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!”
@USCitizenAbroad
“Dash have you ever been in a situation where you personally have been subjected to U.S. CBT while NOT being a U.S. resident?”
No. So I don’t fully know what expats are facing but I stand by my point that most of the problems are related to enforcement not CBT itself.
However I’ve known about CBT since 1987 and I’m in no way connected to or part of the tax preparation or compliance. I’m trying to be respectful but it is little surprising that so many Brockers seem to have done their homework so poorly when it came to researching the tax implications of their foreign moves. I empathize with your situation, and I feel the penalties are way, way excessive–but really, guys, you didn’t do your homework.
@bubblebustin
“Generally speaking, what is the benefit of having 10X as many job opportunities if you’re competing against 10X as many people for the same job?”
I fear that the original context of this point has been lost.
The original point was the situation of a young Canadian born adult, perhaps looking for their first job out of school, who has US-born parents. They have an advantage over their Canadian peers because they can apply for US jobs that their Canadian peers can’t get at least without a visa. But this must weighed against the disadvantage of CBT. It is a personal decision and one person might make a different decision than someone else.
However, just as an aside and this has nothing to do with citizenship issues: I would MUCH rather be one of 10 applicants for 10 jobs than being the sole applicant for a single job. In either case I’m likely to get a job but in the former (but not the latter) case I’ve got a much better chance of having a choice and ending up in a job which is an especially good fit.
@FromTheWilderness
“Can you please explain how levying income tax (CBT) on expats to pay for public goods and services they don’t/can’t receive, but Homelanders do receive is not evil?”
Paying for a service I end up not using isn’t viscerally evil in the same way that, say, rape or murder is evil. I pay for insurance all the time that I hope I won’t actually end up needing to use. In the case of taxes, we often pay for services that there’s a chance we might end up using but probably won’t. That’s the nature of taxes–I don’t see that as inherently evil.
If you live in Canada, you probably remember the “Canadians of convenience” controversy in 2006. The Canadian government ended up needing to pay for the rescue of many Canadian citizens who had no connection to Canada other than their citizenship. If one’s citizenship makes one eligible for extraordinary government service in an emergency, perhaps that justifies paying a tax based on that citizenship.
Or perhaps not. Again, reasonable people can differ on this point. It isn’t inherently evil in the same way that all reasonable people agree that crimes like rape and murder are evil.
@Dash
Consider this:
Although I don’t personally know the people who comment on this blog, what is apparent is that many of them have been outside the U.S. for a very very long time. In fact, the most active participants have been out of the U.S. for most of their lives or at least working lives.
Part of the problem is that the situation has gotten progressively worse and worse. A number of people came to Canada in the late 60s. At that time the world was simpler and the tax rules were much simpler.
There are issues surrounding:
– the fairness/reasonableness of the rules to being with
– the evolution of the rules
– the communication of the rules
– the retroactive enforcement of the rules
U.S. consulates and embassies never organized “reach out” program to educate. Those people who filed used tax preparers (example HR Block) and just relied on what they were told.
Let me use two examples:
1. FBAR – been the law since 1970 – who knew, not even the tax preparers
2. PFIC – 1986 who knew
3. Principal residence becoming taxable – who knew
Now, I point out that in each of these cases, these were rule changes that were extremely burdensome and unfair to U.S. citizens abroad. Furthermore, I can tell you that those who were filing their taxes NEVER received any notification from the IRS (even though they were in the system) about any of these changes.
So, it is NOT a situation of somehow people moving out of the U.S. and never checking the tax laws (although in some cases that is true).
It’s a case of the laws being:
First, slowly changed to make life as a U.S. citizen abroad extremely difficult (because of the application of the same tax code to U.S. citizens abroad and Homelanders);
Second, no communication of those changes.
Third, a move to enforcement without notice.
Fourth, an attempt to apply the rules retroactively
Fifth, no provision of a mechanism for people to correct past mistakes (where even those who had attempted to be compliant) were unaware of the changes. Most of those who are NOT in compliance cannot afford the costs to come into compliance.
So, I disagree with your statement:
“so many Brockers seem to have done their homework so poorly when it came to researching the tax implications of their foreign moves.”
It’s NOT about the move. It’s about the life after the move.
To give you an updated example, the PFIC rules which (as per Mona Lisa’s description) resulted in the taxation/confiscation of her mutual funds and high compliance costs probably did NOT exist when she moved to the U.K., if they did exist they were unknown even to the tax preparation people, are now being applied on a retroactive basis.
The situation is far more complicated than you are suggesting.
Also, my impression of you is that you are a fairly bright guy with a strong awareness of the regulatory environment around you. That is simply NOT true of the average person. Nor should it be expected of the average person.
@Dash, re;
…”.. I’m trying to be respectful but it is little surprising that so many Brockers seem to have done their homework so poorly when it came to researching the tax implications of their foreign moves. I empathize with your situation, and I feel the penalties are way, way excessive–but really, guys, you didn’t do your homework…”
Let me repeat part of that comment that shows me that you do not understand the full spectrum of the situation and issues. You say that we are responsible because we didn’t research “..the tax implications of their foreign moves”…
Consider how you are thrusting blame on these groups:
– Millions of children born outside the US, now and in decades past – who inherited the US taxable status.
– And the Canadian ‘border babies’ who were sent over with their Canadian mothers due to a lack of maternity services or hospital beds, for just long enough to be born, and then sent back home to Canada?
– And those born in the US of one or more US parents, but who have lived outside the US since infancy and have never ever thereafter lived in the US as adults and have no other US connection?
– And those who came to Canada and naturalized during the time when they were told that the loss of their US status was automatic and irreversible?
Guess those babies and minors, and those who naturalized outside the US should have researched and kept up with all the changes, reversals, add ons, and complexities of US immigration, citizenship and taxation laws over the ensuing decades, including the Supreme Court’s declaration that the automatic stripping of US citizenship was unconstitutional?
We can barely understand the complexities of what is going on now – and you think that it is fair or even logical to chide us for “not having done our homework”?
The Taxpayer Advocate and others in the US have noted that even US residents, US tax preparers and lawmakers don’t correctly understand the complexities of the US tax and reporting system as applied to those abroad. And you think that those abroad should?
How do you account for the IRS refusing to rule on the decisions we must make:
Ex.
– declaring our Canadian RRSPs to be taxable foreign trusts – after the fact – see the tortured history of their treatment of them – for example, read http://taxblawg.files.wordpress.com/2013/02/sheppard_intertaxjrnl_2-4-13.pdf INTERNATIONAL TAX JOURNAL 13
January–February 2013 Hale E. Sheppard ‘IRS Introduces Two Unique
Remedies for U.S. Persons with Unreported Canadian Retirement
Plans and Accounts’ or several of the other articles on RRSPs, FBARs, and compliance issues for those abroad by Sheppard here http://www.chamberlainlaw.com/attorneys-96.html
– recognizing/agreeing to make RRSPs tax exempted under the US Canada tax treaty, but still forcing us to invoke the treaty exemption annually.
– declaring Canadian mutual funds to be PFICs – and imposing punitive treatment after the fact, due to complaints by US banks who wanted to prevent competition for investment dollars.
– refusing to rule specifically and definitively on RESPs, TFSAs, and RDSPs, but keeping options open to punish us retroactively for not reporting them as such, and paying US taxes on them.
Exactly how much ‘homework’ are we to be held responsible for?
That same person, born in Canada to US parent(s) could take the initiative to take a first step before s/he decides to apply for jobs in the US: fill out an application and go through steps to CLAIM a US citizenship. An opt-in. That seems the much more sensible approach to me. There would be an incentive to do so; and there would not be everyone else who has no interest in doing so being bound in some way to the US — a citizenship they automatically received with no choice in the matter. Change the whole process to a more sensible one of having to claim the US citizenship that they have a right to because of birth to US parent(s) — then go happily ever after into the US and a new life there.
Just think of what would be saved in preventing the complexity of everyone else being uploaded into the US tax system. If these persons born outside the US to US parent(s) have no interest in claiming that US citizenship (or postponing that decision until some other life event — they could still retain that option), then the US should have no interest in squeezing taxes from them and they would not have to go through the complex processes for yearly US tax returns / FBARs: really, for what reason? If there are for most no actual taxes due to the US, why go through all of the complexity and the cost? What is the reason this would be a bad idea? What is “in it” for retaining the complexity for people who just want to get on with their lives in the country of their choice? Why is there any degree of entrapment of these people by the US? Why cannot the US give persons born in a country outside the US to US parent(s) a choice? Why are they, as I see it, at a severe disadvantage (rather than an advantage — an advantage they could claim through going through a process).
I’m not business-oriented, university educated or tax savvy, thus I have paid $42,000 that I would have never dreamed I would be taking out of my hard-earned Canadian retirement savings to try to get back some semblance of a normal life. Perhaps those with lesser savvy about all this US compliance requirement will pay the most and be disproportionately most severely affected. And, yes, I do mean severely!!
Seems more common sense to me than the monster the US has created. KISS.
@Badger
Thanks for emphasizing that the class of U.S. persons is far greater than Homelanders who moved abroad. It really helps in reinforcing the unfairness/absurdity of the situation.
We should also add “Green Card Holders” and those who spend too much time in the U.S. to the mix.
This has been a great comment thread which is must reading for all.
@Dash
I appreciate your forcing people to justify their positions. I wonder whether or how your perspective might be different if you had been forced to live this nightmare. We will never know.
Is it possible for someone who has not lived this to understand it? I just don’t know.
Really, that seems to be the case! In my situation, my family and friends are just tired of me still having issues with the US tax system. They are tired of trying to understand. They have this ‘new person’ to deal with. I “sense” they think I’ve lost it (perhaps I have!) and we don’t have the things in common that we previously had. I am indeed not the same person I was a few years ago. I want some control, some certainty (as much as anyone could have barring illness, accident — normal life crises). And, I want something I know I have lost: a joyfulness of life. It’s hard to fake it when you’re going through all this.
Badger is right on in the last comment. I had a choice to leave the US and live somewhere else. I had to do something about my choice (actually, the second time around; the first didn’t work as I was given false, or at least misleading, information from the US — warned that I would be relinquishing my US citizenship when I became a Canadian citizen. My children do not have that choice that I had. One has been able to renounce; the other, as I know I keep going on about, is ENTRAPPED. I will forever feel most guilty about US citizenship I have automatically conveyed to my children. I would so much rather that any kind of “Accidental American” have an absolute CHOICE to claim such. They have absolutely NO BLAME in the situations in which they have been thrust.
@badger
“Consider how you are thrusting blame on these groups”
Nope. My criticism is very limited in scope. It is directed only at those who have posted on here that they made a choice to leave the US but somehow didn’t know about CBT. You are talking about “millions” of people but I don’t know enough about the circumstances of those “millions” to presume to criticize. My criticism was directed at about 5-10 people who post regularly on here, who were in a position to research the law, and who didn’t do so. The US government is certainly partly responsible with its unreasonable penalties. But, hey, guys–take some ownership of your own responsibility here!
“Guess those babies and minors, and those who naturalized outside the US should have researched and kept up with all the changes, reversals, add ons, and complexities of US immigration, citizenship and taxation laws over the ensuing decades, including the Supreme Court’s declaration that the automatic stripping of US citizenship was unconstitutional?”
If you replace “babies and minors” with “adults” in the above, then, yes, I do think that an adult living in a foreign country needs to keep up on these things.
“Also, my impression of you is that you are a fairly bright guy with a strong awareness of the regulatory environment around you. That is simply NOT true of the average person. Nor should it be expected of the average person.”
No I don’t think it should be expected of the average person. But I think it should be expected of the average expatriate–especially expatriates who made the decision as adults to expatriate.
“I appreciate your forcing people to justify their positions.”
I’m not trying to force anyone to justify any position. I’m trying to offer constructive criticism.
My understanding is that IBS is a group trying to achieve something politically in Canada. I think that if you keep the focus on FBAR/FATCA–on this attempt by the US government to invade Canadian sovereignty by demanding any and all information about any and all Canadian financial transactions–you have an excellent chance of arousing great Canadian interest and stopping.
But I think that if you focus on CBT, you are going to fail. It is going to be a hard sell trying to convince Canadians that the US government can’t tax US citizens–and an even harder sell trying to convince them that they should care.
If you want to succeed politically I think you should focus on where you have the strongest case. The case against FBARs/FATCA seems very compelling. The case against CBT is much more nuanced and it is going to be hard IMHO to get Canadians interested in what seems to be a domestic US matter.
Dash,
How was I supposed to “do my homework” for US taxes when I was born in Canada to US parents who remained here for over 35 years afterwards? I have never lived in the US, and continue to live and work in Canada. My parents didn’t even know they were supposed to file until I told them recently. Their entire working lives have been in Canada, and my entire life has been in Canada How ridiculous is that??
Could you explain to me how I am supposed to do my homework when I don’t even know I am considered a US person required to file taxes plus all of the other compliance issues until I read about it on the news or the Isaac Brock Website? I don’t see the IRS or Treasury giving out leaflets. I’ve crossed the border into the US many times – never any discussion or any indication. No adverts. They ask about travelling with >$10k cash, and many other things, but never anything about US persons living abroad that have to file taxes/FBARS/FATCA etc.
You are painting us all with the same brush. Don’t do it.
Dash1729,
When did you learn about US citizenship-based taxation? Grade school; high school; university. When did the light bulb go on for you?
My New York and Washington State education systems failed me. Who might I hold responsible for that? I somehow graduated in a class of 354 as salutatorian, but I have no recollection of ever learning about either citizenship-based or residence-based taxation. Surely the importance of the subject should have been drilled into our heads somehow. I had no idea; I can’t imagine most having any idea. But, then, I may be way wrong in my conclusion about this — which is the US failed in educating the masses about their citizenship-based taxation. The US certainly doesn’t advise those coming to the land of opportunity from countries who practice residence-based taxation. Should there not be the signing of a document certifying that they have been made aware of their US tax and FBAR responsibilities? Someone screwed up and continues to screw up; it seems to me to be the USA where this anomaly occurs.
@calgary411
“That same person, born in Canada to US parent(s) could take the initiative to take a first step before s/he decides to apply for jobs in the US: fill out an application and go through steps to CLAIM a US citizenship. An opt-in.”
AFAIK this is, in practice, how it works–although I know you’ve been told by a US immigration attorney that someone born abroad to US parent(s) is technically already a US citizen even before they claim it.
Has there ever been a case where the US government has forced any kind of US citizenship obligation on people born outside the US who’ve never claimed it.
“How was I supposed to “do my homework” for US taxes when I was born in Canada to US parents who remained here for over 35 years afterwards? I have never lived in the US, and continue to live and work in Canada.”
Well, for one thing, for many years–I’m not sure whether they still do it–all Canadian passports came with a warning notice that a Canadian citizen may be a dual citizen based on their parents’ country, etc–and they may be subject to the laws of their country of dual citizenship. Did you ever get a Canadian passport? Did you read that notice? Did you make the connection and realize that, yes, they were talking about you?
@calgary411
“When did you learn about US citizenship-based taxation? Grade school; high school; university. When did the light bulb go on for you?”
Probably when I filed my first US tax return–so actually in 1988 (age 22) after moving to the US in 1987. Of course I wasn’t a US citizen at the time but I learned that various groups of people–US citizens being one such group–always have to file US tax returns.
@Dash
40+ years ago when I moved to Canada there was no internet and it was virtually impossible to research the tax implications of moving to Canada. FBAR had not yet been invented. Besides, I had practically zero net worth, very low income, no US assets left behind and no US source income. I payed little or no tax when I lived in the US because I was young. There were no tax implications. Tax was a non-issue. What was far more of an issue to me was the very real possibility of being drafted and sent to Vietnam to kill or be killed in an illegal, immoral war. The US was on the wrong side of history then and it’s on the wrong side now with CBT. The US government didn’t give a damn about me then except as possible cannon fodder. Now it’s only interest in me is to extract as much tribute as it can by using threats and intimidation.
Without the internet it would be next to impossible to find out about the outrageous extra-territorial rules the US is attempting to force upon the world. Even with the internet there is wide-spread ignorance of US CBT even among those most affected by it. Why would any one even think of researching the tax code of a country they hadn’t lived in for more than four decades? Who cares? We don’t live there anymore.
Citizenship-based taxation is wrong because it implies that the US government owns and can control it’s citizens even beyond it’s borders decades after they have left. This is contrary to the very principals the US was founded upon. The government doesn’t own it’s citizens; the citizens own their government. US citizenship has no value to me because of it’s backward view of the relationship between the state and it’s citizens. That blue passport is a liability for those of us who don’t live in the US. That’s why I got rid of it.
So to accuse us of “doing our homework so poorly when researching the tax implications of our foreign moves” rings more than just a little hollow with me. We are not to blame for this ugly mess. Put the blame squarely where it belongs….on the dis-functional, immoral US government and it’s outrageous CBT. That the US is willing to stand shoulder to shoulder with the failed state of Eritrea in the two member CBT club against the rest of the civilized world speaks volumes about the legitimacy of the present US regime.
@USCitizenAbroad
“Is it possible for someone who has not lived this to understand it? I just don’t know.”
No I probably don’t fully understand–just as those who were born in the USA and take their US citizenship for granted probably don’t understand just how difficult it is to earn a green card (and eventually US citizenship) for those who weren’t born in the USA. Although I theoretically could have moved back to Canada, the Canadian attitude to expats living in the USA isn’t helpful: if you stay in the USA you are a traitor to Canada and if you move back to Canada it must be because you failed in the USA.
So yes I am very very well aware of the challenges faced by expats although I am an expat who moved in the other direction. I also made some mistakes that made my journey more difficult than it needed to be but I take ownership and responsibility for my own mistakes.
Dash,
Your arguments in favour of CBT are made without consideration for fairness. You think CBT is okay but you continue to avoid answering the question of what America’s founders had to say about CBT when the Brits tried to force it upon them? Did they believe the British were morally right in doing so? Or did they renounce British citizenship en mass and declare their own independence? Were america’s founders morally right or wrong in doing so?
Going further back in time, what did the Magna Carta have to say about taxation without consent? How can citizens overseas without any representation in the legislature possibly give their consent in the first place?
Your analogy of citizenship being the equivalent of an insurance policy for emergencies overlooks the fact that evacuations are not provided gratis. They are charged to the evacuees at the full commercial rates. Likewise, all services provided to citizens abroad by embassies are paid for by fees charged to the citizens using them. The next time you are in an embassy, have a look at the fee schedule. You will be astonished at the ridiculously high rates.
So the question remains, what moral principle can CBT possibly be based upon?
@ Dash,
Yes, I definitely did read the “small print” in my passport (there’s not much of it, just four points on the back cover page, and it’s an important document), and I recalled reading something that about if you are a dual citizen (which I am not and was not), being subject to the other country’s laws when you are there. So, I just got out my passport and checked. The exact wording is [emphasis added]:
So, nothing in the Canadian passport about a person being subject to the laws of their other country of nationality when they are in Canada.
…and, Dash1729, how did you learn that? I say that was a lucky fluke for you — and AFTER you actually made that move to the US.
Really, am I the only one who failed to get this citizenship-based taxation lesson — that should have been MANY lessons? I really don’t think so.
The Canadian accountants that I employed to help me with my taxes KNEW I was from the US and TOLD ME that I would not have to file US tax returns, that I would not owe anything to the US. Was I not to believe what I was told? Why had the US turned a blind eye turned to all of this until now?
Sorry, I don’t get it. The US has NOT done its job of educating the persons who are somehow supposed to know about citizenship-based taxation — and it is only punitive in its dealings with us now.
What would the results be of an on-the-street US survey about who knows what in the US (or elsewhere) about the differences between citizenship-based taxation and residence-based taxation and why it matters? And, as we can see, it really does matter — so if the US is to be the only industrialized country in the world who practices this, it should be their priority for ALL to know. I’m willing to bet that even some congresspersons DO NOT know! Ted Cruz seemed to have no idea of his acquired citizenship — why not?
Good question, Dash1729:
Who knows; I’ve been trying to get a straight answer on whether or not there is an option for a claim to US citizenship for children born to US citizen(s) outside the US for some time. Do you think the US is going to give me this information? I only know the information that I PAID FOR in Washington, DC is that my kids were US citizens from the moment of their births. And, straight from the Department of State, again:
It seems to me, though, with making other countries’ financial institutions arms of the IRS with FATCA this obligation will be forced on people born outside the US who have never claimed it. Shall I give my bank my situation and take the chance? I presume they would want something legal saying that if a US citizenship was not claimed there would be no problem.
Asking that question is a little disingenuous. It doesn’t matter whether or not there ever been a case where the US government has forced any kind of US citizenship obligation on people born outside the US who’ve never claimed it. It is a US threat over the heads of these people, these families. Another fear instilled in people. The answer should be very clear. It is NOT very clear. And, I really don’t think the US wants it to BE clear.
“Why would any one even think of researching the tax code of a country they hadn’t lived in for more than four decades? Who cares? We don’t live there anymore.”
Maybe I just look at things differently, but I can’t imagine visiting a country that might claim me as a citizen without researching whether I might have any unmet citizenship obligations that could lead to my arrest while visiting. When I visited my birth country (not Canada or the US) for the first time in 40+ years I ABSOLUTELY made sure that I was in the clear regarding any of its citizenship obligations before even thinking about setting foot there.
Granted these things are easier to research in the age of the Internet but the world has gotten more complicated too so it tends to balance. But the Internet existed for over a decade before this FATCA stuff came in so I’m not sure if that really lets people off the hook.
@Dash1729
When you left your birth country did you check to see if it had CBT?
“You think CBT is okay but you continue to avoid answering the question of what America’s founders had to say about CBT when the Brits tried to force it upon them? Did they believe the British were morally right in doing so? Or did they renounce British citizenship en mass and declare their own independence? Were america’s founders morally right or wrong in doing so?”
Well for one thing that was a case of “taxation without representation”. America’s founders valued democratic representation. Brockers–like other American expats–are entitled to representation in the US but don’t seem to place any value on this right.
For another thing America’s founders renounced British citizenship with pride. They were proud to go their own way. Brockers seem ambivalent, not taking any pride in their decision but acting like renouncing is the worst thing they ever had to do but something they are forced into.