This post comes from Anne Frank. I agree with the contents and thank Anne Frank for taking the time to organize these thoughts.
Practical Solutions Needed
In my view, the election has created a small opening NOW to pursue a pragmatic solution that will resolve MOST but not all of the injustice that FATCA and CBT generally have wreaked upon US Persons outside the United States and their families. What is needed is (i) a VERY SIMPLE and SUCCINCT summary of why this is an injustice that can be grasped by any voter in a coffee shop with the attention span of a four year old; (ii) a SIMPLE and CLEAN proposal to make the problem go away; and (iii) a Congressman or woman with the courage to take it on.
There is an opening in my view because a) the Republicans control both houses; b) the Republicans have apparently embraced repeal of FATCA and CBT as bad policies; c) Democrats Abroad at least have recognized most of the injustices US law perpetrates upon its diaspora and can be expected to endorse at least limited action to address the worst of it if not outright repeal of FATCA; and d) a Congress which has a double majority has some hope of getting a bill passed which – if consistent with principles the Democrats have at least paid lip service to – the President might not veto. FATCA may be bad law, but it sells politically because it targets “FATCAT” tax evaders. We need to let them solve that problem in their own time and in their own way providing they stop with the collateral damage! We all know Congress will have only a short honeymoon period where it has any hope of getting things done, so the best hope of getting something passed is early and not late in the lifetime of the new Congress. The pending Canadian litigation will serve to keep some level of political attention and heat on the issue (I don’t overestimate that factor in the US of course!).
I think our group can collaborate on the simple summary idea. The Democrats Abroad brief is not a bad one and could likely be an appendix to a short summary that highlights a) double taxation that persists despite tax credits and exemptions; and especially b) the ways in which the fines and penalties associated with “death by a thousand forms” subjects US Persons outside the US to discrimination and threats not faced by Homelanders. Real stories of real people will carry 100 times the weight of an academic brief.
What is the simple solution? Well, I tried to put together something as simple as what we put before Parliament when C-31 was being debated. Here is what I came up with (drafted as an amendment to the US Tax Code):
“General (1) For all purposes of this Title 26 and any other statute referring thereto other than Title 8, a person shall neither be considered to be a citizen of the United States nor a U.S. Person if the person would not be considered a resident of the United States (absent the existence of United States citizenship) under the substantial connection test in 26 U.S.C. para. 7701(b)(3) for the particular year nor any of the ten preceding years. This statute shall apply with retroactive effect.
Repeal (2) Title 26, U.S. C. para. 7701(a)(50) is hereby repealed.
Transitional (3) Any person who has filed any return or paid any tax or penalty prior to the coming into force of this statute shall have no claim against the United States government arising from the application of the law prior to the coming into force of this statute. ”
In simple terms, what the amendment to the US Tax Code drafted above seeks to accomplish is to cut the head off the snake. If CBT is the root of all evil, kill as much of it as we can as simply as we can. What I did was go to the source of CBT in the United States Tax Code which is Title 26 in the definitions section (para. 7701). This is where “US Person” is defined to include a citizen or resident. What my amendment would do is simply provide that for purposes of the Tax Code and any other statute that references it (but not the Immigration and Nationality Act which is Title 8), a US citizen is NOT considered a “tax” citizen if you will if they haven’t met the “substantial presence” test for the year in question nor any of the ten preceding years. For someone who left as a child or was born outside the US to US parents, this is a complete waiver. For someone who left as an adult, this limits their “problem years” to the ten years after they left.
The virtue of this is that it does not require the creation of any new tests, definitions or concepts which often involves the law of unintended consequences (and stalls things for a long time while such consequences are studied and debated). Substantial presence has been in the Tax Code for years – it may be a mess, but it’s their mess! Snowbirds need to be wary of it, but occasional visitors do not.
This is not perfect. People who have been out of the country for ten years or more have connections sufficiently tenuous to the US that it will not be hard to explain to Congress and Homeland voters that it is unjust to persecute them. Yes, it does mean that Eduardo Savarin’s of this world will eventually be able to get out of the tax net, but the IRS will still get to torture them for a decade before they get away. They can create new exit taxes for such people if they like. It won’t be hard to do. It does mean that the vast majority of Accidental Americans would simply be out of their net for all purposes and for all time unless they decide to establish themselves in the US.
The law would have retroactive effect (just as the amendments to the citizenship rules did back when they were changed in the 80′s). This would simply make the problem go away for almost everyone. The provision of para. 7701(5) being deleted is the root of “covered expatriate” in the existing statute (citizen for tax purposes until all obligations discharged under s. 877). They are free to come up with a new exit tax for the fat cats who may leave tomorrow if they like,
What I have NOT tried to resolve here is (i) giving citizenship back to those who were effectively forced to renounce; and (ii) refunding money extorted in the past. In a perfect world, a just government would address both of these issues fairly. I strongly suspect that if we try to bite off too much, we may instead get nothing. The perfect can be the enemy of the practical. On balance, I think this remedy is simple enough to explain that it has SOME hope of getting traction if the story behind it is compelling.
That leaves the problem of finding a sponsor. Maybe Rand Paul? Maybe even Ted Cruz? I leave that to others. I confess to having little insight into how this might be done.
My suggestion is that we try to refine these ideas and develop a near perfect “pitch” collaboratively that can be sold to one or more Congress people and let’s see if we can’t actually solve this problem at the source. FATCA will still be bad law imposing lots of expense, but it will effectively only hunt for or disclose US residents with the proverbial Swiss accounts.
Congress can pass a bill to repeal FATCA and Obama could veto it, and then there would be a lot of publicity and public debate, more coverage of the mass renunciations, more embarrassment for the Democrats. They need to do that in 2015 and then pass some compromise in 2016 prior to total repeal under President Paul in 2017.
I like this proposal. At first I thought 5 years would be better, and better aligned with tax residency rules in other countries, but I can imagine the objection being raised that it “allows fatcats to hang out on the beach for a few years” and get away with something unpalatable. Raise the bar to ten years, and then it becomes hard to imagine anyone doing it just for tax reasons. I mean, that is a good chunk of someone’s life at that point.
I agree that we need budgetary impacts studied somehow. Who might be qualified to do that? Can we crowd-source some analysis here, using available published statistics? We will have to show that it is at least revenue neutral (if not actually revenue-enhancing, which I suspect it would be) in order to sell it.
Finally, I agree the time to get something done is now, the earlier the better. Come 2016, the Congress will probably end up divided again, and nothing will get accomplished.
We need Republicans Overseas to get the RNC deliver on the promises made to expats, and not try to deflect this off until 2016. Strike while the iron is hot, RO!
We need Democrats Abroad to confront the DNC on their failed policies (which certainly didn’t win them any expat votes this year, I am sure!). Maybe DA can even try to get an audience with Obama, relate our concerns to him, try to get him to deliver on the promises he made to Americans abroad in 2008, and urge him to put the veto pen down this one time?
I think if nothing happens in the next year or two, nothing will happen ever.
By the way, it looks like the 7701(a)(5) (should be Title 26, U.S. C. para. 7701(a)(50)) typo is still in the original article?
At least in the version I can see.
(Does it look right to you, Anne Frank?)
@FromTheWilderness A bill passing the House and lingering in the Senate does not get the media coverage that a veto override battle does. Now the Republicans can force POTUS to choose between RBT and repeal of FATCA or an embarrassing veto override battle, (which would give more exposure to the renunciations) even if the veto is sustained in one house or the other.
For those who don’t know it, if President Obama vetoes a bill, it can still pass in Congress but it requires 2/3 of both houses.
@George
“I think you are giving far too much credit for the POTUS Emperor. This man gave us FATCA in the first place!!”
You got me completely wrong my friend. I give zero credit to Obama. He is part of the problem, not the solution.
I don’t expect anything positive until after Obama is gone and a Republican takes the throne. The RNC passed a resolution in support of RBT and another resolution to abolish FATCA. Moreover, the RNC pledged to match the next 50,000 USD of contributions to Jim Bopp’s lawsuit against FATCA, FBAR and the IGA’s.
The RNC has clearly taken the side of expats. We need to support the Republicans for doing so and take them to task for following through on their promises.
We should not let up on the lawsuits and human rights complaint. In fact we should find ways to launch more. In addition to the above, we should continue helping people renounce or relinquish US citizenship.
The more renunciations, the more media attention and more pressure on congress to do something. And if the Republicans fail to deliver, at least we helped some people get rid of the cancer that has been eating them.
Very interesting conversation going on at RO Facebook page https://www.facebook.com/republicansoverseas
More and more pressure. Its the only thing politicians understand.
From RO Facebook:
“There is no evidence that Obama will use his executive action on the “same country” exception in order to ease expats’ FATCA pains. To the contrary, we were told privately by a leader of Democrats Abroad France that none of Democrats lawmakers in Congress would vote to repeal FATCA because they do not want to be seen as opposing their president and helping “FAT CAT” tax cheats per DA “Door Knock” teams internal report. That is why DA wants to reform FATCA, not repeal it.”
Expats from DA should defect to RO. The Democrats deserve to be “punished” for their persecution of Americans abroad.
The big irony is that conventional wisdom has it that the vast majority of expats are, or at least used to be, Democrats.
Also from RO Facebook. I see it as a ray of sunshine.
Thanks, eliza, for heading me over there.
Citizenship based taxation is here to stay? That’s what Democrats Abroad says. That’s why I voted Republican.
The US can keep its CBT, only they’ll have to do it without this citizen. RO said I should hang in there. This where the rubber meets the road, my friends.
@Ann Frank Excellent proposal. I would like to see more of this such proposal/letter submission at IBS, with proposals/letters resubmitted reflecting comments. I would have liked to see the Human Rights Claim submitted in this way but understand that there are some confidentiality reasons not to make the claim public before review by the UN (I am looking forward to April). Maybe a “Declaration of Grievances and Resolves” may be one to work on.
I have a collection of thoughts on this that may or may not gel into a single proposal in coming days.
1) “The worst law that no one has heard of.” May we use this as a stealth advantage? We get the Republicans to tack on their proposal(s) on say a budget bill. @Stephen Kish says that proposals need to be revenue neutral, and as part of an overall budget then it would be the overall budget impact that would be of most concern. Who says it needs to be debated? I believe the IBS community may have too much of a sense of fairness and rightness to think that any change requires debate and discussion. Poetic justice – end the same way it was introduced – by stealth.
2) There is a lot of talk of getting POTUS’s approval. With both houses there is also a “defunding” option. What to be defunded: compliance action for tax residents overseas for FATCA and FBAR penalties.
3) It does not appear to me that the closing of bank accounts and blocking employment/promotion impacts of FATCA are addressed here. Even after 10 years the above would still be in play. A blow to FATCA must be given as its 8938 form requirements and relieving from potential penalties necessitates filing a US 1040 tax return. Also, there needs to be exclusion of self employed and completely nonUS companies.
4) If the 10 year period, there still would be some really nasty parts of it remaining during that period. There needs to be a carve out for certain accounts and income, and this could be on a country of residence basis. I am thinking: retirement, education, disability – that these should be entirely left alone, but then taxed if the persons return to the US. Likewise, there should be a carve out for self employment and completely overseas businesses. Perhaps some exemptions may be given for relatively high tax countries such as UK, (most of Europe),Canada, and Australia and similar “high tax” countries.
5) “Amnesty” There could be some sort of “amnesty” here as the US did very little to communicate their tax laws and used confusing/misleading language as part of their tax treaties and counter intuitive silohing each category of tax where credits on one type of tax may not be carried over against tax liabilities on other types of tax. The rules are really complex, so some sort of “going forward” may be part of the solution.,
6) Injustices/unconstitutionality. @Anne Frank it appears that your approach to give them something that is agreeable/not objectionable/the best way to get POTUS to agree is to go easy on the injustices/unconstitutionality of it all. I don’t know if I agree with that. I did say the Pledge of Allegiance to the Flag a bunch of times (when I was a kid) yet that was for “one nation, under god, indivisible, and with liberty and justice for all.” One may argue that these FBAR, CBT, and FATCA requirements have nothing to do with “liberty and justice for all.” Plus without services or effective representation constitutes the very tyranny that the Founding Fathers sought to defend against. The excessive compliance burden in itself – compared to US citizens living in the US – is contra the inalienable rights of liberty and the pursuit of happiness, and in disregard of their well being.
7) Affirmative Action. I believe POTUS is quite pro “affirmative action” in regards to righting the wrong of past discrimination of colored people in the US, and that “affirmative action” is quite justified. If we may present a good case that US persons abroad have been substantially discriminated against by the US government, including disregard for their Constitutional rights, then we may make a case that these people should not only be given a break but that the US should go further including extra breaks to atone for the injustices.
8) Oaths of office to uphold the Constitution – sworn by the President and by I believe many US department heads. What must it take to trigger this responsibility to uphold the Constitution? Must it take a case to the Supreme Court for the Supreme Court to tell these people what their responsibility is and how they should act in regards to laws (someone in the press please ask POTUS this question)? So are they behaving as if this part of their oaths of office “are above their pay grades?” The oaths do not say in regards to the Constitution that they are to wait until the Supreme Court tells them what to do. If there is evidence that the Constitution is being violated for individuals (such as US persons abroad – as such as through dozens of press articles over the past few years) then they have sworn an oath to uphold the Constitution and carefully consider the situation. What is on exhibit here is a weakness in the division of powers between the Executive, Legislative, and Judicial branches. A law is made, then it could take years to come back in regards to direction from the Supreme Court. A remedy could be some sort of Executive/Legislative directly putting a law to the Supreme Court for review, but then this is getting off the topic.
9) FBAR & moneys paid going back. There was some text from the Republicans about refunding FBAR penalties. Another way, if monies paid are not to be given back, is that they could be a credit against future tax liability.
10) Tax treaties. The holes must be plugged in these as a guarantor against the injustices. I favour very specific and blanket exemptions for things like retirement, education, and disability accounts. Mutual funds need to be mentioned. The family home and preservation of family financial security must be mentioned.
There you have it.
Your comments leave a Swiss cheese tax regime in place. The easiest and simplest solution is just to go to RBT/territorial. Otherwise I think that all that your ideas would leave us with is FATCA’s step child.
The basic untruth about cbt is that it gives the illusion that the U.S. is giving up something when it puts exemptions in place. The truth is that the U.S. has no right to regulate the non-resident person’s relationship with the treasury of the country where he/she resides. If you say that retirement funds should be left alone unless the person returns to the U.S. then what you have is the same ridiculous situation that exist now where U.S. corporate profits aren’t taxed unless they are brought back on shore. For the U.S. to put itself in the position of denying the entry of capital into its economic system is just dumb economics. And it still criminalizes emigration.
Straight forward RBT/territorial or a national VAT. Those are the only two options on the table that favor expats.
@JC:
The other quick-and-dirty, but maybe easier to accomplish, approach would be to have the US unilaterally suspend the savings clause in tax treaties. This would instantly give US citizens living in treaty countries the option of RBT by taking a treaty position, while disallowing it in places the US considers tax havens or places that have no income tax (and hence no tax treaty). This could allay concerns that a big change could lead to unanticipated loophole opportunities. If experience then shows that a particular treaty country is still somehow being used by US tax cheats, they could selectively reinstate the clause for that country.
Not an ideal solution, but possibly a sellable, targeted one?
(Credit for this idea goes to someone else here at IBS, but I don’t remember who or when. Sorry.)
@calgary
Just last night I was watching the May 29 FINA meeting on the amendments and Mr. Keddy stated with his usual “authority” that no tax was going to be paid on RESPs and RDSPs. GGGRRRRR
@foo
” This would instantly give US citizens living in treaty countries the option of RBT by taking a treaty position, while disallowing it in places the US considers tax havens or places that have no income tax (and hence no tax treaty).”
Thanks foo. You just suggested screwing expats (like me) who live in countries without a tax treaty.
…and not only by *US Persons in Canada* but with the pool of funds used for government contributions to the Canadian RDSP and the RESP — by, YES, ALL Canadian taxpayers.
Class Act = Gerald Keddy and, indeed as far as I’m concerned, all Conservative MPs who voted in concert with their Dear Leader, no moral bone in their Conservative majority government bodies. There is not one MP in Calgary to represent a US Person that lives here as they are ALL Conservatives.
@John Smith:
Well, I did say it was not ideal…
Hmm, looks like there are only 60-something treaties out there (I presume the one with the Soviet Union is no longer in force):
http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties—A-to-Z
How does the US decide which countries to negotiate treaties with, actually? Anyone know?
@Mona Lisa, I agree with you whole heartedly and would want the option to have my Sophie’s Choice able to be reversed as well.
@OutoftheWilderness, I don’t think it’s all that ironic that most expats were democrats. A lot of us live in countries that are far more liberal than the U.S. is with social programs the U.S. would not contemplate. For a long time it only made sense that most expats were dems. If they were active in the process back home at all that is. Many simply participate where they live.
I liked RO’s original proposal which is why I engaged with them. Solomon Yue has been most helpful in understanding all these issues.
I believe ACA proposed something quite similar to this with a five or ten year limit on tax and filing requirements. It seems quite a few reasonable proposals over the years have been made and I’m not sure congress even reads them. This will be a long haul process I suppose.
@Atticus:
I don’t think Congress even reads most of the bill they actually vote on. FATCA was slipped into the HIRE act the night before the vote, for example.
But I hope it does not become a long haul process. I hope the Republicans manage to take decisive action soon. I expect they managed to pull in a lot of Democratic-leaning voters in this election by taking the stances they took on FATCA and CBT. But if they try to capitalize on this by stringing expats along until the next election, I think they will find that expats dump them just as quickly as they dumped the Democratic Party. They need to show some concrete achievements before the next election, or they may just find that there are significantly fewer expat votes to woo by then. People cannot wait forever for resolution, and will take matters into their own hands eventually.
@Stephen Kish
“You are arguing from the point of view of “fairness”. My recent discussions with some in the U.S. suggest that there is now the highest concern in Congress on the budget and that any change in the tax code should be revenue neutral (or positive).”
This sounds like a higher standard than what FATCA was originally subjected to. Also, the test sounds quite narrow with term of reference only to direct budget impact. True cost/benefit analysis may suggest cost/benefit in a broader sense including indirect budget impact, impact on trade and international relations (the US got the Canadian government in trouble with The Alliance for the Defence of Canadian Sovereignty for example).
Here could be a budget neutral idea: include with the measure that General Electric would actually pay US federal income tax on their billions in US source profit and not $0 as present. The measure would have to undo all their preferential deals, and whatever GE is deploying should be a case study in what to undo (I did send past and present GE CEO idea to help us out, yet nothing). Of course there is this one road block, GE was an Obama top 20 donor – so it may be said something like their donations to Obama were over 100 times greater than their corporate tax liability- even though they had $0 federal income tax liability. (I like this example but don’t believe we may gain much advantage in contrast to our injustice).
@Anne Frank
“the more I think it could be sold as something narrowly-focused on a group that nobody has any reason to dislike.”
What I notice in articles open to posts: there tends to be an assumption on the part of the homelanders about those living overseas as being fat cats. When these people are zapped by a cleaver comment about accidental Americans or Calgary411’s story what do they do? The answer is it is like the comment did not register. They don’t say: really I never thought about it that way, it is just so unfair. What are they really thinking? While those who have posted the cleaver comment about people who live their whole life outside of the US or in the US just for 2 days at the hospital at birth, these counter commenters think that they really zapped them with the comment – but did they really connect?
In certain forms some people really have their guards up. In other forms this is not the case such as the many who have reported that when they tell the injustices of CBT to family/friends that they are met with disbelief. These family and friends don’t have their guards up as it is family and friends who are communicating.
So then one question, may be in what sort of form would the argument be pursued to meet the least resistance? Do we get on Oprah (who would go to America to get on there other than someone who has renounced).
It is said that at the time of the US Declaration of Independence that 1/3 were for, 1/3 were against, and 1/3 were neutral and they still went ahead with it anyway. In the case of US persons abroad I imagine that a substantial majority would be against CBT, FBAR, FATCA but I wonder about how many are “not in the know” about it all.
Maybe someone could start on a “Declaration of Grievances and Resolves” combining CBT, FBAR, FATCA, Constitutional rights, human rights.
@foo
If it looks like the Republican Party is going to jerk us around, I’m going to turn on them like bad cottage cheese. That’s why I got so PO’d today when Republican’s Overseas posted that Fox-newsy-King-Obama garbage on their Facebook page. Don’t waste my time with partisan politics when my citizenship is at stake. If it means working together with the Democrats and the president, then work with them. I’m really fed up with this crap. End of rant.
@Bubblebustin,
Couldn’t have said it better myself.
And that goes for both parties: don’t try to tell me the other party is the problem. Bad laws are the problem. Responsible bi-partisanship will be the solution.
@foo @bubblebustin That is why I have a bit more faith in ADCS – no political parties involved there – and those involved are taking it personal.
I wrote:
Ok, here’s a start. Let’s suppose we throw in the repeal of the Foreign Earned Income Exclusion and Foreign Housing Exclusion to Anne Frank’s proposal to sweeten the pot. So one would have to rely on Foreign Tax Credits only for the first 10 years abroad, then would be taxed the same as a Non-Resident Alien.
The Committee for a Responsible Federal Budget estimates that repealing the FEIE and FHE would bring in $90 billion over the 10 years 2014-2023. They also estimate that removing the upper limit on the FEIE would COST the US $10 billion in tax receipts over that same period.
http://crfb.org/blogs/tax-break-down-foreign-earned-income-exclusion
Now, let’s suppose an average working career is 40 years long. Let’s also suppose the average salary in the second decade is double that of the first decade, the third is triple, and the fourth is quadruple. Then, the first decade accounts for 1/(1+2+3+4) = 1/10 of one’s lifetime earnings. The following 3 decades would account for 9/10.
If the average American abroad starts their working career abroad, and stays abroad throughout it, then the FEIE would apply to 1/10 of all overseas earnings, which would bring in $90 billion * 1/10 = $9 billion in tax revenues as compared to the present situation. The lost tax receipts on the remaining 9/10 of all overseas earnings would amount to -$10 billion * 9/10 = -$9 billion. These two effects thus cancel out, rendering the proposal revenue-neutral.
Of course, many people move abroad later in life, so they would pay higher taxes than in the assumption above (shorter working career in the non-resident phase, and higher average income in the taxable phase), which would make the proposal revenue-positive.
The lifetime earnings profile should be made more realistic, and investment income effects should also be considered. But this might be a start. Thoughts?
Someone will point out that US citizens who were born abroad, or moved abroad young, will time out their 10 years before ever starting working. But I suspect most of them are not filing taxes anyway, so that would be revenue neutral. The few who are filing would likely be at least balanced out by those who moved abroad later in life, at a higher earnings stage of their life, and with a shorter non-tax-resident working period.