and transparent (not just the small print) for all immigrants coming to the US and all US Persons Abroad regarding US “unique from other countries (to say nothing of unfair)” citizenship-based taxation law and its responsibilities (in addition to how one might maintain their nationality and still lose the citizenship part, which is (to me) obviously just for US collection of penalties and double taxing of non-US earned or passive income).
Em and others with green card issues may wonder why a site such as this (http://www.uscis.gov/forms?topic_id=1131&combine=) shows everything you need to know about green cards — EXCEPT how to properly turn them in / get rid of them. Wonder why that is? To me, it appears as more deception for people who need that important information. There must be numerous other examples of this type of ‘not telling the whole story’. This link discusses “LYING” in its various forms — the reader be the judge on how the US pulls the wool over the eyes of the unknowing: http://en.wikipedia.org/wiki/Lie
i.e.,
@ calgary411
Yes Em does indeed wonder. That USCIS site does not even list I-407. I didn’t know it existed until 2012 when someone on Brock came up with the magic form number. You can’t go searching for something when you don’t know it exists or haven’t even thought it might exist. Think what my chances were of knowing this 20 years ago when all we had was a rotary dial phone, a radio and a TV. THEY lie by omission and WE take the blame and the penalties for simply not knowing.
“Em and others with green card issues may wonder why a site such as this (http://www.uscis.gov/forms?topic_id=1131&combine=) shows everything you need to know about green cards — EXCEPT how to properly turn them in / get rid of them.”
Since the Canadian government is ignoring green card holder who live in Canada from FATCA (A lot of these people threw them out 30 years ago). It may be better for these people to not do the exit tax thing with USA if they do not plan on returning to USA and would have substantial costs in doing the various USA tax forms. In fact for a lot of long time duals in the same situation, to not do exit tax compliance, especially if you did not tell your banks you are American. If you do the CLN formally you get on USA tax radar. If you can argue that you renounced US citizenship by taking an oath this may be best situation. Of course these argument do not apply to countries with European type FATCA.
@George III, “Of course these argument do not apply to countries with European type FATCA.”
The reasonable explanation applies at least in the UK. From HMRC on their guidance from last month;
Where the indicia found is an unambiguous US place of birth then the account
needs to be reported unless the Financial Institution obtains or currently
maintains a record of all of the following:
• a self certification showing that the account holder is neither a US
citizen nor a US resident for tax purposes,
• evidence of the account holder’s citizenship or nationality in a country
other than the US (for example passport or other government issued
identification); and
• a copy of the account holder’s Certificate of Loss of Nationality of the
United States or a reasonable explanation of the reason the account
holder does not have such a certificate or the reason the account
holder did not obtain US citizenship at birth.
http://www.hmrc.gov.uk/drafts/uk-us-fatca-guidance-notes.pdf
I got a meeting with an assistant of representative Ted Poe (R-TX), in about two weeks. He is the vice chairman of the House Judiciary Subcommittee on Immigration Policy, which is the subcommittee that deals with immigration and nationality law in the House.
@shadow raider
Is there any accounting for the fact that so few immigrants to the US know about CBT?
I took a cab ride with an Eritrean cab driver in Seattle last weekend. He knew about the Eritrean diaspora tax, but was completely shocked to learn that the US also practices CBT.
@ShadowRaider, I thought you might be interested in this because of an earlier discussion about the distinctions between US nationals and US citizens for tax purposes.
Have posted this also on other IBS threads.
Have not had time to read through it, but it appears to be useful:
‘Who is a U.S. Person? Disparities between U.S.tax and immigration law’
by
Henry P. Bubel, Jenny Longman, Lisa M. Koenig, Nikki Dryden,and Michelle Muñoz-Machen
Patterson Belknap Webb & Tyler LLP, Fragomen, Del Rey, Bernsen & Loewy LLP
“This article is intended to provide an overview of the intersection
of U.S. tax and immigration law in defining who is a U.S. person,
and some of the pitfalls that result from the differing and often
competing definitions under the two codes of law.”
http://www.pbwt.com/files/Uploads/Documents/Who%20is%20a%20U.S.%20Tax%20Person_Bloomberg%20BNA.pdf?utm_source=Mondaq&utm_medium=syndication&utm_campaign=inter-article-link
Breaking news: France finally abolishes CBT for its citizens born and living in Monaco
As I’ve mentioned before, France has a tiny version of CBT: it taxes its citizens who live in Monaco as residents of France, on worldwide income. The French in Monaco have been complaining about the situation for years, won some court cases, and although they number less than 8000 people, they were able to get the French government’s attention, including a visit from the French president himself last year. Now, the French government finally declared that those who have always lived in Monaco will not be subject to taxation by France anymore. Although French citizens who actually move to Monaco will continue to be subject to CBT, it seems to me that the vast majority of the French in Monaco were born and always lived there.
Eritrea next?
@Shadow Raider, that is interesting about France.
I know many are looking at the tea leafs and seeing the abolishing of CBT.
I am developing a competing hypothesis. CBT can only survive if another sovereign recognizes and acknowledges that a multi national person will always have paramount allegiance to the US or Eriteria.
If CBT does not go first, I am thinking instead we will simply see the forcible destruction of the implied recognition of multi nationality.
As an example, if Canada amends its nationality act and states multi nationality is not recognized then the FATCA IGA becomes moot because a Canadian Citizen is solely Canadian whilst in Canada.
I believe that Canada does NOT recognize multi nationality in practice, but they need to take the formal step of stating the obvious and codifying it into law.
This may be part of the next battleground. It would be hard for politicians to say no.
@Shadow Raider:
Thanks for the find on Monaco. The origin of CBT for French citizens living in the Principality of Monaco goes back 51 years. An excerpt from a 2005 NYT article describes the events leading up to it:
“(Prince) Rainier faced a crisis in 1962, when Charles de Gaulle grew fed up with French citizens’ taking residence in Monaco to avoid paying income tax. He threatened to isolate the principality and cut off its supply of French francs, the principality’s currency until the advent of the euro. In 1963, Rainier agreed to a treaty that decreed that the French citizens who live in Monaco (currently there are some 12,000) have to pay income tax to Paris.”
http://query.nytimes.com/gst/fullpage.html?res=9906E3DD153EF933A25757C0A9639C8B63
@Innocente, Thanks for the NYT article. I figured that the reason for the treaty was to prevent allegedly wealthy French citizens from avoiding income tax, but I didn’t know that France went as far as threatening economic sanctions. The situation seems very similar to what the US is doing now with FATCA, but to the whole world, while France restricted it to one tiny country.
After reading the recent articles more carefully, I realized that it wasn’t the French administration that declared the partial end of CBT. It was a ruling by one of the supreme courts in France (Conseil d’État), as the result of lawsuits filed by several French citizens in Monaco. In fact, they are still waiting for the administration to say how exactly it will implement the ruling.
This result makes me wonder if the best way to end CBT and FBAR in the US would be through the courts too. I’m very confident that this approach would work for the FBAR penalties, since they are obviously disproportional and there is the strong precedence of Bajakajian. But from what I understand, only a person who was actually charged the draconian penalties can file such a lawsuit.
For CBT, any American abroad who has paid US tax on foreign income could be a plaintiff. I know that Cook v. Tait already ruled that CBT is constitutional, but that decision only was based purely on the concept of personal jurisdiction. Since then, the US supreme court has greatly expanded the meaning of “equal protection” and “due process”, restricting what kinds of discriminations are allowed, for both the federal and state governments. Indeed, the supreme court has ruled that discrimination based purely on citizenship was unconstitutional under the equal protection clause, in some cases where citizens and aliens were in “similar” circumstances. Would that argument be accepted in the case for taxation too? CBT treats nonresident citizens much more negatively than nonresident aliens in “similar” circumstances, or worse, than nonresident nationals without citizenship, or than citizens residing in US territories, in almost the same circumstances and with practically the same rights. So does CBT violate equal protection? I think so, and Cook v. Tait didn’t consider that. In that case, Congress would be faced with the option to either end CBT or tax nonresident nationals and residents of territories like US residents, but the second option is not politically viable and could possibly violate other constitutional clauses. I wonder how much such a lawsuit would cost.
@ShadowRaider
Can you think of any nation that treats it’s non-residents worse than the US does, as a matter of policy?
The United States, the “land of the free and home of the brave,” has the unquestionable distinction of being number one. No other nation that I am aware of literally forces its overseas citizens to renounce their citizenship in order to lead a normal life in another country. And for many it has become necessary to renounce their citizenship just to survive. And with Fatca kicking into high gear in July of this year the situation for overseas American citizens will become even worse.
For those who do renounce, it is irreversible. They can never obtain US citizenship again. And if Senators Schumer and Reed are ultimately successful with their legislative proposal then those who renounce US citizenship will be blacklisted and never allowed to set foot in US territory for any purpose for the rest of their mortal lives. Yet I hear no outcries about this most obvious violation of the UN’s Declaration of Universal Human Rights which is seemingly enshrined in stone in the US Tax Code.
There were outcries about Eritrea’s similar taxation of its expats which resulted in a Security Council enactment of a resolution of condemnation and the imposition of sanctions against that tiny country. It was none other than Susan Rice, then the US Ambassador to the UN, who led the charge against Eritrea, and that resolution no. 2023 in 2011 was enacted without a even one dissenting vote.
Following are several comments on the French court ruling regarding the taxation of French citizens residing in Monaco:
1) The French Conseil d’État ruled that French income tax could not be applied to French citizens who have always lived in Monaco since it was the intention of the France-Monaco tax treaty that it stop French from moving to Monaco to avoid French income tax.
– This could be relevant to the proposed carve-out from FATCA for local bank accounts maintained by Americans who reside abroad.
2) The French court did not rule on whether it was a human rights violation of French citizens residing abroad to be subject to French income tax because the ruling was decided based on 1) above.
3) The court battle was supported by the Union of French Citizens in Monaco, the French association “Children of the Country” and the French parliamentary representative for French nationals in Monaco, Andorra, Spain and Portugal, Arnaud Leroy.
– The ACA and other associations representing American citizens residing abroad might wish to pay attention to this support.
4) A French citizen in Monaco gave financial support to this court case.
5) The final sentence in the “Monaco Matin” article “Francais de Monaco: vers la fin de l’impot” says: “April 11, 2014 could well mark the end of the decline of the French population in the Principality (of Monaco)”.
6) A familiar sounding comment by a reader of “Monaco Matin” (translated):
“Finally! To know that we have the right to pay and to receive nothing. At one time I could not attend a school funded by the National Employment Agency (employment center now) because of living in Monaco (born and always worked there …), my brother did not perceive the benefits for his cancer, or scholarships to university … We have no right to obtain French social welfare (RSA) … because we live in Monaco. However we had an obligation to pay taxes … It was not very normal, it seems to me … You do not get either anything from Monaco (unless sick) because you are French. In short it was time for a change. We are not asking anything to anyone but it does not work either, to be more accurate.”
A French-language Wiki entry called “Expatriation fiscale” lists popular destinations for French wishing to emigrate to escape French taxation and comments on the undesirability of Monaco (translated):
“Destinations
For emigration, the French usually choose Francophone destinations and/or that are close geographically, with the choice being made according to the fiscal objective and terms of reception:
a. Belgium has benefits for business owners and pensioners, who are subject to a reduced tax on financial income, the lack of a capital gains tax, the absence of a wealth tax (French “ISF”), being near Paris and with a high quality of life in Brussels, an international and open city.
b. Italy is chosen by retirees who wish to escape the inheritance and enjoy a pleasant climate.
c. UK and French Canada (which offers, via Quebec, facilities for French emigration) are often chosen by those who wish to start a business.
d. Switzerland (through tax packages offered by some cantons) attracts very large fortunes and professionals with incomes outside the country (athletes, actors, singers)
Monaco is not a destination for French citizens, because those who are coming are subject to direct taxes exactly as they were in France (after tax agreements signed with France in 1963) or by changing nationality, which is granted only after an arduous selection process.”
https://fr.wikipedia.org/wiki/Expatriation_fiscale
Today I met with Tim Tarpley, deputy chief of staff and legislative director of representative Ted Poe (R-TX). He didn’t allow me to record the audio of the meeting as Em asked, so I’ll describe it here (by the way, I updated my presentation with some of your comments). The meeting was fairly short, as he was already aware of most of the subject, including FATCA and Eritrea (maybe ACA or AARO talked to him before), so I didn’t have to explain too much. He was a bit concerned that people could abuse my proposal to avoid taxes or a possible military draft in the US, so I explained to him that US residents are subject to these things regardless of nationality status. I said that the “avoidance” could only be done by people outside the US, and he was not concerned with that. He also raised the possibility of abuse through “offshore” corporations, and to that I had no answer because I don’t know exactly how the corporate tax works. At the end, he said that the committee is indeed discussing the meaning of each status. I asked if he could mention my idea to the committee, and he said “sure”. He also asked if he could contact me with questions later (yes).
Later, I thought about possible abuses and I realized that there is a loophole with my proposal. US nationals without citizenship who reside in the US and then leave, ceasing to be US residents, are not subject to the expatriation tax. It doesn’t matter how long they stayed in the US. So it’s possible that a wealthy US citizen, residing in the US, could renounce US citizenship under my proposal, paying an expatriation tax at that time, but then return to the US as a US national, invest and accumulate capital gains for years, leave the US for one year (no expatriation tax), realize the gains in that year (nonresident), and return to the US again. The tax would be avoided, and it doesn’t even have to involve offshore corporations. I don’t think anyone would plan that much ahead and actually do it, but it is a possibility. I personally don’t care, but Congress does.
Anyway, I’m not very confident that my nationality proposal will be accepted, but at least it makes them think about the subject. I’m not planning to contact more assistants about this proposal. Instead, I’m thinking that the most effective way to solve the problems would be through the courts, as I explained in my previous post. But that’s not a path I can take myself.