— U.S. Citizen Abroad (@USCitizenAbroad) January 16, 2014
American Citizens Abroad continues its advocacy for Americans Abroad with its latest submission to the Senate Finance Committee. As noted on this blog, submissions to the Senate Finance Committee are due on by January 17. Of particular interest is the reference to and discussion of Canada’s Departure Tax as a possible replacement for the draconian and punitive 877A Exit Tax Rules.
The “Executive Summary Includes”:
ACA, Inc, has submitted a detailed proposal concerning taxation of Americans abroad to the Senate Finance Committee on International Tax Reform.
ACA appreciates the opportunity to set forth tax reform recommendations in response to Chairman Baucus’ request for inputs on Discussion Drafts issued by the Senate Finance Committee and hopes that they will be taken into consideration by the Committee.
The main conclusions in this proposal are:
Residence-Based Taxation (RBT) should be legislated as the default mode of taxation of Americans abroad.
An exit tax on deemed dispositions should be designed to address Congress’ concern that the few extremely wealthy Americans who may choose to move abroad should pay their fair share on capital gains.
A streamlined, comprehensive and non-punitive compliance program must accompany the introduction of RBT for those Americans already resident overseas who have not been in reporting compliance under present citizenship-based tax rules; neither should they be subject to an “exit tax.”
Last Updated January 16, 2014
The Specific Summary of the ACA Proposal is:
In summary, ACA makes the following recommendations to Congress:
1. Residence-Based Taxation (RBT) should be legislated as the default mode of taxation of Americans abroad, with the option for Americans residing overseas for a short period to remain taxed as though they were U.S. residents.
2. If an exit tax is required by Congress, there must be a high threshold before the deemed capital gains are taxed, as well as a narrow range of assets subject to the exit tax, to ensure that that the vast majority of Americans will not have their savings impacted by the exit tax and will remain free to emigrate and to return to the United States without undue financial burden. The exit tax on deemed dispositions is designed to address Congress’ concern that the few
extremely wealthy Americans who may choose to move abroad should pay their fair share on capital gains realized as U.S. residents.
3. The new exit tax will render Section 877A unnecessary and superfluous. Section 877A, Section 2801 and the Reed Amendment should be repealed. The current U.S. estate tax on nonresidents should be repealed or modified.
4. Americans who are already resident overseas when the law changes from CBT to RBT should be largely exempt from the imposition of the exit tax since their earnings and savings have been essentially realized overseas and in light of their generally nonexistent consumption of services provided by the U.S. government.
5. A streamlined, comprehensive and non-punitive compliance program must accompany the introduction of RBT for those Americans overseas who have not been in reporting compliance under CBT.
6. Once RBT is the default mode of taxation, the Foreign Earned Income Exclusion and Foreign Housing Exclusion can be repealed.
The ACA submission specifically includes:
Ideally there would be no exit tax when Americans move abroad, as this is the practice of most countries worldwide and the emergence of a tax liability on this occasion is a contingency for which few will have prepared. There would be no fiscal restraint on full international mobility of individuals. However, Congress’ overriding concern that a few ultra-wealthy Americans may move abroad for tax reasons will no doubt require the retention of some form of exit tax.
The theory behind an exit tax is that unrealized gains which occurred during U.S. residence, when the taxpayer benefited from U.S. services, should be subject to U.S. taxation when the taxpayer moves overseas.
The Canadian model, which is based on deemed disposition at fair market value, is once again a sound reference. The Canadians refer to the exit tax as the Departure Tax. The Canadian system is, in fact, designed so as not to impact retirement savings and to allow mobility and flexibility in paying the Departure Tax. There are consequently several important exceptions which are not subject to the Canadian Departure Tax.13 In brief, there is no Departure Tax on:
• Canadian real property
• Canadian resource property
• Canadian business property (including inventory)
• Pensions and similar rights, including registered retirement savings plans, registered retirement income funds, registered education savings plans, tax free savings accounts and deferred profit sharing plans
• Rights to benefits under certain employee profit sharing plans, employee benefit plans, employee trusts, employee life and health trusts, and salary deferral arrangements
• Certain rights or interests in a trust
• Property you owned when you last became a resident of Canada and property you inherited after you last became a Canadian resident
• Employee security options subject to Canadian tax
• Interests in life insurance policies in Canada
This list of exceptions means that essentially the only assets which are subject to the Canadian Departure Tax are investments in securities and movable personal property. The law is careful not to tax family businesses in Canada as those activities will continue to be subject to Canadian tax. It does not tax Canadian real estate as income from such property would be subject to taxation if rented, as would capital gains at the time of sale. It does not tax accumulated savings related to employment or life insurance contracts in Canada, again because when those savings will one day be transformed into annuities they will be subject to Canadian withholding tax. It also exempts property owned when an individual became a Canadian resident or which was inherited after becoming a Canadian resident. This last point is quite significant for U.S. consideration given the high rate of immigration into the United States.
This excerpt from the ACA submission illustrates how punitive the U.S. 877A Expatriation Tax provisions are and how incredibly unfair they are to U.S. citizens abroad. It’s interesting that the 877A threshold “kicks in” at 2 million dollars. This means that the U.S. treats expatriation in a more punitive manner than it treats death.
Surely, expatriation should not be treated more harshly than death! If this is to then:
Shouldn’t the threshold for the 877A tax be raised to the Estate and Gift tax exemption of 5 million dollars? (If the Exit Tax is to remain at all.)
In any event, the ACA proposal is interesting, well researched, well considered and well written!
Submissions to the Senate Finance Committee are due tomorrow (although they say they will accept them at any time).
Those considering making submissions, may find this collection of “Cook v. Tait” blog posts on citizenship-based taxation to be of interest.