Both….
Lynne Swanson does it again. Another fine piece. This time at the U.K Tax News with a global audience.
She frames the story by asking the key question, “What If Other Countries Adopted American Citizenship and Tax Laws?
It is actually a frightening idea, however in this world of copy-cat taxation policies with OECD’s GATCA arising out of the U.S. unilateral global imposition of FATCA, and the U.K ‘Sons of FATCA‘, it is question that needs more attention. And, she got it!
As I understand it, the article was also published as a letter to the editor in Tax News International (subscription only), the most widely read tax publication anywhere, with the largest audience of compliance experts including Treasury and the IRS.
The questions she asks, is also a question posed by the late Andy Sundberg who penned a piece on January 6th that did NOT get as wide distribution as Lynne’s article did. It paints the picture of a dystopian nightmare for a person laboring under the demands from multiple countries all claiming their citizenship taxation rights. It was posted in February of 2012, the early days of IBS existence. What is the Systemic Risk of Citizenship taxation to the World’s Economy?
Later that year, there was Arrow’s excellent article written in June of 2012. The accidental Kenyan: What would happen if the African nation copied U.S. tax policy? by Don Whiteley. He focused on the impacts on Obama, and it got good play in Vancouver and Canada.
And now Blaze has completed the trilogy for even a wider audience, and answers the key “What if” in a manner that anyone should be able to understand, unless, apparently, you are a U.S. Congressman.
With this piece you are now armed with 3 good articles to send to family and friends that “Don’t get it!”
I would draw a HUGE distinction between the general principle of citizenship based taxation (CBT)–and how it is actually practiced in the country that actually practices it–the US (or Eritrea for that matter).
I find it difficult to quarrel with the general principle of CBT. Citizenship represents an option–an option to resume (or take up for the first time) residency in that country at any time you choose–without regard to that country’s wishes. It’s an option that non-citizens don’t have. And anyone who has every played the financial markets knows that options have real value. If I buy a call option on a particular stock, I can make money if that call option increases in value. And I can make money even if I never actually exercised the option and never actually purchased the underlying stock.
So even if it isn’t something that most countries do, it is hard for me to criticize the fundamental principle of taxing that option–even if the USA is nearly unique in doing so. It is hard for me to say that the fundamental concept of CBT is evil in and of itself. For example, at one point in my life, I had the opportunity to return to my birth country–a country in which I had never set foot in over 40 years. Having that option increased my negotiating leverage with employers in North America–resulting in an increased income–so it had real financial value even though I STILL didn’t set foot in my birth country. Of course my birth country isn’t the USA or Eritrea so I was able to use this option for free–but if my birth country chose to tax this option I would be hard pressed to call that unethical in and of itself.
What I DO think borders on evil, though, is how the US prices that option. For someone who has lived in Canada for 30+ years, and has no current US financial ties, clearly the value of that option isn’t anywhere close to 25%+ of that person’s total assets–especially if all or most of those assets were earned outside the US. Nor should the process of complying be anywhere near as complex or expensive as it is. Nor should someone who honestly didn’t know about the rules for compliance–and, after all, this wasn’t publicized much until lately–be penalized for that.
But I’m having a difficult time with the concept that CBT, by itself, is fundamentally evil if it were practiced in a more reasonable way.
Dual citizenship is a concept that makes some countries rather uncomfortable. The USA is a country that traditionally hasn’t been that comfortable with dual citizenship, and CBT represents the latest attempt to force people to make a choice rather than retaining both (or multiple) citizenships. Even though I’m a dual citizen myself, I can understand the arguments in favor of saying people should have to make a choice rather than keep 2 citizenships.
And–again–I’m not defending any of the ways in which CBT is enforced–such as FBAR and FATCA–none of which seems defensible. But the basic principle of CBT–were it enforced in a more reasonable way–might make some sense.
Dash1729, Re your:
If it were an OPTION, that would be one thing. What I object to is automatic transmission of US Citizenship to our children born in other countries. For them, who had no choice in where or to whom they were born, that should be the RIGHT to a MAKE A CHOICE when they are adults — an OPTION to CLAIM US Citizenship if there exist the prerequisites by birth to US parent(s) in a country outside the US.
Until it is an OPTION, Citizenship-Based Taxation as practiced by the US is ENTRAPMENT for my son (and others like him) with a developmental delay and without the ‘mental capacity’ to renounce such an automatically obtained US citizenship and for which the Department of State says a Parent, a Guardian or a Trustee does not have the right to renounce that “supposed” US citizenship on such a person’s behalf, even with a court order.
Any other country who confers automatic citizenship on anyone because of their birth to parent(s) outside their country should think about the inequity for some persons. The congresspersons who put automatic transmission of US citizenship in place when there is US citizenship-based taxation law for all US citizens no matter where they live, no matter if they have ever stepped foot into the US obviously did not think of this aspect. If they did, what they put into law is immoral.
Isn’t CHOICE, an OPTION, important in these situations? It is not an OPTION.
Is any kind of ENTRAPMENT into US Citizenship and thus US Citizenship-Based Taxation and Reporting responsibilities year after year after year (no tax necessarily due but with the cost of compliance for such persons) justified?
@calgary411
You just quoted part of my message but there was no response of your own–did you mean to include a reply?
But just to anticipate what I expect your reply will be–yes, in your particular circumstances, I believe you should ethically have the right to renounce US citizenship for both yourself and your son. No one should be forced to retain a citizenship that has no value to them–and if they aren’t legally able to act on their own behalf (eg your son) a guardian (eg yourself) should be legally able to act on their behalf.
Again, though, it is the way CBT is enforced in practice by the US–and not the principle of CBT itself–that is the big problem here.
And to answer Lynne Swanson’s question–if CBT were practiced and enforced worldwide, then US politicians would do what Michaelle Jean did by choice and Australian politicians are required to do by law–renounce all foreign citizenships before entering politics.
Sorry, Dash1729. I have finished my thoughts and the comment is now updated. We’re essentially saying the same thing. But I add that I would rather it be a CHOICE / a real OPTION / not automatic, whether that be by the US or Canada or any other country.
@calgary411
In general they DO have the choice that you want them to have. In most cases a dual citizen CAN choose to renounce their other citizenship(s) and choose to retain only the one citizenship where in their heart they truly belong.
Your son, I am aware, is in a difficult situation where I know he doesn’t have that choice that, in general, most people do have. I would definitely favor a change to the law allowing an adult guardian to act on your son’s behalf to make that choice–or, failing that, to exempt him from CBT.
But for many people dual citizenship can provide wonderful opportunities. The USA has a very offensive regime of CBT. It also has a labor market that is 10 times the size of Canada’s that can provide wonderful opportunities for a young person just starting out in life. Different people are going to make different choices depending on their circumstances. I fully favor allowing your son the opportunity to make a choice but I also favor allowing others that choice too–even if their choice might be different from your son’s. Not everyone hates their parents’ birth country so much that they somehow see the citizenship of that birth country as something “forced” on them. Give everyone a chance to make their own choice.
We do agree, Dash1729, but see through different experience lenses. I just wish that “choice” for our children didn’t have to be or not be renunciation.
In my mind, it should be an “OPT IN”, not an “OPT OUT”. That way, it would have to be a very informed choice to claim the citizenship that, I agree, would be a benefit to many — but it should be their choice to make that decision. Otherwise, too many families (not just mine and my son!!! but I know I don’t communicate that point well) would still have to go through some horrendous hoops and expense when and if they learned of that. If it were an OPT IN, those affected would likely be more knowledgeable of such rules as there would be an incentive for them and their families to be aware. And, a PR opportunity for US citizenship benefits, instead of the negativity of present ENTRAPMENT of those most vulnerable.
@ Dash1729
Taxing an option? I don’t get that at all. It sounds almost like taxing people because there is a 1 in a billion chance they might win a lottery someday. They may never buy a lottery ticket but they have the “option” to buy one. Could you please explain why I should be ensnared by CBT too? A long expired, returned, but not acknowledged as returned, greencard does NOT give me the option of returning to the USA (not that I’d ever step foot in that country again). What it does give me is the certainty of periodic anxiety attacks for the rest of my life. What it does give me is the possibility that my entire savings will be handed over to a foreign government sometime in the future. There are times when I actually wonder if the Canadian government will completely betray me and imprison me upon request from its master over the border. CBT is unique and outrageous just as Blaze has written. It is also EVIL. And now I’ve given the damn IRS another idea. Since everyone in the world has the “option” of applying for U.S. citizenship (even though the 99.99999% would be rejected) then everyone in the world should pay taxes to the USA and reveal all their financial details too — not that the NSA hasn’t probably scooped up all that data already.
@Dash1729
What you are basically arguing is that Citizenship should be like a club and you can join or leave at your whim, but while retaining it, you pay your dues.
You are also saying that you should have simple choices (an option) in or out and not something conferred on you from birth without informed consent.
Maybe citizenship, under your model should NOT be given as a baby is christened into the Catholic faith, but a later choice (baptism as a Baptist) when a person is of an age of consent.
Further, multiple citizenship should NOT be allowed, as you can only be one club member at a time. Can’t be both a Baptist and a Catholic, so to speak.
However, back to the practical world of how the U.S. just imposes its Tax, form and penalty club without regard to the wishes of those so enjoined. It is NOT THE INTERNATIONAL NORM.
Just to mix it up a bit, there was an article in February of this year at Bloomberg. It is probably posted somewhere on Isaac Brock Society. I don’t have time to look
Title: Cost of Dropping Citizenship Keeps U.S. Earners From Exit
There were 325 plus comments, and of course, some were of the “good riddance” variety as we have come to expect.
There was one good reply there by PBHale, which should be posted here, for those that argue Citizenship taxation as the U.S. Practices is ok….
I politely disagree with Dash1729. Taxes exist to fund government services, period. So people who use these services should pay taxes, and those who don’t should not. Having the option to move to the US has value, but it’s not a service, as it costs absolutely nothing for the government to simply allow certain people to move there. It’s only an arbitrary definition. If anything, the small cost for the US officer to verify a passport when the person enters the US has already been paid by the passport fee.
Here are some examples that show that governments do not think that this “option” justifies taxation:
1. Of all 244 countries and inhabited territories in the world, 242 (99.2%) do not tax nonresident citizens, even though they still allow them the option to move there at any time.
2. The 32 countries of the EU-EFTA, 9 countries in South America, and Australia and New Zealand, allow each other’s citizens to move there at any time, but do not tax them.
3. All US states and territories allow people in other states and territories to move there at any time, and do not tax them.
4. The US does not tax US citizens residing in US territories (on income from the territories), even though they can move to the states at any time.
5. The US does not tax US nationals who are not US citizens (mostly American Samoans), and citizens of Palau, Micronesia or the Marshall Islands, living outside the US, even though they also have the option to move to the US at any time.
6. Millions of foreign relatives of US citizens and residents have the option to immigrate to the US with little paperwork, but they are not taxed by the US until they actually finish the immigration process, and if they choose do it at all.
7. Hundreds of millions of people around the world can travel to the US without a visa, or have a US visitor visa already. Their stay is usually limited to 3 or 6 months, but this option still has value, and the US does not tax them either, unless they actually stay in the US for a significant amount of time.
In all of these cases, the country or state still taxes these people on their local income, if any, because it’s implied that a nonresident person still benefits from some government services in the place where the income is generated, such as infrastructure, police, defense and courts. But merely having the possibility to be in a certain place does not involve the use of any service from that place, and thus does not justify taxation.
@Dash1729,
re; …”It also has a labor market that is 10 times the size of Canada’s that can provide wonderful opportunities for a young person just starting out in life….”
That is essentially what a US tax lawyer told me, blithely ignoring that IF my child/ren had actually qualified for dual status (which to me it was very lucky that it was established that they did not), then they and I would have immediately had yet another FBAR and ‘taxable foreign trust’ problem – and the US would have levied taxes on their Canadian funded and held RESP (created by a Canadian-only grandparent) – thus eating up all the interest accrued and part of the principle; in back and future annual accounting costs for the 3520 and 3520A and US tax returns and FBAR, as well as potential draconian penalties, etc. It was hard enough to find someone local who still does ‘simple’ US returns, and even some of those say they either have never done, or refuse to touch 3520s. Others wanted to charge incredible amounts. Any Canadian education grants or bursaries would probably be taxed and eaten up by the US as well.
We are of very modest means. The US prevents US citizen children abroad from using the education grants, savings, and incentives it provides for US permanent residents AND US citizens living in the US. However, at the same time, because it refuses to recognize our RESPs as non-taxable, it does not allow US citizen children born and living abroad to avail themselves of their own non-US home and birth country education savings and incentives either. Part of that RESP originates from the funds of Canadian taxpayers who provide the money for the matching grant, and who subsidize the tax exempt or tax deferred status of our registered savings. The US refuses to respect that and punishes us for having them.
If our child was a USP in Canada, they would therefore not be able to use the education tax breaks of either country – due to punitive and confiscatory US tax policies. Without post-secondary education, they would not be able to access all those ‘opportunities’ you cite in the US.
Apparently, the US does not want US children abroad to succeed. There are no breaks at cheaper state universities for US citizens coming there to attend from abroad, unless you establish a minimum length of US residency and demonstrate substantial ties. We cannot afford US tuition. Thus, the US would have prevented my child from benefiting either in the US or in Canada from acquiring the post-secondary education necessary to avail themselves of ‘opportunities’ in the US and Canadian education system, and thus both labour markets.
And I question the benefit of access to the US labour market: I know several young US resident US born citizens who have had to abandon their plans for further education because they could not find sufficient job opportunities in the US, cannot afford more post-secondary training and may enter the military instead – not because of a vocation for it, but from necessity. I do not want them to be killed abroad in search of the opportunities that they could not find in the US. Especially if they are going to a country where the CIA delivers bags of US taxpayer cash to fund and maintain corrupt officials.
@Dash1729
If what you say is true, maybe you could explain to me how countries allow their citizens to return unimpeded with taxation based on residency. That’s because it’s citizenship that grants you the option to move to the country of your citizenship any time you please – not the taxation based on citizenship. The same would hold true for the US. If the US were to move RBT, it is expected that it would look more like Canada’s where someone wishing to end their residency and therefore their tax obligations would pay a departure tax. Of course, you could live elsewhere and continue paying US tax as a resident would if you wished to continue paying tribute to the US, because that’s all it really is.
The one thing I see in this whole system of CBT is a lack of responsibility. If we look at the US system of taxation, yes, CBT is unfair. The real problem I see with it now, is simple. If you want to go after people for your own tax system, that is fine. The problem we have here is that the US was not responsible to it’s people in other countries. With every law, before you can lay a charge or fine, you need to first educate people such laws pertain to them. The large problem with CBT is that yes, while everyone hates it, and yes, it is not right and will not allow people to prosper in other countries without paying their birth country taxes etc. the country that supports CBT(the USA), has the responsibility to reasonably educate their own citizens of the laws regarding CBT. The USA FAILED to do this. This is not stopping them however, from calling it’s own peoples cheats, tax evaders etc. The US feels it has no obligation to educate anyone that left at ANY age or left under various situations(of which some had no control ie: birth only), This is what we ALL relate to in this whole Fatca failure. What the USA is threatening governments with seems strong enough to make governments of all other countries make a decision(cower in fear). The simplest one is to blame the VICTIM and save further problems with the USA. We are seeing that this is not the end of problems, just the beginning. The USA is tearing apart the countries that signed onto Fatca with fines, not only to US people, but to banks that the USA calls criminals. Again, showing no obligation of their laws to banks either. This is where we find it totally unreasonable to people. banks and another country as a whole. I see the Swiss and Caymans etc as guinea pigs. The world is watching and starting to grow a brain and realize that nobody wins and we all will lose under Fatca control. May God bless Lynne for ALL of her efforts and writings etc. She is a professional person that I look up to.
I’d say that a labour market ten times the size of a country that’s 1/10th the population is a wash.
@Shadow Raider
“Having the option to move to the US has value, but it’s not a service, as it costs absolutely nothing for the government to simply allow certain people to move there.”
I would disagree that the cost is zero. As a dual US-Canadian citizen I visit Canada far more frequently than a typical US citizen with zero ties to Canada would likely do. While in Canada I utilize Canadian services even if it is nothing more than driving on roads paid for by Canadian taxes or riding a subway partly subsidized by Canadian taxes.
Now because Canada doesn’t have CBT I don’t have to pay any Canadian taxes. But I wouldn’t have an ethical problem with it if I did as long as the taxes were reasonable and fit the circumstances. Though my use of Canadian services is fairly rare, it definitely exceeds that of the typical American.
Would paying 25% of my assets to Canada be reasonable? Would a small tax fitting the circumstances be reasonable?
It’s bewildering to me why anyone would think it’s hunky-dory that the USA can steal my all-Canadian savings. If it does, someday I will find myself trying to survive solely on a pittance of a CPP payment. And a pittance it is because obviously I wasn’t making CPP contributions while I was naively living in the U.S. tax and penalize you anywhere you go trap. (Reduced CPP contributions mean reduced CPP payments. OAS is reduced also, according to the number of years spent outside Canada.) BTW, I am NOT eligible for any SS payments so please don’t anyone think I would be able to “rob” the citizens of the USA in that way. Sorry to be so pissy today. Good thing there are measured responses here to counter-balance my bad tempered ones.
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Now we want to hear from you.
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@Dash1729
Perhaps the departure tax would more than cover these incidentals?
@ Dash,
Place of birth equating with frequent use of a country doesn’t make sense to me. I was born in the US and I know a total of 3 people who live in the US. I last visited the US for 4 days 5 years ago. Someone born on another continent to US-born parents would be a US citizen, but might have never been in the US in their life at all. Also travellers pay hotel tax, gasoline tax and, on applicable highways, tolls.
@bubblebustin
“If what you say is true, maybe you could explain to me how countries allow their citizens to return unimpeded with taxation based on residency.”
It is because US taxes traditionally have been lower than those of other countries, so most ordinary people didn’t end up paying anything under US CBT. It would have been a different story had other countries with higher taxes imposed CBT. Traditionally CBT worked well for the US because of its low taxes–only the real tax cheats were affected, and in those cases, rightly so.
Of course, under the current enforcement madness, that is no longer true. But I submit again–it is the enforcement madness, not the CBT itself, that is the real problem.
Financial freedom is a right. If one resident citizen doesn’t enjoy the same financial freedom as another it’s discrimination pure and simple. The US has no moral right to tax its overseas resident citizens.
@Dash1729
Under CBT a US emigrant will pay the higher of the two tax systems and receive the lower of the two country’s deductions. We are 2nd class citizens in both the country we live in and of the US, all because of CBT. The only reason why CBT has survived is because no one knew about it and it wasn’t enforced. CBT may very well continue to survive, but US citizens living outside will by and large cease to exist on any scale. CBT will obviously work for those who remain, but there will be much fewer and the face of the American emigrant will change.
I’d like to hear your ideas about CBT could work for American emigrants, because to me it’s unworkable. If CBT worked hunky-dory and you don’t have to pay US taxes, why have it?
@Dash1729, You were talking about taxing the option to move to a country, and I maintain that simply allowing this option costs nothing to the government.
Visiting is another subject, but it still doesn’t justify income tax. The services that visitors use are mostly maintenance of public areas and transportation, such as the roads you mentioned. Those items are largely paid by consumption taxes, such as sales tax or VAT, and taxes on airline tickets, gasoline, lodging and car rentals. You do pay these Canadian consumption taxes when you travel there, they are just hidden and relatively small so you don’t notice them. But don’t feel bad, because the services that you are using are also relatively cheap. You would be surprised at how small the public spending on transportation is. The largest parts of the budget of a developed country, by far, are social services like health and education, and that’s not something that visitors use. Residents do, and that’s why they pay income tax. In other words, you are already paying a “small tax fitting the circumstances”.
Any American can also travel to Canada as often as you do. If you travel there more than the average American, you use more of its services but also pay more of its consumption taxes. It’s only if you stay there for a long time, and are deemed a resident, that you will use the other expensive services like health and education, and pay income tax. But any American could do that too by immigrating to Canada, which is not too difficult. Canadian citizenship, by itself, is just a technicality that eliminates the paperwork. And what about a nonresident Canadian citizen who doesn’t visit Canada at all? Do you think that person would have to pay the same tax as you? In other words, taxes should be charged to reflect what people actually do, not what they are allowed to do.
@Dash1729, I agree that the “enforcement madness” is much worse than just CBT. That’s why, in my list of suggestions to Congress, I focused on the punitive provisions in the first 4 items, and only mentioned CBT/RBT in item 5.
@ Dash1729
I wouldn’t think of asking a Canadian relative to pay me rent while visiting from his/her country of residence and neither would I want my Canadian government to tax you in anyway simply because you have the option to come back and visit and even live here one day, if you choose. Guess I just think differently than Americans.
@ bubblebustin
You took my hunky-dory! Now I don’t even have a boat to stay afloat. Never mind, I know you just borrowed it. 😉 You are bang on about the highest tax, lowest deductions thing. For what does it gain a CBT victim to take out a registered Canadian savings plan if the USA tax code negates it?
@bubblebustin
“I’d like to hear your ideas about CBT could work for American emigrants, because to me it’s unworkable. If CBT worked hunky-dory and you don’t have to pay US taxes, why have it?”
CBT would work fine if it were enforced within the context of the existing US-Canada tax treaty, and the harsher measures like FBARs and FATCA were reserved only for nations which (unlike Canada) are known tax havens.