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.
“IRS User Fee. Under current law, there is a State Department fee of $2,350 charged for renunciation of US citizenship. Under the RBT approach, there would be a one-time IRS User Fee for issuance of a Departure Certificate equal to the State Department’s then applicable renunciation fee. Americans abroad qualifying for the special 3-year rule, above, would not be subject to this User Fee. [Comments on this subject would be appreciated.]”
A bribe to the IRS to persuade them to take on the extra processing?
Come to think of it, there is a particular group this proposal might help: compliant US citizens who want to renounce but are at risk of “covered” status.
They could opt for RBT for the same price.
Plaxy,
So this proposal helps the rich, but puts RBT beyond the reach of more than half of Americans. http://isaacbrocksociety.ca/2017/09/14/the-majority-of-homelanders-have-no-savings/
I wouldn’t say only the rich. House prices put a lot of not-otherwise-wealthy people at risk of the exit tax. But well-off, yes. People like the typical ACA member, maybe.
From my perspective, one who can afford to buy their freedom, be it called a renunciation fee or whatever, are rich.
Seems to me that there is little difference between what currently exists and what they propose other than the what things are called and perhaps with whom we would have to file tons of paperwork with.
Rich or not, a person opting for RBT under the ACA plan wouldn’t be buying freedom. This plan would charge people for not renouncing.
CBT is not the disease, it is a symptom. If it were the disease, then nonUSC green card holders and non USCs who meet the physical presence threashold would not be affected after leaving the US. They are not citizens and are yet enslaved to feed the paperwork monster. If CBT was the disease then we would not be hearing of bank lock by those who have relinquished.
Renouncing does not necessarily free one from reporting obligations nor protect them from their FIs reporting to the US nor protect from bank lock out.
Personally, I do not seek freedom from the US. I seek freedom from enslavement to the paperwork. If renouncing would do that for me, and I could afford it, I would take that route if nothing better exists, assuming I could gain Japanese citizenship. If the current proposal for an option for RBT allowed this freedom, I would take that route. As both require feeding the paperwork monster and money I do not have, both are equally unworkable and from my perspective open only to the rich (rich enough to spend the required time and money).
In either case, renouncing or opting for RBT, one is attemting to buy freedom from reporting requirements, possibly in addition to other purposes. For those who have never considered renouncing until learning of the reporting requirements, I believe freedom from these requirements to be the prime reason to do so.
The ACA plan doesn’t offer freedom from reporting. FBARs would still be required, and those born in the US would still be classed under FATCA as reportable, though it seems likely that FIs would be allowed (not required) to treat them as non-reportable.
I think that the principal carrot dangled by this plan is escape from the specific trap faced by US expats who don’t want to keep paying US taxes but are worried about getting hit by the exit tax if they renounce. This plan, if enacted, would let them keep the passport and avoid the tax.
All hypothetical though, since there’s no indication it’s likely to be adopted.
“I think that the principal carrot dangled by this plan is escape from the specific trap faced by US expats who don’t want to keep paying US taxes but are worried about getting hit by the exit tax if they renounce.”
It might also help US expats who don’t owe any US taxes and wouldn’t get hit by the expat tax but who can’t afford the renunciation fee and/or can’t get another citizenship.
It might also help US expats who will no longer have to fight for refunds of US withholding that gets embezzled by US government employees.
The US, with its miraculous implementation of equality, arranges so that a victim whose 45 years of work have amassed an appreciable fraction of the amount of savings needed for retirement and does not even own a house or car but tries to get back $10,000 that was stolen by Monica Hernandez and cohorts, and a multinational company that wants to use transfer schemes to reduce its tax bill by $10,000,000, can both pay an equal $1,000,000 to cross-border tax lawyers and pay an equal $6,000 fee just for printing a petition for cert which will almost certainly be denied without explanation (except that the multinational has a better chance of getting cert). Anatole US is Anatole France on steroids.
Ah, equality is here to stay:
http://www.nytimes.com/1988/07/13/opinion/l-how-the-poor-are-made-equal-with-the-rich-095688.html
All roads…
“It might also help US expats who don’t owe any US taxes and wouldn’t get hit by the expat tax but who can’t afford the renunciation fee and/or can’t get another citizenship.”
Yes, maybe.
“It might also help US expats who don’t owe any US taxes and wouldn’t get hit by the expat tax but who can’t afford the renunciation fee and/or can’t get another citizenship.”
How?
“It might also help US expats who don’t owe any US taxes and wouldn’t get hit by the expat tax but who can’t afford the renunciation fee and/or can’t get another citizenship.”
‘How?’
It would become possible for you to survive without needing to renounce.
How? Have to be compliant to get the deal. Can’t be compliant, so how does it help?
Interesting comment and footnote in Allison Christians’ new paper on citizenship by investment (recently noted by badger in the Current Media thread, http://isaacbrocksociety.ca/media-and-blog-articles-open-for-comments-part-4-of-4/comment-page-52/#comment-8012158)
This is the reason it’s not simple for the US to switch to RBT/TBT. CBT is the starting position, and all subsequent deviations from that position are exceptions to the rule, which can only be coped with by deeming all US citizens to be forever and inescapably resident in the US.
Most countries don’t suffer from this wilful! self-inflicted inability to accommodate reality. (Though some have their own denials of reality, manifested in tortuous struggles to define “residence” in a way that increases revenue.)
OAP,
My interpretation of the ACA RBT proposal is that it does impose requirement for “some” IRS tax compliance to obtain either a departure certificate or a departure tax waiver for U.S.-tainted persons who have never had a meaningful relationship with the United States and who do not consent to be U.S. citizens.
I have asked ACA whether it feels that IRS compliance is reasonable/justified for those persons who do not have any meaningful relationship with the United States, but have received no response. The ACA proposal (and ACA) is focused on “real Americans” as I once was — and all “Americans” to ACA are the same.
What would happen if the ACA proposal, forced tax obligations to a foreign state for persons wanting to be free but having no meaningful relationship with that state, became law? I suspect that most non-meaningfuls would continue to just “do nothing”.
Personally, I would like to see the above ACA position, if made law, litigated in U.S. court, but recent history suggests that you need the right plaintiff with the right standing. I assume that no local government would be willing to protect its citizens from the ACA law.
I hoping the ACA proposal goes down in flames. If we get it, that is all we are going to get.
We should be so lucky! We first have to get lawmakers to look at any of the proposals before any of them can go down in flames!
That would be the biggest victory for me at this point.
@Stephen Kish
“My interpretation of the ACA RBT proposal is that it does impose requirement for “some” IRS tax compliance to obtain either a departure certificate or a departure tax waiver for U.S.-tainted persons who have never had a meaningful relationship with the United States and who do not consent to be U.S. citizens.”
I believe we have both come to the same conclusion. Perhaps our method of arriving at that conclusion may be subject to different interpretations, but yes, to obtain a Departure Certificate will require ‘some’ compliance in one form or another, dependent on the individuals circumstances.
@SK – “The ACA proposal (and ACA) is focused on “real Americans” as I once was — and all “Americans” to ACA are the same”
That view of the American abroad has always seemed evident in past ACA comments. Spokespersons for ACA have recognized an accidental problem exists, but ACA appears to have carefully maintained an alignment with the legalities of tax compliance for all ‘Americans’. IMHO, ACA continually attempts a ‘compromise’ solution to the RBT question, hence their definition of the proposal as being a ‘vanilla’ solution and the belief that immediate ‘full flavoured’ RBT would be much less likely to succeed. IMHO, they have always portrayed their approach as the pragmatic approach. They’re in the RBT game, but playing by rules they feel will not contradict the powers that be, and through compromise assuring the powers that be the satisfaction of never being seen as the loser.
@SK – “What would happen if the ACA proposal, forced tax obligations to a foreign state for persons wanting to be free but having no meaningful relationship with that state, became law? I suspect that most non-meaningfuls would continue to just “do nothing”.”
I agree. As has already been discussed in this thread, there appears to be no motivation for those with a non-meaningful relationship to subscribe. Right now the choice is to comply, renounce, or simply keep one’s head down. An ACA vanilla RBT regime would offer no significant difference to their current situation. Comply, renounce, head down, or an ACA version of continuing yearly ‘comply’, albeit reduced.
@SK – “Personally, I would like to see the above ACA position, if made law, litigated in U.S. court, but recent history suggests that you need the right plaintiff with the right standing. I assume that no local government would be willing to protect its citizens from the ACA law.”
Although unquestionably I must bow to your knowledge and experience in the area of litigation, and I do appreciate the sentiment of your comment, this may be the point at which we may view the ACA proposal differently.
ACA may be non-partisan, but the ACA proposal is possibly the most succinct in detail. RO, DA, and both the Democrat and Republican Party do not offer any equivalent depth of details in their proposals (although I believe the RO proposal does offer some detail). But importantly, it is only one untested viewpoint from an outside organization professing no substantial knowledge of tax law (although the author is knowledgeable, it’s still outside opinion). Is ACA more aligned to the message of DA (don’t allow one individual to escape unchallenged, even if 8 million must suffer)? The House Oversight Committee hearing on the Unintended Consequences of FATCA of 26 April showcased the Democratic Party requirement for “compromise” as is evident in the ACA proposal, IMHO, from their comments on FATCA, one might surmise Congresswomen Norton (especially) and Maloney would not be supportive of any ‘full flavoured’ immediate RBT initiative, …or amnesty. IF (and that’s a big IF) there were to be serious debate on RBT, the possibility of the compromises the Republicans in Congress would need to make to placate the Democrats (and the attitude of many Republican voters towards expats paying their fair share) to allow passage of such an initiative would result in a solution we have yet to imagine. Politics rule, and with the added difficulties of TTFI, the real, Congressional massaged, debatable proposals are yet to be placed on the table.
Sadly, and without an Executive Order, it’s hard to imagine Congress consenting to a simple RBT amnesty that doesn’t require some initial level of contact with the US for all ‘Americans’, and country of actual residence be damned. Those who would disagree must continue in all efforts if they wish to be heard.
And, all of the above post may be an isolated individuals misinterpretation of both the ACA proposal (and others) and ACA, as well as the attitude and workings of Congress.
“See IRC § 1 (imposing U.S. federal income taxation on “every individual”); IRC § 61 (defining income for tax purposes as “all income from whatever source derived”). While this construction would purport to include the entire global population, the Internal Revenue Code later limits the federal income taxation of non-citizens who are not resident in the United States … ”
‘This is the reason it’s not simple for the US to switch to RBT/TBT. CBT is the starting position, and all subsequent deviations from that position are exceptions to the rule’
No, CBT is not the starting position. The entire global population (including non-resident aliens who aren’t even accidental Americans, who have absolutely no ties whatsoever) is the starting position. A subsequent deviation is to exclude some non-resident aliens, e.g. those who never had any ties whatsoever. Therefore it WOULD NOT be hard linguistically or legally to extend the deviation to all non-residents; it’s only hard politically.
“IMHO, ACA continually attempts a ‘compromise’ solution to the RBT question, hence their definition of the proposal as being a ‘vanilla’ solution and the belief that immediate ‘full flavoured’ RBT would be much less likely to succeed. IMHO, they have always portrayed their approach as the pragmatic approach. They’re in the RBT game, but playing by rules they feel will not contradict the powers that be, and through compromise assuring the powers that be the satisfaction of never being seen as the loser.”
That being their starting position, what do they give up to show they are willing to compromise?
“I agree. As has already been discussed in this thread, there appears to be no motivation for those with a non-meaningful relationship to subscribe. Right now the choice is to comply, renounce, or simply keep one’s head down. An ACA vanilla RBT regime would offer no significant difference to their current situation. Comply, renounce, head down, or an ACA version of continuing yearly ‘comply’, albeit reduced.”
According to the FATCA letter I recently received from a non national bank in Japan, published by the Japan Bankers’ Association, just being born in the US is enough for Japanese banks to report such persons to the US, regardless of how meaningful a connection they have with the US.
With Japanese citizens born to Japanese citizens while in the US but left at an early age, are now, at this very moment, being reported to the IRS by their banks in Japan, I am left to wonder about those born in Japan to one JN parent and a USC parent. Keeping one’s head down is now impossible here.