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.
@Harrison.super
Never say never.
I remain skeptical about all the possibilities-the interaction of this and that seem to suggest whatever happens is likely to be fragmented at best and for those of us in retirement-age era, no change is very likely. I personally renounced because I could without too much expense and it was best for me. Five years and counting, no regrets!
Not to worry. You are in good company here.
I finally realized what the same-country exception reminded me of: the failed U.S. don’t ask, don’t tell policy towards gays in the military. Instead of making it o.k. for people to live normal financial lives abroad, they propose to simply bring in a reporting exception while not changing the underlying tax law.
just another case to increase the reason to “self relinquish”
for the rest of you who have to comply with an unjust or fair system you have my sympathy!!!
@Patricia
I am not skeptical but a realist. There is just too much money involved in the compliance industry. As I am a friend of a tax attorney I know they would never give in to getting these laws repealed since they virtually own the lobbyists. Renouncing will not give me a chance to visit my children in USA but that’s ok now and they understand my situation too. That is the only reason I kept this nightmarish citizenship with me is for my children. Hounded by banks and brokerages here who are not willing to let anyone with a taint of US citizenship I had to close all my accounts and live on cash now as the banks told me that they would have to close my accounts due to extreme compliances with US govt and they do not wish to hire additional staff to deal with US citizens anymore. I wish and hope ACA is reading all this.
I am glad you did your renouncing Patricia. It was an intelligent decision on your part. Wish I had applied for immigration to Canada decades ago when it was easier to get into. I have lived in Canada too for sometime but at the time I was never aware of RBT vs CBT and US on enforcing its extra judicial laws all over the world as I was a student back then.
@Publius – well said. I absolutely agree.
@ Publius depends on situation by situation. If US knows about it then you can’t avoid reporting it to avoid fines. If they don’t then yes your statement makes sense. It all depends on case by case. Like for instance whoever did not report bitcoin transactions from Coinbase is in a lot of problems as US has now issued a John Doe summons to Coinbase get all the records. I never invested in bitcoins myself as it was too volatile and after Mt. Gox fiasco I did not want anything to do with bitcoin. But good luck to anyone who has bitcoins now or did any transactions from Coinbase for the past few years and not reported to ‘Don’t ask don’t tell govt” as they are getting their guns aimed at those who invested in Bitcoins using Coinbase.
Publius it all depends on case by case and one advice is not good for everyone.
@Patricia Moon,
It’s clear nothing works as well as getting out. For me the plan has to be to limit my foreign accounts the first chance I get in a tax efficient manner. I can’t hope they will treat me better sometime in the future. You have to look like everyone else or the politicians will chop your head off.
@Harrison.super:
“If US knows about it then you can’t avoid reporting it to avoid fines. If they don’t then yes your statement makes sense. It all depends on case by case. Like for instance whoever did not report bitcoin transactions from Coinbase is in a lot of problems as US has now issued a John Doe summons to Coinbase get all the records. ”
Coinbase is in America, and wants to comply with US tax law. The IRS doesn’t have the same power over people who live elsewhere and don’t regard the IRS as their rightful taxing authority.
While I need to study this proposal some more I think the politics of getting rid of the FEIE without FULL RBT are very unfavorable with the current GOP Congress(The head of House W&M represent a big time oil and gas district in the Houston, TX area). The oil and gas industry is a heavy user of the FEIE and has a lot of friends in Congress and the White House.
The ACA proposal was basically written for a Democratic Congress and Democratic White House.
Second while the $2350 “user fee” might small seem like small potatoes I think both Democrats and Republicans should and I think may look at it as a thinly “disguised” head tax. In fact the ACA proposal in a narrow sense brings the US closer to Eritrea.
I have been finding out some things about ACA in private suffice it to say I used to the think there head person and chief counsel were nefarious now I simply think they are not very competent.
Thirdly I find the whole give us donations to get the bill “scored” to be a bit of a scam. As I understand it the CBO only “costs” legislation introduced by actual members of Congress and upon their request. Whatever type of third party scoring ACA seems to want to pay for is it totally irrelevant to the Congressional budget process.
Homelanders abroad, like regular homelanders, look at everything through the lens of American exceptionalism – a truly distorted perception of what is fair and just, or just plain practical.
Taxing its citizens abroad pays tribute to that myth, just as ACA’s proposal does.
@iota
“Scavenging” is perfect. Sure makes all this concern about double taxation seem rather disingenuous when they’ll gladly take the difference between the two tax systems – as though that itself is somehow more noble.
Furthermore, what the US is entitled to is left to the discretion of the host nation. In other words, whatever the host nation doesn’t want, the US is happy to take even if it means the individual who provides it is left disadvantaged in the country where they live.
Disgusting.
@Bubblebustin – Speaking only of the UK – I don’t think the officials who negotiate the terms of bilateral double taxation treaties, are concerned about what’s fair to individuals.
Not that they’re all necessarily heartless bastards, but that’s not what the treaty’s about, it’s about which country gets taxation rights, particularly over the big items: oil, corporation income, securities, etc. It’s who concedes taxing rights that’s under negotiation. Yes the US is nickel-and-diming round the edges, telling USCs they “must” pay US tax on anything not taxed by the UK, such as gain on sale of property, but the UK retains the right to tax gain on sale of UK situs property and could wipe out that particular bit of American scavenging tomorrow by a change in domestic tax policy.
Took me a long time to get my head around that.
But I’m only referring to the UK. Canada may be different, having more USCs and, of course, the Charter. The UK doesn’t have any legislation similar to the Charter.
Just saw this tweet from ACA: https://twitter.com/ACAVoice/status/854575397186490368 which includes a link to this article about their “RBT” proposal in TaxNotes: https://www.americansabroad.org/media/files/files/a20342d5/Velarde_Andrew_04-03-2017_.pdf
In the article they justify the repeal of FEIE by stating that the exclusion helps corporate exporters because they pay the US tax bill of their expat employees. I find this argument hard to believe. First, I would expect most expats that are on tax equalisation packages would have high enough income FTC would be preferable to FEIE (unless they are in a low tax country). Second, my gut feel is that the proportion of expats on tax equalisation packages would be a very small percentage of the 9M US citizens abroad (though possibly a relatively large percentage of those expats who actually file US returns).
Can anyone point to statistics on the proportion of expats working for US employers?
All,
I don’t believe in making enemies for enemies sake but I also don’t believe that if somehow everyone involved in this issue really understood it they would “see the light.” Again many people who seem hostile to us have deep seated financial interests in the status quo. Thus at some level I want to make friends but I also expect to make some enemies along the way however, unpleasant that might be. So if we are not making at least a few enemies then we probably aren’t fighting hard enough.
This is where I disagree most with ACA(who seems to want to make friends with everyone except people on their own team) but this is just my view and others might have a different perspective.
@Karen
After reading through the ACA documents it seems to me the organization is working against US expats and for some corporation donors. They want to repeal FEIE why ? Just because of US employers based overseas? How many US employers employ US citizens outside US? US employees are expensive to hire than the rest of the markets except in EU, UK maybe. Rest of the world they are more expensive and US employers usually hire Asian employees or Mexicans in case of Mexico. FATCA has made it very difficult if not impossible for even foreign banks or foreign employers or US employers to hire US citizens.
ACA, like the National Taxpayers Advocate and the Tax Compliance industry all want to find a way to make Citizenship Based a Taxation work.
It will never work and Americans will continue renouncing, FATCA or not.
@Bubblestin
100% agreed already. There is too much money involved in it for compliance industry to let it go. As long as laws are there they will design all ways to get money from you so they will never let them repeal it. I know I will never donate to ACA ever as we know they are against us.
One key point of Trump tax reform is simplification. That in itself would be of help, one would hope.
I don’t know how new this is. It is a ACA FAQ on their RBT. They use the word “accidental”.:
What about Accidental Americans and RBT? Won’t they pay a heavier price of entry into RBT?
The ACA prescription for accidentals: Streamlined, which is an ACA original.
https://www.americansabroad.org/rbt-faqs/?mc_cid=f4a2d884d2&mc_eid=b8f7f2647e
Bubblebustin: you have summarized it so perfectly that I feel like writing the same thing. They want to make citizenship-based taxation work. But it doesn’t and it won’t.
I wish people would understand that CBT makes no sense because an ordinary person with normal finances cannot reasonably (be expected to) conform to 2 tax regimes simultaneously. Enforcing CBT it is just creating a lot of harm and ill will and forcing people to renounce. I fail to see how the ACA and Democrats Abroad proposals (other than DA’s lip service to RBT) can really help ordinary middle class people living abroad who just need to be left alone. Speaking of which my personal politics are being completely turned on their head, and I am in danger of turning into a former Democrat even before I turn into a former American. Because even though most of what the Republicans stand for makes me shake my head, the only ones who have caused me harm personally are the Democrats.
FATCA repeal is a double-edge sword because of the danger that FATCA repeal might be viewed by lawmakers as a way of allowing CBT to work better, especially if those who are advocating against it give them that impression by not focussing on CBT as the source of the problem.
They need to know that CBT doesn’t work with or without FATCA, but FATCA could work better without CBT.
“They” being lawmakers.
So nothing changes – “All roads lead to renunciation”
Patricia Moon says: 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.
Your horizon has holes, even within Canada. There were other nonsharks back then.
On another front, it’s hard to forget being assailed for holding Hodgen in high esteem from the outset. And in consequence being taunted for trolling, compliancing, whatnot. Broccultist nastiness.
Yours truly, celebrating year five of nonUSpersonhood.