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.
@FredB
“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.”
This is also the road I have travelled, from a liberal minded, east coast, physician to a renounced EX American who would rather see anyone in the White house rather than the likes of the Clinton democratic mindset.
But honestly , does it matter what the social policies of the US are anymore? We don’t live there, our concerns should be just about their fiscal policies and the effects on US citizens abroad.
I am no longer an American . My concerns now are for my own country and their policies. If you are settled abroad in your other citizenship, then does it matter if you have second thoughts about being ‘their form” of an American Democrat? You can still be a Democratic socialist or whatever in your resident country. Let America go, it is an abusive partner in your life. Hoping for it to change doesn’t work.
Absolutely right to the above statement.
TBT or any other gimmicks do not address the issue of bondage to US citzenship.How do you rid yourself of an unwanted citzenship ,w/o extortion. Does TBT free from ever having to deal with the IRS ?
The issue of RBT seems more of an ethical and logical issue (right and wrong) and one wonders how it landed in the financial scoring arena.
I believe if slavery was considered with scoring,we would still have it today.
AMERICANS abroad represents just that and not accidentals and those who have turned that page a long time ago.
ACA do not represent me and I am not an accidental nor one who turned the page long ago. They do not represent anyone other than those who are wealthy enough to afford this extortion and suffer little more than a (financial) scratch.
@Japan T
You are quite right.A lot of folks here are being or have been extorted plain and simple.And to bring ethical issues into a den of thieves and hope that they toss you some crumbs is senseless,to put it kindly.
The idea should be kill the beast(CBT) and not to turn it into a wolf-in-sheeps-clothing.
“The issue of RBT seems more of an ethical and logical issue (right and wrong) and one wonders how it landed in the financial scoring arena.”
From what feedback I get from most of the homelanders I talk to, right and wrong is determined solely by who benefits from a policy. If they benefit, then it is right.
They always cite their financial needs (rebuild schools, roads and bridges, for examples) as justification.
Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.”
An old cliche from Mark Twain proving that not all HLs are/were alike.
” They always cite their financial needs (rebuild schools, roads and bridges, for examples) as justification. “. It’s more convoluted then that ,if you factor in the CONDORS and other deep pocket lobbyists, the result will be so watered down as to not please anyone here. I only wish to be wrong and this coming from someone who wagered a Trump win without being a Trumpist.
True, but if the ordinary citizen supports it in addition to the condors, the fight is even bigger.
I’ve heard homelanders say that our taxation pays to keep the lights on while we’re away.
I had not heard those exact words but the same general, basic idea. If I had heard those exact same words I woukd have responded with, “I turn my lights and gas off when I leave.”
Boneheads.
They, homelanders, not you are the boneheads.
I have also been told that itizenship is like a club membership and that it is foolish to think we can get out of paying our dues just because we haven’t been to the clubhouse in a while.
The excuses they come up with are amazing.
When I hear that “REbuild schools, roads, and bridges”, all I can think is: if you’d have taken care of them, instead of wasting all that money and manpower destroying other country’s schools, roads, bridges, hospitals, mosques, etc., you wouldn’t need to REbuild them.
Oh, here we go again. If you look at the US budget, you’ll see that only 16% of it spent on the military. FAR FAR FAR more is spent on social programs.
I’m not going anywhere on the US budget for military. Don’t know how much it is and could care less; hope it bankrupts them.
You wrote “They (Homelanders) always cite their financial needs (rebuild schools, roads and bridges, for examples) as justification.”
My rebuke to them (not you) and the stupid argument they (not you) bring: if you take care of it then you don’t have to RE-build it. You rebuild what has run-down from neglect or has been destroyed. I don’t see any drones from country X flying over the US bombing civilian targets indiscriminately to kill may one or two people that may or may not be in that building, so these thing must have been neglected all these years.
Further, the US has no scruples about bombing other countries, destroying their infrastructure, which those countries will have to RE-build on their own dime.
Whether the budget is 2%, 16%, or 99.7%, money is being spent destroying others infrastructure, while complaining they need our money to fix their own.
Not my argument (or yours, I assume), but theirs, and a stupid one, as I was trying to communicate.
@Unforgiven
Very well said. This is what bothers me so much about those who defend FATCA. I looked up which/how many countries have signed IGAs and could not believe Haiti–HAITI, the poorest country on earth has agreed to fund the US’s relentless demand that others pay for THEIR tax cheats. How on earth can anyone justify that?
What you mention is even more shocking. Americans simply DO NOT care about any other nationalities getting killed, especially not from American actions. It is repugnant that these “moral high-grounders” always turn it on someone else.
Vehemence coming from reading “People’s History of the U.S.: *Zinn; the chapter on Vietnam. I once asked the lady in the salon who used to do my nails, whether or not the people in Vietnam hated us. She was adamant that they did not. I cannot understand this. Re-living the turbulence of those times but the horror seems even WORSE than I remember. GRRRRRRRRRR
This more than anything else completely disgusts me and I await the day they pay for their abuse of power.
@ JT
Let’s put that 16 % in perspective. All countries have mandatory and discretionary spending but no developed country spends 16% of their budget on military spending. Bear in mind that 16 % of of world’s largest budget adds up to a fair amount of cash. 1.5 trillion dollars (2015) US military spending is more than the world’s combined and then some.
I prefer apple pie to pie graphs anytime. Where is federal debt servicing and where does the homeland security industry fit in with the the military spending in the budget breakdown. Far to nebulous.
Not to go into US military spending, the US recently complained that MY country, Germany, was not spending an entire 2% for their military. However, thankfully, at least part of the government here knows that spending more on military will NOT increase our security, and would rather spend the remaining amount on humanitarian aid.
When one considers that all that money the US is spending on military, however much it may be, is making Germany, the rest of Europe, as well as the entire world, LESS secure and raising the need for this aid, I think this is the right way to go. And makes all the arguments the Homelanders bring about the US spending so much to defend us moot.
I specifically did not mention all the killing: it is just plain despicable and is nothing other than state-sponsored terrorism (the true meaning of the word).
@Patricia Moon
It’s ironic that everyone loves and praises the American as protectors til they step on their toes.
All big powers do the same in one way or another but you don’ t notice it until it happens to you. I have always looked at our southern neighbor with caution and the subtle and sometimes -not way that they deal with us economically and politically.I think it is difficult for a dual to see it cleary since they are of a dual heart,especially those with close ties to our neighbor.
@Unforgiven Too
Yes,the American is one big bad wolf here. What about all the strategic military exercises in the Baltic.
On the other hand, I think the Europeans want the American there in spite of the arm twisting.
The Americans on the left and the old nemesis,the Russians,on the right. Two devils.Which way do you like it.
Yes, well you will find in every government politicians who think they absolutely must have the Americans involved (JT) and will bend over backwards to their every wish. That’s democracy for you: an idiot in every government.
In the long run, I think the EU would hold its own against Russia, should it go rogue, however in my personal opinion, the world would be a safer place if the US just stopped “protecting” it.
This whole military thing, however, is off-topic here, so: over-and-out.
@RobertRoss
I was a dual and have no difficulty seeing how evil the U.S. can be.I saw it before I renounced as well. What kicked me over the edge, was not future tax or FATCA or any of that. It was looking at the assassinations, holding so-called “terrorists” without charge for years in Guantanamo, treatment of prisoners Abu Gharib…IOW, no problem imagining them screwing all of us over, would be nothing in comparison with all those things………..
Unforgiven, couldn’t agree with you more.
@ Unforgiven too
Just to finish , I agree with you entirely,even regarding our pot hero,JT.
You see , Canada alway managed to avoid major military involvement by request by deliberately keeping its military ill equipped and of course supportive talk is cheaper,which is really a smart way out of a confrontation,
Ciao
@ Patricia Moon
Sorry, I didn’t mean it personally.However, I do believe that many contributors here who had or have a deep attachment to the US for one reason or another and looked to the US as only just and fair felt betrayed by FATCA . In this case it is a sad but enlightening experience to realize where they fit in the American world as well as how other countries view them.
‘What kicked me over the edge, was not future tax or FATCA or any of that. It was looking at the assassinations, holding so-called “terrorists” without charge for years in Guantanamo, treatment of prisoners Abu Gharib…’
Hey, that’s not fair. 1% of them really were terrorists.
But yes that’s what kicked me over the edge too, just not fast enough. I was planning to wait until retirement (i.e. was planning to continue filing honest US tax returns when I thought it was legal to do so) and then renounce unless the Supreme Court upheld the constitution again, as they did when upholding the right to counsel. But when the IRS told me that honest declarations were the reason they were penalizing me, I couldn’t wait as planned.
@UnforgivenToo
You are right to attack the US gov’s spending habit, for until it is curbed they will always have the ‘need’ to find ever creative ways to fund their habit. However, focusing on a part of the budget that is too small to affect the need for funding, you are in effect just shooting into the dark.
The 2% of GDP to be spent on defense is the amount agreed to be all members of NATO. The fact is, Germany and many other NATO member states have not been living up to their agreed to NATO obligations.
“In the long run, I think the EU would hold its own against Russia, should it go rogue, however in my personal opinion, the world would be a safer place if the US just stopped “protecting” it.”
Sadly, history does not support this, nor does the current military rediness of most EU states.
“in my personal opinion, the world would be a safer place if the US just stopped “protecting” it.”
One should not forget that the US had very little to do with Europe militarily until compelled twice in half a century to intervene and help sort out huge messes over there.
@ Robert Ross.
Yes, the amount the US spends on its military is greater than what anyone else spends, but that has nothing to do with the US’s need for money. FBAR has been with us since 1970 or so. Why was it only untill 2009 (or there abouts) that penalties were first implemented for failure to file? Why is FATCA only recently come to be? I belive there are too reasons, need and ability. The technology to implement FATCA and enforce FBAR simply did not exist until recently. But, still why in the first place? Need. The US national debt is close to 20 trillion dollars and unfunded mandates was around 50 trillion dollars last I checked. The comparisons of the amount of US military spending to that of other nations has no place in this equation. Remove all US military spending and these debts remain. The need for money to pay for the programs that are contributing to this huge debt is the motive force behind their money grubbing and thus should be our target, if we are to discuss spending.
“This whole military thing, however, is off-topic here, so: over-and-out.”
Actually, no, it IS THE topic, rather an important facet of THE topic. Please do not take this personally, it is not meant to be, but the attitude your remarks convey is exactly that which we encounter with homelanders defending CBT. For most people, their political beliefs are like a religion to them.
This little discussion is the perfect microcosm, if you will, for our whole problem. People’s political beliefs are like religion. They believe and no amount of facts will dampen their passionate defence of those beliefs. Indeed, they do not even want to hear anything that will challenge their belief. We have several examples with in these past few comments.
“It was….. holding so-called “terrorists” without charge for years in Guantanamo, treatment of prisoners Abu Gharib…”
As I have pointed out previously, were German, Japanese, American, Canadian, British orany other POWs of WWII released before hostilities ended? Were they held on charges? No, of course not. So why would anything different be expected with those at Gitmo?
What about Abu Gharib? Long before the photos were published, those involved had been arrested, trial for a few where already underway and, if memory serves, one conviction had already been passed down, BEFORE the photos were published. Some sick individuals abused their positions, were caught by the US Army’s IG and were bring punished as reported in the press BEFORE the photos were published
Yet, these arguments continue to surface.
The facts I present fall on deaf hears, as do ours in regards to our unifying issue when talking to homelanders.
In another post, I argued against Obamacare. Persons here discounted the figures I gave saying that they looked like those found on right winger websites. While the figures may match, I got my figures from actual “Obamacare” websites, Covered California and which one serves the Boston Mass. area. But these figures, taken from official websites are automatically discounted because they differ from the news outlets trusted by the believers and match those given by the sources distrusted by those who believe in it. And all it would take, is for people to go check for themselves and learn the truth. But very, very few seem willing to do so.
How can we expect anyone to listen to our arguments when we refuse to listen to arguments on other issues?