cross-posted from CitizenshipSolutions dot ca
The use of the "savings clause" to invade other nations. It's the weaponization of citizenship! pic.twitter.com/wacQ0zZwLI
— Citizenship Lawyer (@ExpatriationLaw) May 26, 2016
Introduction …
"Savings Clause" guarantees right of the USA to impose double taxation on the residents + citizens of other nations https://t.co/ylsc8KPza7
— Citizenship Lawyer (@ExpatriationLaw) May 26, 2016
It is commonly believed that U.S. Tax Treaties are for the purpose of preventing “double taxation”. In general, US Tax Treaties do NOT prevent double taxation with respect to Americans abroad. For Americans abroad, double taxation is mitigated (but not prevented) by through Internal Revenue Code S. 901 (foreign tax credits) and Internal Revenue Code S.
911 (Foreign Earned Income Exclusion).
U.S. Tax Treaties include a “savings clause” (found in different sections of different treaties) that:
1. Guarantee the right of the United States to impose taxation on its citizens who are residing in other nations; and
2. Guarantee the right of the United States to impose taxation on its citizens as though the treaty didn’t exist.
Note that these “U.S. citizens” may (and in many cases are) citizens of their country of residence.
Those countries that have signed FATCA IGAs have effectively agreed to assist the United States in imposing taxation on their own citizens and residents. This will allow the United States to legally transfer capital out of the signatory country to the United States Treasury (for better use).
May 2016 – Elazar Cole and the “Savings Clause” …
On May 16, 2010, the U.S. Tax Court in the decision of – Elazar M. Cole v. Commissioner of Internal Revenue, T.C. Summary Opinion 2016-22 (May
2016) – confirmed the principle that a U.S. citizen cannot (as a general
principle) use the Tax Treaty to prevent U.S. taxation.
The decision is here
The “Savings Clause” and the Canada U.S. Tax Treaty …
Reverend John B. Duncan was the employed “Pastor” of a Presbyterian church in Canada. At all material times he was U.S. citizen.
The relevant part of the decision reads as follows:
Second, even if those provisions of the treaty were in effect during 1979, we still disagree with petitioner’s contention that the income he earned from personal services is not subject to taxation by the United States.[10] His argument fails to take into account the savings clause provision of the treaty, which is paragraph 2 of article XXIX. In construing a treaty, the provisions of the savings clause take precedence over the other provisions in the treaty, unless the other provisions are specifically excepted from the provisions of the savings clause. Filler v. Commissioner, 74 T.C. 406, 410-411 (1980). Paragraph 2 of article XXIX reserves the right of the United States to tax the income of its citizens as if the treaty were not in effect. Since articles XIV and XV are not excepted from the provisions of paragraph 2 of article XXIX, the savings clause controls and the income 975*975 petitioner earned is subject to taxation by the United States. Since his income is subject to tax by the United States, paragraph 4 of article XXIX is not applicable.[11]
Those interested can read the complete decision in the Duncan case here.
The Savings Clause of the
Canada U.S. Tax Treaty reads as follows:
Article XXIX
Miscellaneous Rules
2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.
Towards a new model Tax Treaty …
Brock project: Analyze the new 2016 U.S. Treasury Model Tax Treaty – What does it mean for your country? https://t.co/5UGpNxdAQO
— Citizenship Lawyer (@ExpatriationLaw) May 26, 2016
In 2016 U.S. Treasury released its new model tax treaty. An interesting discussion about the provisions took place at the Isaac Brock Society.
The first comment (which started a fascinating discussion) focussed on the text of the proposed “savings clause”:
Article 1 4 is the “savings clause” which is that part of the tax treaty which gives teeth to CBT, since it is this paragraph that allows the US to tax “by reason of citizenship its citizens, as if this Convention had not come into effect” (present day words in the UK-US Convention). The new words are similar, “the Convention shall not affect the taxation by a Contracting State of its … citizens”.
But then there seems to be a new second sentence which is more fierce, ending “… a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.” On the face of it, this allows the US to tax people who have renounced and who are no longer US citizens. Perhaps FATCA will make it possible to enforce this, whereas previously it would not have been possible. Perhaps banks worldwide will need to ask “Are you – *or have you ever been* – a US citizen.” I hope I read this wrongly.
The pre-2008 expatriation regime allowed for a continued 10 year long US-taxation of covered expatriates. Perhaps this sentence is there for that, since its affect will not fully expire until 2017. The UK-US treaty has presently Article 1 6 which allows for taxation of an ex-citizen “whose loss of citizenship…had as one of its principal purposes the avoidance of tax …. but only for a period of 10 years.” A difference is that the new sentence in the model treaty does not restrict to 10 years.
Article 1 5 provides a few exceptions to the savings clause. These are not identical to the exceptions in present day UK-US treaty. Further study is needed to see if these exceptions are more generous or not. My first reading of this is that Boris Johnson would still have to pay US capital gains tax on sale of his London principal residence.
The “Savings Clause” in a FATCA world …
FATCA will reveal how the United States uses “place of birth taxation”
and FATCA to extract capital from the economies of other nations. (The “savings clause” effects different people in different countries
differently.)
A strong first step in a “FATCA Fight Back” would be to renegotiate ALL tax treaties to remove the “savings clause”. The Savings clause is how the United States “plants flags” in other nations. Film Maker Michael Moore understands this principle.
busy but first thought is, we must begin contacting our countries’ tax agencies about this as well as getting our registered plans exempted in these treaties……..
We need reciprocity on the savings clause as a back door for the master nationality act
It would have been more revealing if the pastor had Canada citizenship
It all makes me wonder if I’m going to have to start filing again and contact a cross-border accountant to make all my UK investments compliant with U.S. tax laws, as though I we’re still a U.S. citizen but without any of the rights of a U.S. citizen. This is pure bullying and extraction.
“… a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.”
My interpretation is that the clause is there so they can still go after people who expatriated and got their CLNs, but didn’t tie up loose ends with the IRS by filing the 8854, etc. Or green card holders who left the US without severing official ties to the US.
@Westcoaster, hopefully you’re correct, but it’s the ambiguity that makes me uncertain. Seems go me that nobody can enjoy full certainty that they’re completely out, especially as the U.S. can do whatever it pleases….I’m certain than many over there consider us former citizens apostates who deserve harsh punishment for having been brazen enough to leave.
I will hold tight for now but would imagine that I’d be contacted by my accountant and financial advisor if the laws change again. All I know is if they do reimpose tax citizenship, that I will get completely out of investments and keep my finances as simple as possible so I could file cheaply with software. I would have lost all incentive to invest,being a second-class citizen where I live….with all the responsibilities of a U.S. citizen but without any rights of a USC.
@monalisa1776
I don’t like the ambiguity, either. However, for the sake of my sanity and in the absence of contradictory evidence, I’m going to assume that a CLN and the submission of all the required paperwork to the IRS does sever official ties.
Having said that, make sure that you scan those documents and make copies to store in more than one location. Not matter how much time passes, always hang onto the proof that you filed the requisite five years of taxes, six years of FBARs and the 8854. And your CLN, of course.
@mona et AL
It sounds to me like they are just updating the old treaty which required 10 yrs of tax returns before exiting. The rules for those renunciants are still in place until the 10 yrs are up. For those of us who renounced under different rules, I do not think they can retroactively change the tax statutes/laws under which we renounced. Surely those are the only ones that apply at that time?
Isn’t this just rewriting the savings clause to echo the existing situation, ie to continue to tax those who didn’t exit cleanly?
@Heidi and @Westcoaster, I hope that the rewording is only being directed to those who didn’t exit cleanly. But I could also see the ambiguous wording as a means to enable the U.S. to punish former citizens for leaving and to deter people from expatriating. It certainly would put a stop to the huge surge of renunciations.
@mona
Yep, never say never where the US is concerned.
Mona. Your epitaph will read ‘can I stop worrying now’. You can stop worrying any time. You are free.
The concept of equal ‘taxation rights’ and ‘tax reporting rights’ should be established for all resident citizens in any country. Unless the US is cut out of the picture, tax discrimination will persist.
Only way out is to buy physical gold and silver cause they can’t get their dirty hands on it !
When out on the lawn there arose such a clatter,
I sprang from my bed to see what was the matter.
Away to the window I flew like a flash,
Slammed down the shutters and locked up the sash.
More rapid than eagles the coursers they came,
And they whistled, and shouted, and called me bad names.
“Who were you expecting?” they asked with a sneer,
“Santa is a myth; we’ve got Savings Clause here,
With the sleigh full of guns to collect all your savings.”
Could someone tell me whether any of the tax treaties U.S. Senator Rand Paul wants to kill contain any provision permitting, supporting, or agreeing with etc, anything to do with U.S. imposed citizenship-based taxation?
@ Stephen Kish
Jim Jatras would probably know. Here’s a recent article he wrote for Accounting Today about this but it’s only accessible by membership:
http://www.accountingtoday.com/news/tax-practice/rand-paul-stand-against-tax-treaties-78105-1.html
I do know Rand Paul’s objection to these treaties involves the issue of privacy and his justifiable assertion that the bulk collection of data is wrong. Of course Obama and others are saying he’s promoting tax evasion but we know that’s just a crock.
It’s actually the “Saving Clause” no “s”
The Saving Clause is in all US tax treaties, and exempts US citizens from most treaty benefits.
If citizenship based taxation were ever to bite the dust, the US’s entire treaty network would have to be renegotiated… which is unlikely
@ mona lisa. — yes I share your worry— I done all the 8854 , 3621 3621 A, 8938 +++ cr**.. and I can’t do any more. months and months and months of LCUs, 40% of net savings to pay forensic accountants , mental health, good relationship with hubby—- all went into the rubbish can of getting compliant –“It all makes me wonder if I’m going to have to start filing again and contact a cross-border accountant to make all my UK investments compliant with U.S. tax laws, as though I we’re still a U.S. citizen but without any of the rights of a U.S. citizen. This is pure bullying and extraction ” yes and worry about retroactivity.
—couldn’t agree more but there comes the time when you have done all you humanly can, financially and morally and equitably and legally, and you “can’t do no more”. in GAAP the concept of “materiality” and “substance over form” comes into mind.
my “gut response” ??=fine. I will be much less likely in future to invest in either UK or US , save generally , be prudent and work hard and want to work for US MNC — because my history of USness could tar my UK family and me with the 77K pages of US tax code b******s . I would say more if I thought it would remain truly private but HELLO NSA and CIA and FBI–I was never more patriotic than when I renounced. “absentia core amantius fecit”
I am fiercely proud of all US has achieved in 240 years and that will NEVER CHANGE.
I started reading the Australia-US Tax Treaty. The language is such that one may easily get the impression that it is all about “preventing” double taxation. Goes on and on about various circumstances where double tax shall not apply (Of course there is the “savings clause” counteracting such language of prevention.). This all helps promote the myth that the tax treaties prevent double taxation. It may have fooled Parliaments and Treasury Departments into thinking these treaties are all good.
The CRA equivalent website here – the website of the Australian Taxation Office (ATO) – says that tax treaties “prevent double taxation” with no footnote in regards to the Australian-US tax treaty. They are misleading. The site is a resource for all manner of Australian tax obligations and specific tax laws. So they say “prevent double taxation.” That is not correct. I tried to point out to them, thinking that the myth of “preventing double taxation” is a barrier as it cloaks the problem of guaranteed double taxation. Remove the cloak then perhaps that would be a step toward addressing the injustices.
We heard back from Australian Treasurer Morrison that it is all a matter to pursue with the US in the first instance. Very true for an Australian resident in the US. For an Australian resident in Australia there is the Master Nationality Rule, and really would US law determine a US person’s right to bear arms in Australia? A truth that needs to be reckoned with is that Australia has ceded its sovereign right to solely determine tax and compliance of its residents by signing the tax treaty. And that is a matter for the Australian Government. I am trying to push that point.
I don’t know of accounts closed in Australia because of FATCA. So the real injustices thus far lie with CBT and Tax Treaty Gaps and may, in my view, will get more attention then just claiming privacy breach due to FATCA.
I support all avenues to remedy the injustices.
Residents in Australia may find it easier to visit their MP and find them more accessible then their US Representatives in a far away foreign land. So then what to bring up in such meeting: http://isaacbrocksociety.ca/fatca-and-australia/comment-page-33/#comment-7561948
@Crystallondon
I see this as a key point : that CBT+FBAR+FATCA + other laws are unAmerican
That needs to be brought up early and often to counter Homelander knee jerk “traitor” thinking.
There is this point of injustice about the existing treaty treatment of categories of income and assets separate from each other – as opposed to considering all income and all tax paid say in Australia, against the US tax liability. Australian tax rates quite quickly go up to 49%. The extra tax rate over US rates should be allowed to be carried over as a credit against the full US tax liability including any taxes the US has but Australia does not. What the FEIE nicely does is exclude Australian earnings and also taxes paid against those earnings from consideration. Even if the FEIE is not used the extra Australian tax rate over US tax rates is not recognised.
But, noooooo oo !
This point was put in a draft for the Democrats Abroad Platform (as opposed to the Democrat Party Platform). A few weeks now and have not heard about the DA Abroad Platform platform: http://www.democratsabroad.org/2016_draft_platform :
“Simplify the calculation of the foreign tax credit by allowing individual taxpayers to group all foreign income together.
Sounds really good from DA. Yet we have heard lots before. I think DA is a bit conflicted right now between Clinton (stomp down every thing else besides SCE) and Sanders (Shift to Residence Based Taxation).
@SK
no time yet to look further than this:
–
Rand Paul is truly refreshing:
“may be relevant” – one of the phrases really used against us and/or used to justify bulk transfer of information in the trial last August……
Re: Rand and tax treaties
http://dailysignal.com/2016/01/28/this-tax-treaty-would-authorize-the-automatic-sharing-of-americans-financial-information-with-foreign-governments/
However, buried among the eight tax treaties passed by the Senate panel is one that could have significant consequences for Americans with foreign bank accounts, as well as foreigners who have an account at a U.S. financial institution.
It’s called the Protocol Amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. If ratified by the Senate, the convention would result in the automatic exchange of individuals’ and businesses’ sensitive financial information between foreign governments and the U.S.
Specifically, the U.S. government would be required to share with foreign governments the financial information of foreign individuals and businesses with accounts in the U.S. Additionally, foreign governments would be required to share with the U.S. the financial information of Americans’ and U.S.-based businesses with accounts overseas.
That does not sound like FATCA $50,000k thresholds. No threshold is mentioned there.
@ Patricia Moon said Rand Paul is truly refreshing:
“To be clear, I certainly do not condone tax cheats, but I can’t support a law that endangers regular foreign investment and punishes every American in pursuit of a few tax cheats. Most importantly I cannot support a bulk collection tax treaty that has complete disregard for the important protections provided to every American by the Fourth Amendment,” the Kentucky Republican wrote in a letter sent today to Senate Majority Leader Harry Reid, D-Nev.
_
Fine but I do not need nor am I subject to your fourth amendment rights, whatever they are. I refuse to even google them. Step one is the fact that the USA employs CBT. All else, including the IGAs signed by many nations under the pressure of FATCA flows from that.
I defy one lurker Homelander reading here to justify this. Come on, talk to me. Explain why I who lived in the USA briefly or those who never did but inherited the” privilege”/curse of being deigned USA citizens for tax purposes should pay tribute to a foreign lord.
More than anything it is that arrogance that irritates me. My POB has not ever enriched my life or conferred any benefits to me. It’s been my personal nightmare.
I keep whispering to my dead parents: why why why did I have to be born just one mile away from my Canadian born siblings? One mile and my life would be different.
They must be rolling in their graves.
Come on Homelanders, please explain this to me. Tell me why you think you are the greatest nation in the world. Tell me why you think I committed High Treason. Tell me why I am a tax cheat. Tell me why you want to hunt me down like I am a rabid dog.
And I will tell you why hundreds of people across the nations raised money from mostly shallow pockets to prove you wrong. Because you are.