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.
@Canadian Ginny That is the line of questioning one would have hoped the Press pursue with those responsible for the laws. It is a major failure over many years.
Re: tax treaty and Rand Paul. I know the Obama administration wants this to sound reciprocal, yet we know the US financial institutions are not asking account holders to state under penalty of perjury if they are Canadian persons. Therefore, the information exchange can not be reciprocal.
Here is US reciprocity:
http://www.bna.com/sticking-sore-thumbthe-b57982072499/
Referring to President Obama’s well-known observation about 19,000 companies being registered in a single building in the Cayman Islands, Bell claimed that there “is one building in Delaware which has 285,000 companies registered in that one building and they don’t know the beneficial owners of any of them.
@Canadian Ginny
My P[lace] O[f] B[irth] has not ever enriched my life or conferred any benefits to me. It’s been my personal nightmare.
Have courage and faith. Right is on your side.
“And that power in its scope and extent, it was decided is based on the presumption that [American] government by its very nature benefits the citizen and his property wherever found….”
Justice Joseph McKenna, Cook v Tait, 1924
“McKenna resigned from the Court in January 1925 at the suggestion of Chief Justice William Howard Taft. McKenna’s ability to perform his duties had been diminished significantly by a stroke suffered ten years earlier, and by the end of his tenure [say, in 1924] McKenna could not be counted on to write coherent opinions.”
https://en.wikipedia.org/wiki/Joseph_McKenna
@Westcoaster
Why it is there is irrelevant. How may it be used is all that matters. If it may be used to go after expatriated citizens who do have CLNs, it eventually will.
IRS teaches:
“Saving Clause
Most tax treaties have a saving clause that preserves the right of each country to tax its own residents as if no tax treaty were in effect…”
@Westcoaster
If they want that clause in to catch out people who snuck out of a big tax bill or did not renounce properly under the applicable laws of that time, then that needs to be specified in writing. There is a long tradition in this area of law of incautious wording. So, laws that are supposed to be about going after bad Americans doing bad things abroad, and there are some, invariably end up being applied in ways that whack more ordinary Americans earning an honest living abroad because the language was not crafted carefully enough. I am not sure whether or even how a court would consider the original intent of a tax treaty. Once the treaty is signed, it will be too late to get the language changed or interpreted in a more favorable way. It would be much more effective for renunciants to write to their governments and treasury departments with their very real concerns to make their governments aware that the language needs to be modified to protect their citizens who have renounced their U.S. citizenship.
So, due the the savings clause, tax treaties are of little or nor value.
Hear, hear, Ginny, hear, hear!
@Ginny,
I too would love to hear their response. Hang in there.
According to Robert Wood of Forbes, “Claiming a foreign tax credit generally does not eliminate double taxes.”
His significant addition of the words “does not” flies in the face of the current generalization that treaties eliminate double taxation.
http://www.forbes.com/sites/robertwood/2016/05/23/never-trump-never-hillary-tax-wise-exit-if-your-candidate-loses/#aac2b4346190
If a country sees human beings as objects to be exploited and extorted, as is the case of the United States, then it is only “normal” that they create all kinds of convoluted laws in order to be able to continue their exploitation and extortion, all under the guise that it is “legal” and “just”. What more is needed to prove that we are here dealing with an unjust, undemocratic and out of control State?
On the subject of democracy, or creating the appearance of a democracy, I am puzzled that there has not been even one blog entry on this site calling out the fact that none of the presidential hopefuls have made any overture whatsoever to the expat community. It indeed may be a fruitless exercise but attention needs to be drawn to the fact that it would appear, when reading the news and observing where and to whom the candidates address themselves that around 8 million people who the U.S. believes it owns and can tax, just like ‘homelanders’, that the expat community doesn’t exist, yet they should be taxed, fined and kept under surveillance. Their master do, however, give them the right to vote in Presidential elections. Why hasn’t this blog drawn attention to this? Why has this blog not challenged the candidates to take a position on 8 million of their fellow taxed citizens? Nothing in the U.S. works without some form of pressure, aggression or threat and if the objective of this blog is to change the status quo, then why don’t you challenge a response from the candidates and their operatives?
There have been posts quite some time ago, when things were just starting for the campaigns, that requests for the canidstes postions were reported to have been sent and their replies, such as the were. I do not recall when, where or by whom but am quire certain it was here that I read it.
I have not seen any recent posts on the subject, however, possibly due to the fact that the positions of the various canidates is well understood.
@AmericanDystopia
Here’s just one:
http://isaacbrocksociety.ca/2016/02/04/not-much-to-hope-for-in-democrats-vision-for-expats/
@JapanT
Yes, sometimes you can’t see the forest for the trees 😉
@AmericanDystopia, a country that is choosing Donald Trump and Hillary Clinton as its two main Presidential candidates cannot be expected to reform its tax treatment of expats. Devious Donald is an America Firster and Hillary is the epitome of the status quo. Neither gives a sh_t about US citizens abroad except as vassals of the State.
The only hope for expats is that other countries might pressure the US into changing its tax laws and treaties. So far, the Liberal Government here in Canada has been a big disappointment in that regard. It seems that it’s all up to the ADCS lawsuit and the courts here to make some progress on this. Don’t expect any help from US politicians or the US public in general.
Don’t expect any help from the governments of the countries we live in either. Once they figure out the raw deal they are getting, that the USCs in their midst are the tools of the US to siphon funds out of their economies, they’ll just kick us out. Or make it impossible to continue living in their country so we decamp.
Much easier to go after us than fight the US on it.
@Japan T
“Why it is there is irrelevant. How may it be used is all that matters. If it may be used to go after expatriated citizens who do have CLNs, it eventually will.”
I think the inclusion of this clause is very relevant indeed, so we’ll have to agree to disagree regarding the relevancy of the clause.
If you re-read my original comment, I said that I think the clause is indeed geared towards expatriates with CLNs — but only those that didn’t file all the related paperwork with the IRS, breaking ties cleanly as per the requirements outlined at the time of their expatriation. Moreover, I think that will happen sooner, rather than later.
@WestCoaster
I agree that it being there there is very significant. The why it is the not at all because it being there allows someone in the future to use it in any way they wish, regardless of the reason for it being there in the first place.
I believe that it will be used against any and all with a US birth place and those begott by the same. And I agree that it will be sooner than later.
My point is that they have shown that they will not limit themselves to neither what the law says they can do nor to what the intent of the law was. Thus, we should should not look at how any wording may limit them but how far they can take it to mean.
@Publius
“If they want that clause in to catch out people who snuck out of a big tax bill or did not renounce properly under the applicable laws of that time, then that needs to be specified in writing. There is a long tradition in this area of law of incautious wording. So, laws that are supposed to be about going after bad Americans doing bad things abroad, and there are some, invariably end up being applied in ways that whack more ordinary Americans earning an honest living abroad because the language was not crafted carefully enough. I am not sure whether or even how a court would consider the original intent of a tax treaty. Once the treaty is signed, it will be too late to get the language changed or interpreted in a more favorable way.”
You’re working on the assumption that the USG serves its citizens. Based on what I’ve seen and experienced (the USG protects the USG, at the expense of everyone else, including US citizens), this is an erroneous assumption, so it works in USG’s favour to keep their laws vague as it allows the USG the greatest leeway in implementation.
“It would be much more effective for renunciants to write to their governments and treasury departments with their very real concerns to make their governments aware that the language needs to be modified to protect their citizens who have renounced their U.S. citizenship.”
It depends on whether the renunciants have officially severed ties with the US. If yes, then they absolutely should appeal to the government of whatever country they have become citizens of. If not, regardless of whether they hold an additional citizenship, I believe it’s more appropriate to appeal to the USG.
@Japan T
“Don’t expect any help from the governments of the countries we live in either. Once they figure out the raw deal they are getting, that the USCs in their midst are the tools of the US to siphon funds out of their economies, they’ll just kick us out. Or make it impossible to continue living in their country so we decamp.”
I think the key issue is that many Brockers are still officially Americans. Dual citizenship is a double-edged sword because both countries recognize the sovereignty of the other in regards to the dual citizen. In other words, when I was dual American-Canadian, I could not depend on Canada to protect from the US laws unless those resulted in my physical safety being compromised.
That is why I have officially severed ties to the US, so there is absolutely no ambiguity that my allegiance belongs to Canada, and Canada alone. As a citizen of Canada and no other country, I am now only beholden to Canadian laws. (Unless, of course, I move abroad; in which case, I’d also have to answer to the laws of the country I reside in.)
Japan T, you’re in a category all your own. Although you have made a life in Japan and don’t intend to return to the US, you only hold US citizenship. Moreover, you live in a country that does not legally protect foreigners in any way shape or form. As I’ve cautioned you before, this is a very risky way to live.
Nobody speaks for the huge number of (arguably) former US Persons with another nationality who have cut off all relationship economic or other with the USA and refuse renunciation, tax compliance, CLN or anything else. The only risk they have is the folly of foreign governments who may choose to become enforcers — collection agents, extradition agents — for the USG. For millions, compliance is not an option, perhaps not legally possible locally. How many are willing to impoverish non-US family for … Bernie Sanders? I call these millions a “silent majority”. Enforcement is impossible, FATCA and PFIC irrelevant. So long as they can find a workaround, benefit from ambiguity or confusion, lie, or deal in cash (Truck Acts, anyone?) Foreign governments have been subjected to USG blackmail. At some point at least one of them will have to acknowledge reality, at least for their own citizens denied banking, pensions, mortgages, investment. And engage in legislative treaty override the way Congress has so often done.
@Carol C
Welcome to Brock! You said it…..this is the best (and ironically, the most visible) expression of civil disobedience in my lifetime………
If I could have gotten away with doing nothing, I would have.
@Stephen Kish
ALL of the treaties Rand Paul is blocking re-iterate the Savings Clause thus all of them do further Citizenship Based Taxation.
@ Carol C
Hear, here! You packed a whole lot into that nutshell comment … and welcome! As for the saving disgrace clause which even after all these years I don’t understand, it’s pretty telling that its wording doesn’t seem to lead to any absolute interpretation and attracts worrisome speculation regarding its possible future expansion. That is probably the intent of the clause crafters.
Tim,
That’s what I expected. Thanks for the answer.
@WestCoaster – The physical issues in your comment also illustrate a difference in how CBT vs. conscription (another issue sometimes brought up on here) can be enforced extraterritorially. In the case of a military draft, the other country would have to physically get you into their possession (where they can send you off in their military) in order for the law to be enforceable – but with CBT, especially with FATCA-esque tools like blackmailing banks in your home country and the sky-high penalties for not complying with FBAR, etc., you never have to physically set foot on U.S. soil for them to enforce CBT if they can wipe out your savings.