by Karen Alpert
www.fixthetaxtreaty.org
Overview
This feedback addresses the Residence Based Taxation (RBT) proposal from American Citizens Abroad that can be found at these links:
- Residency-Based_Taxation_ACA_Proposal_Side-By-Side_Comparison_161201_Final (1)
- Residency-Based_Taxation_Baseline_Approach_Feb._7_2017
- https://www.americansabroad.org/news/aca-publishes-detailed-descr-of-its-rbt-proposal-and-announces-coalition-to-score-rbt-proposal/
- https://www.americansabroad.org/news/aca-advances-on-residency-based-taxation-rbt/
This proposal starts from the premise that citizenship is an acceptable basis for taxation. Shouldn’t that premise be questioned? Allison Christians, tax law professor at McGill University, argues that citizenship alone is not a sufficient basis for taxation ( https://ssrn.com/abstract=2924925). Every other country on the planet (bar Eritrea) starts from the premise that countries have the right to tax residents to support the services used by residents.
Qualification for RBT
For Accidental Americans – both those born in the US to foreign parents who have not lived in the US as an adult, and those born outside the US who qualify for US citizenship from birth but have never lived in the US – the justification for citizenship based taxation is non-existent. Do these individuals need to apply for a “Departure Certificate”? If so, at what age?
When a person makes a long-term move out of the US, why should they have to wait for 5 years to qualify for RBT? If I move from California to Texas, once I’ve established a residence in Texas, California no longer taxes me as a resident, effective immediately. Why should an international move be any different?
While waiting those 5 years, US tax will cost low income earners much more than it does under the current system. The proposal repeals the Foreign Earned Income Exemption (FEIE). While the level of FEIE is quite high, it is most valuable for middle class and lower socio-economic groups. Other countries have much more generous tax free thresholds and lower tax rates at low income levels. In Australia, for example, an individual could earn up to A$20,000 (US$15,000) before any Australian tax is due. Loss of FEIE will mean tax is due to the US for individuals earning US$10-15k. At the other end of the income spectrum, however, FTC is always a better answer than FEIE. Australia’s tax rates rise to 45% for incomes above A$180,000 (US$135,000). So, repeal of Section 911 FEIE will impact those least able to pay additional taxes and exacerbate income inequality.
The proposal does not address other information returns. Current IRS rules require that forms 8621 (PFICs) and 5471 (controlled foreign corporation) are required even when a tax return is not. For many Americans abroad, the reporting (and associated punitive penalties) is more of a problem than actually paying taxes (most owe no tax to the US anyway). If the reporting continues as long as one is a citizen, then renunciations will continue as well.
Departure Certificate
When applying for a Departure Certificate it appears that the IRS has control over the timing of the issuance of the Certificate and thus the effective date. With the current renunciation process, the potential renunciant has the date of the appointment in advance and can decide on the day whether to complete the process or not. With volatile exchange rates, the timing can affect the US dollar net worth of the individual, potentially subjecting them to the Departure Tax should the value of the US dollar fall relative to their home currency in the time between submission and approval of the application for Departure Certificate. Additionally, lack of control over the timing could cause hardship for those who must be free of US reporting to take up a job, or otherwise have a time-critical need to be free of US taxation.
Annual re-certification is a bureaucratic nightmare. One possible alternative is to collect this information as US citizens enter and leave the country. For those who return to employment in the US, the chance of avoiding taxation is minimal. Similarly, Social Security checks or investment income sent to a US address could be used as a rebuttable presumption that the US citizen is once again residing in the US.
In the Departure Tax section of the proposal it is not clear whether the intention is to use the net worth threshold in section 877(a)(2) and raise that to $5million for both renunciants and citizens opting in to RBT. Given the justification used by legislators for both the exit tax and the Departure Tax, the net worth threshold for both should be linked to the estate tax threshold and similarly indexed for inflation.
At what point does an individual determine that they have been tax compliant. Is it similar to the current Exit Tax procedures where delinquent returns filed before filing form 8854 allow one to certify compliance?
The IRS “User Fee” of $2,350 per person is a lot of money for those on modest incomes – precisely the people who will be hurt most by the repeal of section 911. The renunciation fee, which the IRS User fee is based on, is already the highest such fee in the world, and a financial hardship for many. Forcing citizens to buy their way out of Citizenship based taxation at this high price means that only those who are already relatively well-off will be able to buy their freedom. Like the current system, the proposal exacerbates income inequality by making it prohibitively expensive for those with incomes below the median to exit the double taxation forced on them by the unfair system of citizenship based taxation. As under current rules, the proposed User Fee also makes it harder and more expensive for US citizens residing outside of the US to leave the US tax system than it is for permanent residents (green card holders) – in this area citizens are treated worse than non-citizens!
Furthermore, setting the IRS User Fee to the same price as renunciation makes renunciation preferable to RBT for many citizens abroad. Those who will not be covered expatriates, who are having trouble maintaining banking relationships, are shut out of jobs due to either FATCA/FBAR reporting or the requirement to report controlled corporations to the IRS, or have no intention of returning to the US will find renunciation preferable.
Anti‐Abuse Rules
Under the Anti-Abuse rules – gain from sale of securities taxable in the US for two years after receiving the Departure Certificate: but individuals must have a foreign residence for five years before they are even eligible for a Departure Certificate, and if their net worth is above $5 million they must pay a Departure Tax. What abuse is it if securities are sold within 2 years of receiving the Departure Certificate?
On page 6: “Individuals eligible for the special rule for individuals residing abroad (RBT rules, above) would be subject to the Departure Tax, whether or not they are tax-compliant. The date of departure for such individuals would be the subsequent date of issuance of a valid Certificate.” This appears to contradict the special rule on page 5 which states that these individuals are not subject to the Departure Tax if they are tax-compliant.
On page 6: “If an individual who was a non-resident American for any of the prior 5 years and was a resident American for any year prior to that period, and again becomes a resident American, then he or she shall be treated as a resident American for each of the prior five years.” (emphasis added) This appears to be saying that anyone returning to the US who has ever been subject to US tax will have to amend their prior 5 years of non-resident returns and file as a resident. The proposal requires individuals to wait for 5 years before they are eligible for RBT, then if their life circumstances change and they move back to the US, they will lose the benefit of up to 5 years of non-resident treatment under RBT?
FATCA and FBAR reporting
There are several reasons FATCA should be repealed beyond the problem of access to banking by US Persons. FATCA costs much more than it will ever generate in revenue. The OECD’s Common Reporting Standard (CRS) has been implemented by financial institutions in many of the countries with FATCA IGAs. Under CRS, institutions collect the tax residence of their clients. If the US were to abandon FATCA and implement CRS (not likely, I know), then financial institutions would not be required to use a separate system for American clients, and they would no longer be subject to the 30% FATCA withholding. Under those circumstances, FFIs would be much more welcoming to American clients. Furthermore, those Americans who qualify for RBT, would be tax-resident only in one country, and only reported to that country. Those who do not yet qualify would be tax-resident in two countries (one being the US) and their data would be reported to the US.
Same Country Exception (SCE): There are many legitimate reasons to hold bank accounts in countries other than where one is resident. In Europe, in particular, it is quite common to bank in another country. SCE does not make compliance any easier for FFIs – they must still keep track of their American account holders and treat them differently should they move across a border or back to the US. Under FATCA, the threat of 30% withholding is so draconian that many banks, especially European banks burned by the DOJ, are not willing to take any risks with US citizen account holders. What concrete evidence does ACA have that banks, especially in Europe, will be any more willing to deal with Americans under SCE?
For taxpayers who qualify for RBT and have received a Departure Certificate, why does the US need to know about their non-US bank accounts and investments? In this circumstance, non-US accounts do not generate income taxable in the US. Requiring FBAR reporting (and form 8938 for any accounts not required to be reported on FBAR) will be seen as a disadvantage to retaining US citizenship. Many NRA spouses and business partners object to joint accounts being reported to the IRS and/or FINCEN.
Thanks for posting that, Tricia.
My critique/feedback was prompted in part by a new twitter campaign by @ACAVoice.
As I said in my comment on the Media Articles thread (http://isaacbrocksociety.ca/media-and-blog-articles-open-for-comments-part-4-of-4/comment-page-22/#comment-7866417):
Wow, with friends like ACA who needs enemies?
@ Karen
I often get Departure Certificate confused with Death Certificate because it seems that is what it will take to free ourselves. You use kinder words than I can summon when you say disingenuous. No one needs to read my words for this proposal.
ACA is nothing but a shill for the traiterous Democrat party–the libtard Dems are in reality happy with FATCA and FBAR because its what their dear Dem leaders in Washington need to vacuum up every tax dollar available to fund their socialist, big government regime (which sadly many statist Republicans in DC have also bought into), not through taxation but by way of the draconian penalties for non-compliance, despite both programs being directly inimical to the interests of libtards living overseas (and in fact ALL hardworking Americans living abroad). ‘Useful idiots’ was never a more appropriate term for those like ACA and Dems Abroad, as well as RINOs in Congress. Whatever happened to individual Americans’ right to be left alone by its government?!?! See Olmstead v US, Brandeis dissent.
On facebook after the election a bunch of friends of friends were giving me hell for voting for Trump. Of course I argued my case including FATCA etc. One of those giving me hell claimed to be part of ACA and of course FATCA just needing some changes.
The exit tax is evil. You can’t have to pay US tax on sales for two years since you would have to avoid PFICs in that time and those are normal things to invest in when you live in another country. Same country exception doesn’t help immigrants and I am not sure it helps those abroad beyond avoiding some minor filling issues. With FATCA the banks just don’t want to deal with anyone affected regardless of if they could check and avoid it.
@Canadian Ginny – I’m trying very hard to be polite. ACA have already blocked many of the anti-FATCA crusaders on both twitter and Facebook. If they won’t speak to us, there’s no way to attempt to convince them that their proposal actually conflicts with the core values of freedom and justice espoused by all patriotic Americans. (not that I think I’ll be successful, I just want them to think through the consequences of their proposal)
@Neill says “You can’t have to pay US tax on sales for two years since you would have to avoid PFICs in that time and those are normal things to invest in when you live in another country.”
Good point – I should have mentioned that as well. PFICs are evil and the only policy reason for treating retail mutual funds as PFICs is to keep the money invested in US mutual funds (which expats can’t buy without a US address anyway).
@Karen great explanation rebutting ACA proposal, thanks for taking the time to provide this resource. Did you see my tweet reply to ACA who were asking for nominations for best state dept employee? I suggested the polite vice consul who assisted with my renunciation… ACA are so out of touch!
American Citizens Abroad (ACA) and its many proposals are for Homelanders Abroad only.
http://isaacbrocksociety.ca/2014/02/10/i-want-my-son-to-be-able-to-expatriate-but-they-wont-let-me-do-so-on-his-behalf/comment-page-1/
Why will ACA not address the unfairness for *Accidental Americans* of exceptional in the world US-CBT, including for those who are entrapped by some mental incapacity into US taxation citizenship and the complex and costly year-after-year compliance, not able to renounce a US-deemed US citizenship nor a parent, guardian or trustee allowed to do so on such a person’s behalf? How about a claim to US citizenship for defined *Accidental Americans* by the individual when that person is of age and mental capacity to understand what such a claim entails for them, positive or not? How about If not claimed by the adult individual with or without requisite mental capacity, with a provision such claim be re-opened to them anytime after being of age and capacity, it is null and void? Departure Tax? — those like my son never departed your country and those who departed the US as children with their other-citizenship parent(s) had no choice in where or to whom they were born. Does anyone there have a shred of common sense when dreaming up these outrageous proposals?
Thanks for posting that. These questions also cover a lot of what I was wondering about. A few more thoughts bouncing around inside my head that I’m trying to write up in more coherent and less snide fashion to send to ACA:
1. What happens to a kid born outside the US? (Deemed to have Departed at birth? Born an Undeparted tax evader and $2350 in debt? Inherits Departure from either parent? Inherits Nondeparture from either parent? Some complex evidence-based rule along the lines of 8 USC 1401(g) in reverse? (With a presumption of innocence? With a presumption of guilt?)
2. What “anti-abuse rules” will Congresscritters demand — since ACA are already adopting a posture of pre-emptive surrender — to ensure that Homelanders don’t run off and have Departed anchor babies in Mexico? (This is of course a Very Serious Problem just like all the hordes of Homelanders who moved to Puerto Rico to avoid US capital gains tax. There’s literally dozens of them! They must be stopped at whatever cost to the other nine million!)
3. Could a Departed holder married to a non-Departed spouse elect to be married-filing-jointly for a particular tax year?
@Jay – thanks. Yes, I saw your suggestion on twitter – very appropriate. As renunciations are now a DoS profit center, it would be appropriate to reward good customer service, even though repeat business is not encouraged! 😉
@calgary411 – the interaction of immigration/citizenship law with CBT is part of what makes CBT indefensible. If citizenship is to be a basis for taxation, then there must be a way for EVERYONE to relinquish/renounce their citizenship at a reasonable cost (Australia charges A$205). The whole idea of a Departure Tax / Exit Tax is ridiculous – especially for those who have been outside of the country for years/decades/their whole lives. One of the confusing parts of the ACA proposal is that at one point they seem to be saying that the Departure Tax will not apply to those who have already been out of the US for 3 years when their proposal is enacted – but then they seem to take that away in their “Anti-abuse” provisions. Any Departure/Exit tax should apply only to assets acquired when resident in the US – much like the provisions that apply when a resident moves from Australia or Canada.
@Eric – good questions! Please do send them to ACA and let us know if you get a response. As for the Departed anchor babies in Mexico, my understanding is that a large portion of the US citizens living in Mexico are minors (many of them anchor babies) – who is going to tell them that the country that deported their parents will insist on taxing them and make it difficult for them to open a bank account in their home country? Will the US politicians currently ranting against giving citizenship to anchor babies make it any easier for those anchor babies to exit the tax system? (highly unlikely, after all, who in their right mind would ever want to give up US citizenship?)
Looks like $2350 is now seen as the market buy-back price for a used American tax-citizenship. 🙂
“What happens to a kid born outside the US?”
Wise parents will know what to do:
http://www.imdb.com/title/tt0407887/parentalguide
@Karen: good comment about anchor babies. I once knew a man in Miami who was from Morocco. He was there legally. His 12 year old daughter was born in the US and hence a US citizen. She was not an anchor baby, as at the time of her birth, the father had a work permit. At some point the INS found out that he had had some criminal issues prior to receiving his green card or naturalization, but had since behaved himself perfectly. They deported him, with his minor US-citizen daughter ! The daughter would be in her 20s by now and I wonder how she is coping or maybe if she returned to the homeland.
It sure would be an insult if she had to deal with FBAR / FATCA after that bad experience.
That is an anecdote which haunts me and really pisses me off.
BTW though I have respect for some of the older ACA officials and the contributions they have made, I do not approve of the present ACA wishy-washy proposals. I have always sought complete and utter abolition of extraterritorial taxation by the US. Anything less is anti-American, and counter-revolutionary.
Residence-based taxation is hardly revolutionary. Residence-based taxation is the international status quo. Even for America, CBT is the exception not the rule.
America claims it taxes its citizens on their worldwide income wherever they live but in reality it doesn’t, and can’t, because the result would inevitably be frequent instances of double-taxation, which wouldn’t be acceptable under double-taxation treaties which have been agreed by America itself: so America uses various ploys like FEIE, and FTCs, and “re-sourcing”, and Savings Clause “exceptions”, and just refusing to explain the “rules” clearly to expats who are trying to comply, all to maintain the pretence that it could enforce full taxation on USCs worldwide, but chooses not to. When what it’s really doing is scavenging.
Wonderful post.
In the best of cases the ACA is trying to be realistic and present something that has a chance of being adopted in the House and Senate, offering to be reasonable in exchange for getting at least something.
However the ACA’s proposals are complex, unfair, and illogical. They add a layer of Kafkaesque conditions and requirements, they make navigating this whole mess even crazier, and they make life more difficult for the little people.
To support the ACA one must truly believe that what they propose would be a good long-term alternative to the current toxic FATCA+FBAR+CBT situation.
The obsession with “abuse” (present in FATCA and current ACA proposals), making certain nobody anywhere ever gets any kind of break is both paradoxical and hypocritical. It is paradoxical because it institutes, legalizes, abuse of the little person, it is truly tyranny based on money. It is hypocritical because in addition to abusing the little guy it actually institutes and legalizes mechanisms that (will continue to) shield the true fat cats (because if $2350 is pocket change, much less than what you pay your accounting team each month, it’s really not an issue, and in fact awfully cheap for that departure certificate or CLN).
So in my opinion, ACA’s reasoning that something is better than nothing may be turned around to say, hey, nothing is better than that something. Maybe the current situation will finally blow up some day, either thanks to the GOP or by itself in the coming years, because FATCA will finally piss off enough people, because renunciations will rocket, because of a court case, because countries or maybe even the EU and China will tell a weakened US to eff off, etc. Whereas if the ACA’s bandaids are in place, they may actually be worse but look better and be harder to get rid of.
I’ve expressed my disgust with this ACA proposal several times on other threads but if it’s raising its ugly head again I’m glad those of you who tweet are striking back. Thanks for raising the issue here again, Karen.
@ Fred (B)
I want to add something here. ACA is just trying to pass some complex laws to please congress to get away from compliance vultures who are lobbying for congress to pass more draconian laws as their entire industry benefits from it.
The phrase “putting some lipstick on a pig” describes this proposal perfectly. The reality is that the US government is what needs to be controlled with some sort of “anti-abuse” legislation.
The ACA’s underlying assumption here is that US citizenship is something worth preserving. For a permanent expat or accidental that is simply not the case. If the price is on a par with renouncing, then renouncing is the way to go because that will get the US government out of your life once and for all.
The goal is to reduce the threats, the confusion, and the complication. This proposal does exactly the opposite.
Their efforts will not work unless they go for full repeal of FATCA. FATCA will piss off enough people in the end as my friend told me and finally they will make it impossible for anyone to get out. So get out early before they block you and this is coming from a compliance condor’s advice years ago which of course I did not listen to and I saw the fees shoot up from 0 to 400$ and then to 2350$. He knows this industry more than us and their power.
Other countries want their own citizens so therefore they signed up for ‘GATCA’ another name for CRS and AEOI. This was after OECD liked ex President Obama’s FATCA and adopted it as CRS. Almost every country jumped on board except a few that could not be threatened as no one would put money there. The only difference is FATCA was for CBT and CRS is for RBT but then again US never signed up for CRS purposely as they wanted themselves to be the only tax haven of the world. They have signed up with a few countries on mutual taxation treaties such as for Netherlands etc etc for IRS to report to Netherlands about its residents holding accounts in USA but it is based only on separate agreements not like CRS.
After a lot of research and talking to few compliance condors over the years renouncing is the only way to go about it and soon that option would end too as 1.5m East Asians and millions of dual Canadians, dual Australians and all the dual nationals are thinking about it seriously now as per the newspapers all around the globe. Maybe in Canada they are only thinking about the Canadians as this is mostly a Canadian blog but trust me there are plenty of folks in this situation all over the world. Dual saudis, Dual Kuwaitis are all renouncing their US citizenship. It was a prize to have US citizenship and a gift to their children (they were giving births in USA to their children decades ago) but it’s becoming a nuisance to deal with now for their grown up children. For more info please look at Phil Hodgen’s blog as he advises a lot of dual nationals in countries all over the world who were accidental citizens as their parents did not know that their gift will become their children’s biggest nightmare.
Leaving aside the specifics, the ACA proposal reflects:
1. A commitment to taxation-based citizenship; and
2. A commitment to FATCA.
Like the SCE (“Same Country Exemption”) proposal before, it is a proposing a “carve/buy out” for a select group of U.S. citizens who have demonstrated their loyalty to the Homeland by paying taxes and filing forms. For those, and those alone, they will be offered the privilege of “buying their freedom” in the same way that some slaves in another century were offered that privilege.
The ACA proposal is extremely vicious, very honest in one respect and very dishonest in another respect.
The Viciousness Of The ACA Proposal:
The sole beneficiaries are those who are U.S. tax compliant. For the vast majority of these deemed to be “U.S. Property/Slaves” it is too late for them to enter into the U.S. tax system. I have seen it said that:
“Seven out of eight Americans recommend noncompliance!”
This means that the maximum percentage of people this could benefit (if they can afford the financial cost) would be 1/8 or 12.5%. In other words, the proposal is of very limited value to “American Citizens Abroad”.
The Honesty Of The ACA Proposal:
In at least one respect, the ACA proposal is the most honest proposal out there. It is the only proposal that is predicated on the correct assumption that U.S. citizenship is a modern day form of slavery. And why not? Slavery has played an important role the whole history of America. Some will scoff at the assumption that U.S. citizenship is a form of slavery. But, hey if it’s not a form of slavery, then why are people not free to leave it?
The Dishonesty Of The ACA Proposal:
Once again, ACA considers U.S. citizens to be ONLY Homelanders and what I would refer to as “Homelanders Abroad”. It does not acknowledge the existence of “accidental Americans”, and long term dual citizens who are permanent residents of other nations and do NOT consider themselves to be Americans in any relevant sense.
In any case, the proposal is so complicated that I doubt it will go anywhere.
Just in case, anybody has missed the main point of this:
Renounce and Rejoice! – It’s the only option CURRENTLY available to you.
@Harrison.super
When it comes to accepting renunciation and being aware how widespread this desire is around the world, you are preaching to the choir. Brock owns the renunciation movement. That’s what got us kicked off the Expat Forum and lead to the founding of Brock! And Brock has had a cordial relationship with Phil Hodgen from the very beginning Some of us took his advice immediately:
Then again, it would seem many expats must be choosing to renounce with their feet and could care less about going through the tax compliance/State Dept versions. Any accidental born outside the US would be nuts to do any of those things. In retrospect, there may be many who regret having formally renounced, spent the money becoming compliant when it may have, in the end, turned out to be unnecessary. As we have always said, it depends totally upon each individual’s unique set of circumstances.
As to the compliance industry knowing this business better than any of us, I seriously doubt that at this point. What is known is that they, not the IRS, steer and enforce CBT. One is to be wary of them at all times. It is just as bad to be scared into renouncing as it is to be scared into complying. I cannot think of any firm outside of Phil Hodgen’s nor any individual lawyer such as John Richardson, who say, five years ago, would even accept, nevermind promote renunciation. That was like cutting off the arm that feeds you. They all were so certain that US law was unstoppable and getting us into compliance at great cost, was goal #1. Once it was obvious renouncing was an unstoppable fact, more and more became active in “assisting” expats outside of mere tax compliance. At least that is the case here in Canada and Western Europe.
This site may have been started by Canadians but it has never been only for or about Canadians.We have always strived to develop as much info for as many different situations as expats find themselves in. See for example, the country-specific posts/pages.
As to the MCARs you might be interested to know that all 5 countries that have signed such agreements will not collect on anyone who was a citizen of their country at the time the tax was incurred. So I don’t see these in any way, shape or form as anything resembling CRS.
This site may have been started by Canadians but it has never been only for or about Canadians.We have always strived to develop as much info for as many different situations as expats find themselves in. See for example, the country-specific posts/pages.
So true, Tricia. I have always been humbled by and thankful for our many overseas and across -the- nations donors who contributed to our fundraising. And I have been very concerned about those, as just one example, whose bank accounts have been closed in other countries.
@ Patricia lol I did not know I was preaching to the choir. I have met Mr Hodgen personally who told me the same thing get out before they close the door. For the sake of my US based children I had to stay but now I am regretting the whole situation as they are making it impossible to do business anywhere in the world for US citizens. No business wants US citizens as partners or even employees since their financial data would be shared with IRS which no foreigner wants. It is really creepy when brokerages or banks show you the door since they don’t want to hire people for IRS compliances as they told me they have to get signed into portals every time for each US citizen or permanent resident they have as clients and they don’t want to deal with it every month or so for their bank not to get into the dark side of the IRS or they would punish the banks severely for anything. Another act is Dodd Frank Act which terrifies brokerages due to its nightmarish compliances. As Mr Hodgens told me to get out quickly years ago I did not and I regretted my decision ever since then and I know I am preaching again to the choir but get out before they lock the door. There is no use waiting for ACA trying for RBT as their version as you read already is entirely useless. Even FATCA to be repealed is a pipe dream as it is too much money involved for compliance condors and they will never let it be repealed. The lawyers and the CPA teams (the condors )are the ones who design these laws so they can sell their loopholes they know already to the rich and powerful. For us small minnows they make our lives miserable. Yes even foreign bankers told me they sympathized with our situation but their compliance teams do not want them to take US citizens as their clients. You can forget about brokerages as not even US brokerages will take a US citizen based overseas unless you have a US address of a friend that they can mail to and are claiming on their form to be living inside US due to FATCA