@Tim alerted us to this “opinion paper” just issued by the Republican staff of the U.S. Senate Finance Committee.
The December 11, 2014 paper, entitled “Continuing the Conversation on Comprehensive Tax Reform” has a section dealing with the question of citizenship-based taxation.
This is a very brief outline “analysis” only and does NOT equal introduced legislation — which I hope will happen during the next two years — and which may well fail to be passed into law.
Go to page 282/293:
“The United States needs to rethink its taxing rules for nonresident U.S. citizens.
If a U.S. citizen is living and working abroad with some permanence, and the primary nexus the individual has to the United States is citizenship, we think it makes sense to tax the individual, as a general rule, only on income from U.S. sources.
A test would need to be developed to determine at what point a U.S. citizen is considered a nonresident of the United States and then at what point the U.S. citizen is considered to be a resident again.
Some factors that may be considered include the permanence and purpose of the stay abroad, residential ties to the United States, residential ties to the foreign country, and regularity and length of visits to the United States.
The test could be adopted, in some part, from the existing rules that are used to determine residency of alien individuals, i.e., those individuals who are not U.S citizens.
In addition, an exit tax could be applied when the U.S. citizen is considered a nonresident and no longer subject to U.S. worldwide taxing jurisdiction. If the U.S. citizen later becomes a resident and then becomes subject to U.S. worldwide taxing jurisdiction, then the individual’s basis in her assets would be the fair market value of the assets at the time she again becomes a resident.”
[—Many readers believe that ANY position taken by the United States is not deserving of attention or comment and will have nothing whatsoever to do with the U.S.
It is irrelevant to them whether the U.S. moves towards residence-based taxation, or not.
Others appreciate that this slight “snippet” of an opinion by the U.S SFC Republicans does not go far enough and is short on details (I don’t like the “exit tax” either). The “opinion” might well have zero future consequence.
The default and expectation is that CBT WILL ALWAYS be imposed on U.S. citizens. The options then include resistance to an unjust law, compliance for life (and beyond death) or compliance for the purpose of renunciation, if one is willing and financially able to afford the costs.
But do we really feel that it would be preferable if the SFC Republicans had NOT stated in a public document an opinion beginning with the sentence: “The United States needs to rethink its taxing rules for nonresident U.S. citizens.” — or if the RNC had NOT passed a resolution moving towards residence-based taxation?
I have asked my (Democrat) reps on the SFC and the House W&M Committee, Senator Maria Cantwell and Congressman Jim McDermott, respectively, to work with the Republicans on the two committees to help introduce legislation during the next two years that will move us closer to RBT. I also emailed Senator Orrin Hatch, who probably will soon be the Chair of the SFC, and asked him to help get this legislation moving.
If you have any interest in the Republican majority introducing legislation during the next two years to kill CBT I suggest that you send your thoughts to Republicans Overseas, your reps in House/Senate (if you have any), Orrin Hatch and other members of the SFC, etc. Be specific and provide your timeline. Appreciate that the positive SFC opinion and RNC resolution are a long long way from legislation.
[You might also want to contact the SFC by sending an email to Aaron_Fobes@Finance.Senate.gov who is the Republican Press Officer for the SFC. Ask him to forward your thoughts to the relevant staffer/Members.]
Also, I asked and will continue to ask that John Richardson, our ADCS legal counsel, provide expert testimony at the SFC hearing at which the RBT proposal will be discussed. The January 2014 submission John Richardson, former IRS attorney Willard Yates, and I made to the SFC can be found here.]
And, for those of us who know the incredible work you’ve put in on this from your side of the border, thank you very much!
The most effective action expats can take to push for change is to renounce their US citizenship. Change, if it ever happens, will be too late for those folks but may help future expats. Only the stink of thousands of renunciations can make the point that this is a problem that needs to be fixed NOW.
They do their best to try to hide the real numbers, but sooner or later the truth will become widely known. Meanwhile, expat individuals need to deal with this despicable policy immediately in order to have a financial life in their chosen home.
@Shadow Raider
Thank you. I’ve felt under siege for so long that I have a difficult time recognizing anything positive. Is that the definition of cynical?
For those newcomers who would like to read those submissions Shadow Raider and others have referred to, you can find some of them here under “International”:
http://waysandmeans.house.gov/taxreform/workinggroups.htm
The Brock discussion here:
http://isaacbrocksociety.ca/2013/04/17/excellent-submission-to-the-ways-and-means-committee/
The Republicans Overseas (RO) Facebook site has just mentioned the SFC opinion paper and has also provided a link to this Brock post.
RO says:
I agree that this is only a “small step” and also that it is “encouraging”.
Keep the pressure on.
Not only should there be no exit tax for those whose only US connection is citizenship or who left the US years ago, but I want a retroactive rebate on my ‘fair share’ of all the US services and ‘benefits’ I didn’t receive – and I want it dated from the day my family left – when I wasn’t even school-age, up until recently when I appeared at the US consulate to formally expatriate.
I could generate an assessment notice – tally up the estimated savings for the US – starting with my Canadian taxpayer funded education, and the utter lack of any US political representation, the many battleships and rescue missions I never required nor requested, the voting I could not pursue for years and decades because they made it so difficult (and because the time I asked for assistance with voting, the Toronto consulate was of NO help whatsoever – staff merely pointed to telephone sized directory sized collections of state by state rules chained to the wall when I tried to find out about how one might even try to find out how and where to register, etc.). How about the many times Social Security did not answer letters on behalf of an aging parent? How about the total lack of information and notice from the IRS and Treasury about FBARs?
I could go on.
@badger,
I’ve given up on expecting justice. I’ll settle for being left alone.
And if Solomon Yue is reading this (since RO linked here):
Congratulations, Solomon, you turned a lifelong Democratic voter, me, into a Republican voter last election, based solely on the issue of RBT. If you want my vote in 2016, get RBT enacted by then. Don’t waste your time on FATCA, GATCA, US immigration policy or other domestic issues. (I don’t care about US immigration policy — I care only about US emigration policy.) Focus all your efforts on getting RBT passed before 2016. If that doesn’t happen, don’t count on me voting for anybody at all.
What do you say?
@TheMom, It’d be great if you could get a copy of your crayon-form into the papers or into social media, and help get the word around. To be honest, I don’t think the politicians (and the aides that open their mail) would take the time to read what you send and your story, but regular folks might!
Janet
Thanks to RO the Republicans are at least on the right track by formally acknowledging the unbearable situation expats are in as a result of CBT, FBAR and FATCA. Now lets see if they are able to turn sympathetic words into real action.
Meanwhile, the Democrats continue pretending like nothing is wrong while sneakily putting up more obstacles (fees) to wall-in expats who are trying to free themselves by renouncing or relinquishing US citizenship.
A formal investigation should be made into the manipulation and sandbagging of expatriation appointments and statistics.
There may be a lot less here than meets the eye. “…we think it makes sense to tax the individual, as a general rule, only on income from U.S. sources.” They’re still talking about taxing. Which means still filing. Which means still being bound by regulatory shackles and the constant threat of being branded a tax criminal for failing to send in forms to a country that some of us haven’t resided in for decades. The problem isn’t that we’re over-taxed, the problem is that we have to file at all, that we have to go into hock to compliance condors just to prove that we owe the US… nothing.
@Foo – I agree with you. I give it until 2016 and if the situation does not change, then I will be an ex US Person. I don’t want to do it, but will have no choice. Obama will take in millions of illegals with barely an education crossing the border but not blink even once when educated US citizens living abroad who are not leeches on the government for services are forced to give up their US citizenship in order to live a normal life.
@PYYJ,
If Non-Resident Citizens are taxed the same way Non-Resident Aliens are now, there would be no need to file. Tax would instead be automatically withheld from US-sourced dividends.
Shadow Raider: Thank you for reminding us that, indeed, an important step in a positive direction has been taken. I am actually quite thrilled that our issue is finally being discussed by people who are actually in a position to do something about it. But I am just concerned that only a fraction of our worries is going to be addressed.
If they’re going to spend the time and energy to begin serious talks about changing to RBT they need to be prepared to deal with our entire package of concerns: CBT itself, exit taxes, penalties for past non-filing, etc. Truly, we need a real and complete amnesty. Frankly, a law that for the past 100 years has been so spottily enforced that the vast majority of people didn’t even know it existed should be considered, by law, to be null and void.
If a cancer surgeon cuts out only a part of the tumor the disease is still going to kill the patient.
@Foo,
I do not know whether any residence-based taxation legislation can be successfully “passed” with Mr. Obama as president — but I agree with you that if no legislation is introduced during the next two years there will be many US citizens overseas like you who will not vote for either party in 2016.
Copy that, foo, Stephen Kish.
Yes, Stephen Kish, it might get vetoed. But if Congress gets an RBT bill passed, even if it later gets vetoed by the president, I will consider that a good-faith effort, and promise to vote for whomever got it passed through Congress at least.
I will not consider it a good-faith effort if instead of an RBT bill, we get treated to a stream of excuses and invective about the evils of “King Obama” and other distractions. I just don’t care about any of that. I only care about RBT.
I do hope Solomon Yue is reading this, so that the stakes, and direction to take, are clear.
@foo
I believe Solomon’s gotten the message loud and clear that these distractions are extremely annoying to those of us who consider our citizenships to be on the line. Now a single-issue voter, my allegiance is to the party that puts action behind its words. So far, we’ve only been given words, a nice Facebook page where we can vent, and a plea for donations. Fortunately, Solomon seems to have a very good grasp of the situation, and unless he gets drowned out, I feel confident that he will do his best to help us.
Vote (Do you think the U.S. needs to rethink its taxation rules for nonresident U.S. citizens?) and comment on this new “Ask An Expert” “EXPAT” article:
Wall Street Journal, December 16, 2014: U.S. Expats Find Hope in Senate Finance Tax Reform Proposal
AND: Wall Street Journal, December 16, 2014, Jonathan Lachowitz EXPAT Opinion: Senate Proposal Could Aid ‘Marginalized’ U.S. Expats
If you would like to contact the Senate Finance Committee and let them know that you want RBT legislation in two years, perhaps you could email Mr. Fobes below and ask him to pass on your message to the relevant SFC staffers and Members.
[—Mr. Fobes just responded to my email, apologized for not being able to take my call, and promised to send on my email on to the relevant staffers. Reasonable of course to assume that there will be no consequence, but perhaps others could send a more focused email to Mr. Fobes to help convince the Senate to make @George’s (see below) small word change during the next two years?]
@StephenKish, RBT or RBT Like could be passed by making some non-descript amendment to the IRC by inserting something as minor as a comma and making a small word deletion.
Thats how Washington works..
The IGA Canada signed could have been simply had a word or paragraph change as well to protect Canadian Citizens and Permanent Residents and was proposed several times by other than Conservative MPs and it was rejected out of hand with the phrase “Congress has spoken”.. well Congress actually did not speak nor did they vote for a senate majority stamp of approval, yet our government pushed through this monstrosity KNOWING how easily it could be changed to actually do what it pretends to intend. That’s how Ottawa works!!
Here we go again–adding 8,000 more pages to a tax code already 72,500, instead of scrapping the entire mess and passing to FairTax and it would accomplish all you need and everything else that is wrong, but alas the congressmen and women couldn’t extort campaign contributions if it made sense. They have to make it so complicated that only they can pass amendments that make sense, but only for money.
“mean-spirited Congressional laws”
CBT can’t be described any better than that.
I am posting this comment of John Richardson from the WSJ article concerning this report.
10:34 am December 18, 2014
John Richardson wrote:
Thanks to Mr. Lachowitz for his initiative and insight which is reflected in this quality article.
His article includes:
“Comprehensive tax reform is high on the priority list of many members of Congress and with a Republican majority in both houses the chance for a tax reform bill being sent to the Oval Office for a signature in 2015 has been significantly increased. All this said, legislators must also be careful that, in their efforts to improve the lot of overseas Americans, they don’t inadvertently make things worse for some American expats by exposing them to higher taxes under a different part of what is a very complex federal tax code.”
Yes, Congress must take care to NOT make things worse (which is easy to do) but more importantly the time has come for America to decide whether it values all Americans (including Americans abroad) or whether it wants to perpetuate a system of laws (not even found in one section of the Internal Revenue Code) that not only penalizes Americans for living outside the United States but is now forcing them to renounce U.S. citizenship to survive. Yes FORCING them to renounce.
With the exception of the “Foreign Earned Income Exclusion” the U.S. Internal Revenue Code “in it’s majestic equality” treats Americans abroad and Homeland Americans in exactly the same way. It’s just that the Internal Revenue Code punishes anything that is “foreign” and anything that is NOT a U.S. sanctioned form of tax deferral. The effect of this in plain English is:
1. All the financial accounts of U.S. citizens abroad are deemed foreign and are therefore subject to complex, punitive and and expensive reporting requirements. The penalties for mistakes can be life altering and can destroy assets. (That includes your neighborhood bank.)
2. Retirement planning throughout the world is generally based on principles of “tax deferral”. This means that it is very difficult (and I would argue impossible for people of modest means) to engage in retirement planning abroad. The tax compliance community is even treating Canadian mutual funds as vehicles that are subject to special punishment (PFIC taxes and reporting requirements).
3. Business planning – Americans abroad who run their business through corporations (in Canada think Canadian Controlled Private Corporations) are subject to unbelievably punitive requirements.
4. This regime is enforced by expensive accountants and lawyers who (truth be known) don’t completely understand how this complex system of laws interact and don’t fully understand them (not that anybody could). The result is that they interpret the laws in the most conservative ways (generally to protect themselves). Consider the new 3.8% Obamacare surtax. Everybody knows that this is for the purpose of financing Obamacare for Homeland Americans. There is no specific clarity on whether it applies to Americans abroad. What’s interesting is that if the Obamacare surtax applies to Americans abroad, it is likely that a higher percentage of Americans abroad will pay this tax than Homeland Americans will pay it. The main reason is that Americans abroad are married to “foreign spouses” (AKA “aliens”) will almost certainly use the “married filing separately category”. The result of this filing category is that the threshold for this tax is lower making more people subject to it. Think of the unfairness and absurdity. The Obamacare surtax – which is designed to fiance medical care for homeland Americans – is likely to be applied to a higher percentage of Americans abroad than to Homeland Americans.
5. Before stopping (I could go on all day) I am aware of elderly Americans abroad who are (I am going to put this in CAPS) FORCED TO RENOUNCE THEIR U.S. CITIZENSHIP TO SAVE THEIR RETIREMENT. Here is an increasingly common scenario which I am seeing in Canada. In Canada the sale of a principal residence is tax free and the U.S. it is subject to capital gains tax (and possibly the Obamacare surtax). Imagine a person reaches the age of retirement and has lived for years in a house that has increased in value (along with the rate of inflation). In other words, the house is the persons source of capital and retirement plan. Once the person stops working they really can’t afford to pay the expenses of running the house. So the idea (and possible long term objective) was to sell the house, downsize and live off the capital. As a U.S. citizen, the person is NOT able to do this and preserve the capital. Why? Because the sale of the house will be taxed. The solution AND OBVIOUS NECESSITY is to renounce U.S. citizenship so that the person can sell the house and preserve the capital. Does the person want to? No. Does the person have to? Yes.
6. But hold on just a minute. Since 2008 U.S. citizens who renounce U.S. citizenship (I don’t move physically MOVE from the United States) may be subject to (get this) a tax on the renunciation of their U.S. citizenship. This is nothing more and nothing less than the confiscation of the assets of people (which were not accumulated in the United States) because they chose to live outside the United States.
I could go on but I am going to stop. Thanks again to Mr. Lachowitz for this fine article. I certainly share his view that Congress must be careful to NOT make things worse, But, actually it’s time for the U.S. to stop this nonsense and move (just like the rest of the world) to residence based taxation. The situation is urgent!!!!
And I almost forget, I didn’t even mention FATCA – the new U.S. “Foreign Account Tax Compliance Act”. The purpose of FATCA is to enforce these tax rules on Americans abroad. But to enforce the rules, one must locate Americans abroad. Hence, FATCA. Since July 1, 2014 banks around the world are now searching for U.S. citizens who are account holders. Obviously this primarily affects U.S. citizens abroad. If you were a non-U.S. bank would you want to put up with this garbage? Of course not. The obvious solution if possible – close the accounts of U.S. citizens.
To repeat – the U.S. must reform (tax and otherwise) the way that it treats its citizens abroad!! (That is if it cares about them)
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