This post appeared on the RenounceUScitizenship blog.
Should #americansabroad be taxed according to the same rules as homelanders? renounceuscitizenship.wordpress.com/2013/01/06/law…
— U.S. Citizen Abroad (@USCitizenAbroad) January 11, 2013
I recently saw the movie Les Miserables which is based on the great French historical novel. As it is described in Wikipedia:
The story begins in 1815 in Digne, as the peasant Jean Valjean, just released from 19 years’ imprisonment in the galleys—five for stealing bread for his starving sister and her family and fourteen more for numerous escape attempts—is turned away by innkeepers because his yellow passport marks him as a former convict. He sleeps on the street, angry and bitter.
Can you imagine? Five years of imprisonment for stealing bread. The only punishment comparable in its insanity would be an FBAR penalty. Well, they say that France and the U.S. have a lot in common. What the French government of the day regarded as “equality under the law”, the poor in France regarded as oppression and unfairness. Equality is a very difficult concept to define. I think I recognize inequality when I see it. But, I don’t know of any successful attempt at defining it.
Two ships: Each called “The Good Ship Equality” – Passing in the night
Ship 1: The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.Anatole France, The Red Lily, 1894, chapter 7
French novelist (1844 – 1924)
Methodology: Apply exactly the same rules to everybody without regard to the outcome.
Clearly the definition of the “ruling class in 19th century France.
Clearly the view of Former IRS Commissioner Douglas Shulman reflected in treating U.S. citizens abroad with “offshore bank accounts” the same as “homelanders with “offshore bank accounts”. This would result in “equality” in so far as each and every person would have to report bank accounts outside the United States.
Ship 2: “The true interests of equality may require differentiation in treatment”
Canadian Chief Justice Brian Dickson – Big M Drug Mart – Early 1980s
Methodology: Devise rules in a way that the application of those rules will result in equal treatment with respect to the purpose of the law.
Clearly the view of McGill Professor Allison Christians and American Citizens Abroad in proposing a “same country exemption” for FBARs and Form 8938s. This would result in “equality” in so far as there would be no FBAR requirement with regard to bank accounts in your country of residence.
Assuming The Taxation of U.S. citizens abroad: Should they be taxed according to the same rules as homelanders?
I recently wrote two posts on Cook v. Tait and citizenship-based taxation. These posts focused on the the constitutional rationale for leving taxes on the income of property of U.S. citizens no matter where they live. Many U.S. citizens are also citizens of other countries (dual citizens). Therefore, as a practical matter by “taxing U.S. citizens abroad” the U.S. is taxing the citizens of other countries who reside in that other country. FATCA will put citizenship-based taxation under the microscope. Once the world wakes up to the fact that citizenship-based taxation is really a levy on the economies of other countries, there will be trouble and resistance to FATCA.
In fact as Todundsteur has suggested it is possible that citizenship-based taxation will be a casualty of FATCA. Think about. How can the U.S. have both FATCA and citizenship-based taxation. The deadly duo of citizenship-based taxation coupled with FATCA will create a society where the world must be tribute to the United States. That is NOT going to happen. (In the real world the debtor does NOT set the terms of the arrangement with the creditor.)
This post is to raise a different question.
Assuming the U.S. continues to levy taxes on the incomes of U.S. citizens abroad (and therefore residents of other countries) should the approach be that of 18th century France or 20th Century Canada? In other words, should the principle be:
1. Every U.S. citizen should be subjected to exactly the same rules; or
2. Should different rules be designed to ensure that all U.S. citizens pay tax but that the rules are reasonable for U.S. citizens abroad?
At the present time, with the exception of the Foreign Earned Income Exclusion, U.S. citizens abroad and homelanders are subject to the same rules. It’s just the the rules have a disproportionate and disabling effect on U.S. citizens abroad. The rules mean something very different to U.S. citizens abroad.
– although all U.S. citizens are required to file FBARs it is really only U.S. citizens abroad who are affected by the requirement
– although no U.S. citizen abroad is permitted to own a PFIC as a practical matter the PFIC rules prevent U.S. citizens abroad from normal retirement planning.
I could list many more examples, but you get the idea.
Therefore, as part of considering citizenship-based taxation, one should raise the question:
Should different rules apply to U.S. citizens abroad? Shouldn’t the rules be such that U.S. citizens abroad can live normal lives, do normal retirement planning, and be ambassadors for the United States abroad?
When it comes to the taxation of U.S. citizens abroad, what should “equality under the law” mean?
U.S. citizens abroad are now forced to renounce their U.S. citizenship to protect themselves and their families.
Therefore, when it comes to U.S. citizens abroad, either:
1. They should be subject to a different set of rules – Remember that “the true interests of equality may require differentiation in treatment”.
2. Citizenship-based taxation should be abolished in favor of a residence based tax proposal suggested by American Citizens Abroad.
To subject U.S. citizens abroad to the same tax rules as “homelanders” is to destroy U.S. citizens abroad. Surely “equality under the law” should allow U.S. citizens abroad to live!
Very eloquent and well reasoned series of posts USCitizenAbroad.
Excuse what may be slightly offpoint to this thread, but as a related aside: when I followed the link to excerpts from “Canadian Cases in the Philosophy of Law (page 142, 4th ed. Bickenbach, Jerome), reading it provided a very useful term – that of ‘economic interdependence‘- which may provide additional evidence for why a FATCA IGA should not be entered into by Canada’s government.
Perhaps not only can we explore the possibility of a Charter challenge based on the negative and discriminatory effects and burdens imposed by a foreign law enabled on Canadian autonomous soil – as applied to those deemed by the US to be ‘US taxable person’ individuals in Canada, but the idea of ‘economic interdependence‘ may yield evidence for a separate and complementary challenge – on the grounds that any Canadian-sited household where at least one Canadian resident member is deemed by the US to be a ‘US taxable person’ (with all the unjust burdens that entails) – will thus also be discriminated against, and the result disadvantages and burdens the entire Canadian household or family unit – even though FATCA and US extraterritorial citizenship-based taxation is not applicable to the other members – who have no US obligation. This is not an acceptable result or desirable good for Canadian society, and so there must be a utterly compelling reason why our Canadian federal government should choose to implement a made-in-the-US foreign law, and thereby sacrifice the wellbeing and viability of entire Canadian households and family units – whose best interests are bound together – through ‘economic interdependence’.
Canadian tax laws recognize married couples, and some other family arrangements as economic units, with ‘economic interdependence’ – through considering the income of married spouses as a related unit, or designating that certain deductions can only be made by one of the parties in a spousal relationship (ex. for childcare or dependents) – though they theoretically file their taxes separately.
If households and couples can be considered as an inseparable unit for those tax purposes, can they not be considered ‘economic units’ for the purposes of formally challenging the effects of a FATCA IGA on the non-US Canadian citizens in an ‘economic interdependent’ Canadian family with one or more US member?
This may be even more apparent in a family situation where one member has been deemed legally incompetent to manage their own affairs, but is considered by the US to be a ‘taxable person’ – for life, as in the case of children and adults with significant intellectual or psychological disabilities sufficient to make them incapable of renouncing and incapable of filing taxes, or managing their finances (ex. RDSPs). Could this help in situations such as that of Calgary 411 – where now only one family member remains bound for life under US tax and citizenship law, but in actuality it continues to constrain the whole family unit – because of the concept of ‘economic interdependence’?
@USCitizenAbroad, thank you for this compelling series!
If US law-makers had set out to provide the most effective legislation to compel a citizen to renounce US citizenship, they’d be hard-pressed to find something better than citizenship based taxation. The only reason citizenship based taxation hasn’t been challenged en masse is because it hasn’t been responsibly enforced by the US. Although FATCA isn’t a responsible way of enforcing the taxation of USP’s abroad, there’s not doubt that it will be effective, as even the threat of FATCA is causing a significant increase in renunciations/relinquishments of US citizenship.
On a sidebar: Our lawyer mentioned in a conversation with my husband yesterday that he’d heard that US Ambassador Jacobson had a big sit-down with then IRS Commissioner Shulmer about Canada. Also, although none of our lawyer’s OVDI clients has yet been contacted by the IRS, he’s hearing the the results are coming back “better than expected”.
Yes, the King of Thailand should submit FBARs.
Also, Princess Madeleine of Sweden (lives in NY) should submit FBARs for the Kingdom accounts where she has signature authority. This will make it so that the IRS knows more about the financial affairs of Swedish Monarchy than the Swedish government does.
I should have it right this time: Shulman. Although if would prefer another word that starts with sh.
@ Mark Twain, re; “This will make it so that the IRS knows more about the financial affairs of Swedish Monarchy than the Swedish government does.” That’s because Sweden is such a tax haven! NOT
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