But, on this note one must ask the question:
Question is NOT what are US tax compliant #Americansabroad prohibited from investing in – the question is what are they ALLOWED 2 invest in?
— U.S. Citizen Abroad (@USCitizenAbroad) October 15, 2015
Americans abroad are “everyday people”. They can be found on every street corner in every town and in every country. Because they are “every day” people, they have “every day” needs. They must have pensions, savings, homes and they must plan for retirement. On the other hand, the United States requires that they live exactly like “Homeland Americans”. This leads to all kinds of problems and severe difficulty in investment and retirement planning.
Most blogs, focus on identifying financial products that are “unsafe” for Americans abroad. The truth is that almost all forms of retirement planning and investing outside the United States are “foreign” and involve “tax deferral”. Both of these things are punished by U.S. law. In fact that vast majority of non-U.S. financial products are either PFICs or Foreign Trusts.
My question is: Can you identify the kinds of investments in your country of residence that are permitted to Americans abroad. By “permitted”, I mean: do NOT encounter either punitive taxation or expensive reporting.
It seems to me that the U.S. Government does NOT benefit Americans wherever they may live. In fact the U.S. Government is an impediment to Americans living outside the Homeland.
But seriously, what are the financial products in your country that are “permitted” to Americans?
Well….let’s see… in Canada we have:
TFSA – nope
RESP – nope
RDSP – nope
RSP PRPP – nope
RRSP – RRIF – nope
CDN Mutual Funds – nope
Interest accounts – Yep
Individual stocks – Yep
Rental income – Yep
Limited partnerships in Canada – maybe.
I once bought shares of a limited partnership. Instructions from then-Revenue-Canada were that, as a non-resident Canadian, I had to flow through the Canadian sourced portion of the partnership’s gains and losses and declare them on a Canadian return, and flow through the non-Canadian sourced portion and not declare them on a Canadian return. The general partner (administrator and issuer of T5 and whatever, I forget now) refused to supply information needed to separate the Canadian sourced portion from the non-Canadian sourced portion. Every year I had to make guesses. On US returns I had to declare the entire amounts as reported by the partnership, so I knew those numbers, but on Form 1116 I had to report the same guesses as I made on Canadian returns. The IRS “forgot” to tell me that it was illegal to call a guess a guess. 20 years later the IRS told me it’s illegal to call a guess a guess. If I knew correct numbers I probably would have been OK. Well, I figured out that I never want to own shares in a limited partnership again.
There used to be a company called Brascan. They used to be owned by owners of shares of stock. They converted to a limited partnership. Now this partnership issues US tax forms to residents of the US, which astounded me. But what happens if a resident of the US is a Canadian citizen? I bet they still get stuck the same way I did 25 years ago. Luckily I’m not a US person any more, but I hope I won’t inherit some of those shares.
Individual stocks – yes and no. Allowed yes, but double taxed. The US gives a foreign tax credit for Japaneses taxes paid on Japanese dividends, and Canada gives a foreign tax credit for Japanese taxes paid on Japanese dividends. But the US doesn’t give a foreign tax credit for Canadian taxes paid on Japanese dividends, and Canada doesn’t give a foreign tax credit for US taxes paid on Japanese dividends. Actually the result is about 1.5 times taxation not full double taxatioon, but still not fair.
Interest accounts – yes and no. Technically US rules are that you have a capital gain or loss every time you withdraw money from your bank account, based on the exchange rate at the time your employer deposited the money and the exchange rate at the time you withdraw it. Even though the money doesn’t get exchanged at all, the US pretends that we live on US dollars in daily life. Like the famous problem of house and mortgage, in miniature. I only read about one time the IRS tried pursuing someone on that matter. Luckily the IRS didn’t pursue me over it. (Yet. Oops.)
Cash – yes and no. You see, Canadian bank notes are promissory notes of the Bank of Canada, and Japanese bank notes are promissory notes of the Bank of Japan. When we spend one to buy food, it might not have the same value in US dollars that it had when we withdrew it from an ordinary bank. And if we don’t pay in exact change, the grocery store gives us change, and we have the same problem when we spend those. Luckily I haven’t read about the IRS pursuing anyone over that. (Yet. Oops.)
By the way, at the time of Cook v. Tait, US citizenship probably was an advantage. It wouldn’t have been an advantage for escaped slaves, but slaves weren’t citizens.
Even if a particular product has been exempted in a IGA, the problem is that the bank is allowed to play by its own rules.
If a bank wants to exclude you, no recourse except a longwinded legal challenge. If a bank wants to make your account ‘US reportable’ whether it’s correct or not, the bank risks no penalty for wrong reporting.
Until the legal challenge is complete, FATCA always pressures the bank to report, whether it’s in error or not without the bank incurring any form of immediate penalty at all.
FATCA is a political decision (with the US holding a gun to a country’s head) than an economical one (any country collecting more revenue than the cost of actually implementing FATCA).
“If a bank wants to make your account ‘US reportable’ whether it’s correct or not, the bank risks no penalty for wrong reporting.”
Exactly. The world should send 7 billion reports to the IRS, and let the IRS figure out which ones it needs.
And the IRS should send maybe 1 billion reports to each other country’s tax departments, for a total of around 190 billion reports.
Why doesn’t the IRS waste resources sending out reminder notices or demands and see what there response rate is?
The rules of the road of FATCA need to be established soon. At some point someone in the US is going to say we’ve got all this data, we calculate those evil ex-pats owe us $X, and those b*s*ard foreign governments won’t give us more help collecting the money.
The US must not be allowed to advance this to routinely freezing people bank accounts, or being to use a country’s internal tax recovery systems for the benefit of the IRS in future.
What’s the good of having all this data if collecting becomes a monumental pain in the neck?
@Norman Diamond
“Exactly. The world should send 7 billion reports to the IRS, and let the IRS figure out which ones it needs.”
And if each person has, let’s say, 3 accounts, then 7 billion becomes 21 billion. Are the IRS not short-staffed these days?
Tricia, I think you should add “home ownership” to the list of financial products that is prohibited by FATCA. Owning a home is arguably the largest single financial investment that anyone undertakes, and you can add it to the “nope” list of off-limit investments. The capital gains implications of long term home ownership are as toxic as anything imaginable.
I had understood that a UK employer sponsored pension scheme was ok. Within that scheme, you can select from the options presented by the plan administrator without attracting PFIC treatment.
I had also understood that the availability of an employer sponsored pension scheme as a tax deferral mechanism was restricted to only the handful of countries where the US had recognised the pension system.
I would say individual shares are ok but with caveats. If you want to steer clear of PFIC you need to avoid anything in the financial sector (banks, insurance etc.) and loss making companies.
You also need to pay attention to things like corporate transactions. For example, Vodafone, one of the largest UK companies with a large retail shareholder base sold its 45% holding in Verizon Wireless to Verizon last year for cash and new Verizon shares. Shareholders had the option of receiving their pro rata entitlement of cash and Verizon shares as “income” or as “capital” (for the purposes of UK taxation) where “income” is taxed as a dividend and “capital” goes to reduce your tax basis and defers any gain until you sell the underlying shares and the gain is treated as a capital gain. I was no longer a US person so I didn’t investigate the US tax consequences. I suspect that the advice would have been to make the counter-intuitive option to elect to receive the distribution as “income” and to be subject to UK taxation today (on the assumption that any distribution to a US person will be treated by the US as a dividend anyway). This counter-intuitive election would have minimised the potential for double taxation due to a) the timing difference between today and when you sell the underlying Vodafone shares and/or b) the unavailability of a tax credit in either jurisdiction because the same payment was treated and taxed as “income” in one jurisdiction and a “capital gain” in the other. The A+ answer would have been to sell the Vodafone shares before the distribution occurred to avoid unnecessary brain damage.
Just another example of how a US person abroad spends their entire life minimising the harm inflicted by a country they don’t live in rather than maximising the gain in the country where they do.
“Why doesn’t the IRS waste resources sending out reminder notices or demands and see what there response rate is?”
They do. A recent thread discussed a report that the response rates tend to be around 40%, varying by country.
Of course those notices and demands are often sent by surface air lifted so they arrive after the deadlines stated for responses; some are sent with insufficient postage; some are sent by sea mail from the UK to Japan or Germany to Japan; etc. Also TIGTA reported that IRS employees steal incoming mail from IRS mail rooms, so even when we reply (after receiving the notices after the deadlines expired for our replies), who knows when our replies get stolen. The IRS usually doesn’t reply to our replies, but there have been a few exceptions — sometimes the IRS said they’ll need more than 45 days, but there will be a 30 day period when they will reply, some 30 day period in some unpredictable year far in the future — but then the IRS destroys their records of our replies.
If money was received from a UK source that could be counted as either dividend or capital gain, I think a Form 1116 for “passive” category would allow the credit either way. However, if they end up in different tax years because one country calls it dividend (taxed immediately) and the other calls it capital gain (defered until the time of sale), if the difference is more than one year in one direction or ten years in the other direction, it will be double taxed.
For 30 years I wrote notes on Forms 1116. I thought some were simple, such as writing “interest + dividends + capital gains – capital losses” on the “passive” Form 1116. I thought some were simple, such as “after 2555 exclusion” on one line and “including 2555 excluded amount” on other lines on the “general” 2555, obeying IRS published instructions to prevent double dipping of benefits on the same income. The IRS complained in Tax Court that I had obeyed IRS instructions. Four of my pages of evidence were copies of IRS instructions and the IRS stopped complaining. Then the DOJ complained in Court of Federal Claims that I had obeyed IRS instructions. I didn’t oppose them that time — if Court of Federal Claims wants non-resident US persons to double dip two benefits on the same income, I’ll make the sacrifice, and other people can get the benefit, though they need around 4 times the amount of income I had in order to profit from it.
Some of my notes were more complicated, making guesses on some later lines and working backwards to compute guesses for earlier lines, in particular the amounts of carryouts of credits unusable this year with the potential of being carried in to other years to reduce US taxes for other years. In 1981 I asked the IRS how to compute amounts to write for carryouts, and the IRS could not answer, but around 1995 or so I gradually figured out how to make guesses by working backwards.
When the IRS coerced me to commit perjury by refiling returns with signatures on known false preprinted jurats instead of writing honest declarations, they also prohibited me from writing those notes on Forms 1116. You see, IRS employees are poorly trained, so if facts are difficult for me then facts are difficult for IRS employees, and if I write facts then they get confused and I impede the administration of US taxes, and that’s why honesty is illegal, frivolous, punishable by penalties and further punishable by refusals to refund withholding.
Also not allowed is any kind of shared account – whether it be personal or business – if the co-account holder or local laws prohibit the account information being sent to the IRS.
@Jeffry….I have NO idea what you’re talking about. Are you trying to defend what the superlative USA is doing? I just don’t get it.
PierreD,
I put the comment into Pending for someone else to look at — appears to be the start of some type of advertising.
I’ll come back to this after the AARO meeting next week, but, in France, and from memory, several accounts are exempted from banks’ reporting in the IGA appendix (not exempt from the taxpayer’s declaration: Livret A and LDD, which are limited to €30000, earn 0.75% and are tax exempt in France; similarly limited and low-earning tax-exempt savings accounts for purchase of a home (PEL and CEL); certain retirement accounts (PERP). All of these are government sponsored accounts that don’t earn much.
@Tricia Moon…I’m confused. I thought Canadians could invest in Regustered Retirement Savings Plans (RRSP). That because they are treated separately in the tax treaty, that they can be used and anything invested in them escapes additional US tax reporting. Am I missing something?
Asleep 12. You are right. RRSPs and RRIFs are treated as legitimate tax deferral investments. They are not reportable accounts as far as FATCA is concerned. (perhaps some FIs will act differently)
Income is reported as ordinary income when it is taken out. Same as here.
The only caveat is that they are supposed to be reported on FBARs, tax return form 8938 and exit tax form 8854.