cross-posted from citizenshipsolutions
Update January 2018: This post has been updated with some new links and discussion.
Part I is here.
We are witnessing what McGill law professor Allison Christians once referred to as the “Story of The Century“. To borrow from Professor Christian’s post:
The US is right now imposing enormous penalties and unleashing general chaos on people living in other countries with US citizenship, both by newly enforcing long-ignored rules and by layering on top of these rules a new and more draconian layer of enforcement. The chaos comes in the form of fear-inducing, devilishly complicated and duplicative paperwork, and penalties, most of all penalties, and it is being piled on to millions of people around the world, many of whom, like Cruz, are very possibly only beginning to understanding that citizenship status is mostly conferred upon rather than chosen by individuals.
Ted Cruz should consider himself very lucky. The Canadian citizenship he claims he didn’t realize he had, doesn’t carry any punishment IN CANADA for his failure to recognize it. Moreover renouncing Canadian citizenship, if he really intends to follow through on that promise, will be relatively simple, cheap, and painless other than any damage (if any) to his US political career. (Interestingly Australian Green Party Senator Larissa Waters was forced to resign because she was born in Canada and still (although she was unaware of it) held Canadian citizenship.
Not so if Mr. Cruz he had lived his life in Canada with his current apparent dual status. US citizens abroad now understand that discovering ties to the US means discovering a world of obligations and consequences flowing from citizenship that one was expected to know and obey. Ignorance of the law being no excuse, the punishments range from the merely ridiculous–many times any tax that would have ever been due–to the infuriating: life savings wiped out and many future tax savings sponsored by your home government, such as in education or health savings plans, treated as offshore trusts and therefore confiscated by the US. Moreover there is no ready escape hatch for the newly discovered and unwanted US citizenship: five years of full tax reporting compliance must be documented, appointments must be made with officials, fees must be remitted, interviews must be conducted, and in some cases exit taxes must be paid. If some in Congress get their way, renunciation could even mean life-time banishment from the US someday soon.
In the grand scheme of things Ted Cruz’s citizenship is a non-story. But for what it illustrates about citizenship-based taxation, it could be the story of the century.
The Debate – Taxation Based On The “immutable Characteristic of Place of Birth”
Toronto – Reinventing Citizenship Conference – May 2014 http://t.co/h1NwmnqD5D pic.twitter.com/vxnXfiqP2f
— John Richardson – U.S. citizenship lawyer (@ExpatriationLaw) November 1, 2014
In May of 2014 I presented a paper at the “Reinventing Citizenship” Conference hosted by Alternative-Academia and run in Toronto, Canada. The Conference was approximately two weeks after the Toronto Conference on Citizenship-based taxation organized by American Citizens abroad.
The paper I presented at the Alternative Academia conference was influenced by the Michael Kirsch Bernard Schneider debate held in Toronto on May 2, 2014. The May 2 conference was a great success. Among other things, it spawned the New York Times op-ed by David Kuenzi discussing the absurdity of the FATCA rules as applied to Americans abroad.
As might be expected my paper focused on Citizenship-based taxation in general and the question of what kind of “connection” (voluntary or otherwise) to the United States must be established to justify the taxation of a U.S. citizen residing outside the United States.
The complete paper may be read here:
Taxation of Americans Abroad in the 21st Century
Toronto – Conference on U.S. Citizenship-based taxation – May 2, 2014
ND Law Prof Michael Kirsch explains rationale 4 US taxation of #Americansabroad Read: http://t.co/fR5q40nwj0 Listen: http://t.co/AiCbR3bK3R
— John Richardson – U.S. citizenship lawyer (@ExpatriationLaw) November 6, 2014
“Citizenship does reflect a voluntary identification with society – Professor Michael Kirsch”
On May 2, 2014, the first ever conference on U.S. citizenship-based taxation took place on the campus of the University of Toronto. The conference – sponsored by ACA Global Foundation – featured a debate between Dr. Bernard Schneider (who opposes citizenship-based taxation) and Professor Michael Kirsch (who supports citizenship-based taxation). Both Dr. Schneider and Professor Kirsch have authored leading papers on this topic. There was general agreement that a discussion of U.S. citizenship-based taxation necessitated a discussion of (at least) the following two issues:
1. Whether it is appropriate to use citizenship as a criterion for the imposition of taxes under any circumstances (can the U.S. levy taxes on its non-resident citizens on income that is not earned in the U.S.?); and
2. If the U.S. can levy taxes on its citizens who do NOT live in the U.S., are there limits to how far this taxing power can extend? At what point does something cease to be a tax and become a form of “life control”? (In addition, at the present time, the U.S. taxation of its citizens abroad amounts to a tax on the country where the U.S. citizen resides. The days of the world accepting that the U.S.has the right to tax its citizens in any way that it chooses are numbered.)
I was the moderator of this fascinating debate. Significantly, both scholars seemed to agree that (with respect to the second question) the practical application of U.S. citizenship-based taxation was excessive and unworkable. In other words, if U.S. citizenship-based taxation can be justified at all, the current U.S. rules of U.S. citizenship-based taxation are too onerous and excessive in their reach. (Those who doubt or don’t understand the practical reality of U.S. citizenship-based taxation are advised to reread the opening paragraphs in the Introduction to this paper.) Commentary on the conference from third parties may be found here and here.
This conclusion is not surprising, given that U.S. citizenship-based taxation in practice results in disadvantages which include:
– U.S. citizens abroad being subjected to significant double taxation (Social Security taxes in some countries and the Obamacare Surtax)
– U.S. citizens abroad being subjected to taxation on things that are exempt from tax in their country of residence (example the principal residence)
– U.S. citizens abroad being disabled from effective retirement planning if they live outside the United States (the prohibition on foreign mutual funds, life insurance policies, etc.)
– U.S. tax rules being used as a mechanism to control the activities of its citizens abroad (for example U.S. citizens who marry non-U.S. citizens are subjected to problematic tax consequences)
– U.S. citizens abroad being subject to “reporting requirements” (including but not limited to the FBAR) that impose limitations on their professional mobility (the requirement to report on non-U.S. business partners)
– U.S. citizens who relinquish their citizenship are potentially subject to “Exit Taxes” on assets acquired with money earned in their country of residence
– The effect of taxing U.S. citizens abroad, is that capital is siphoned from their country of residence to the U.S. To put it another way: to tax the U.S. citizen abroad, is to tax the country in which he lives.
Where the scholars disagreed, was on the first question:
Is it appropriate to use citizenship as a criterion for levying taxes at all?
When considering the appropriateness of using “citizenship” as a criterion for levying taxes one must ask the question:
What is it about citizenship that makes it an appropriate criterion to impose taxes?
“The effect of taxing U.S. citizens abroad, is that capital is siphoned from their country of residence to the U.S. To put it another way: to tax the U.S. citizen abroad, is to tax the country in which he lives.”
Theft, as I call it.
“The days of the world accepting that the U.S. has the right to tax its citizens in any way that it chooses are numbered.”
Possibly, but I’m not sure it will be because governments around the world tell the U.S. to get the hell out of their residents lives, but that U.S. persons themselves will develop defence mechanisms.
Or perhaps I’m wrong. Perhaps one day the world will wake up to what is going on here and will stand up to the U.S. and say NO!
Heck, perhaps the 330 million inmates of the largest open prison on earth might actually notice that they now have an owner that wants them and their money on the tax plantation and that they are actively hunted down and punished for trying to leave?
At what point do they bring out their guns against this government tyranny?
@Mike the world does not care about the plight of the US citizens. The world banks and central banks care only about USD as the reserve currency it needs to pass through the US banks and they are scared of heavy handed US govt of imposing fines on the reserve currency passing through the banks in USA. This is not possible on GBP, EUR or CAD transactions. As long as USD remains the reserve currency they will feel threatened by it.
During this last election The Isaac Brock Society did two things wrong. They didn’t try to get a Supreme Court Ruling that a 19th Century Amendment (14th) was not meant to grant immediate citizenship to children born to non citizens and non Residents, but to grant immediate citizenship to freed slaves. We need to recognize that it didn’t mean everyone born here of foreign parents would get citizenship, but a Court that was in error thought they had the duty to amend the constitution themselves. It was one of a bout 100 bad decisions they have made. Example–Dreed Scott 1858, said he was (property) and not a person.
Secondly, the society should have read Neal Bortz’s book The FairTax, and put all their might behind these two Ideas. Now look what you misdirected efforts have done. It is worse than before. The Congress will only take up tax reform,Which is only the name they gave it and not real reform, every 30 years or so. Congressmen and Senators will not easily give up adding all the things they took out of the law, back in for generous ”Campaign contributions”. The real name of which is Bribes to do something, not in the interest of their people.
In theory, a mischievous foreign government–Dr. Doom’s Latveria, let us say–could bring down the entire government and parliament of Australia by unilaterally awarding all their members citizenship.
I have read the newly enacted Section 965 of the IRS code which “imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of US companies by deeming those earnings to be repatriated.” I am not sure I understand this ruling. It states: “subsidiaries of US companies” If one is a US citizen and a Cad citizen and holds a Canadian company in Canada, how can it be a subsidiary of a US company? I would be interested in anyone who might know the answer to this. I now see US accountants requesting up to $1000 just to do a net calculation of how much one might owe to the US on a canadian company’s retained earnings (either as of Nov. 2, 2017 or the company’s year end). How can the US ask for something to be returned to it when it was never theirs in the first place and when Canadian taxes have been paid.
It’s interesting how jurisdiction outside the US plays a role in exercising a US citizen’s constitutional rights, yet has no effect on our so-called responsibilities, such as taxation.
My US Citizenship doesn’t give me any more right than anyone else to carry a handgun in Canada, yet when it comes to US taxation it’s another story.
BB – isn’t it because carrying a handgun is against Canadian law, while filing US taxes is not?
“How can the US ask for something to be returned to it when it was never theirs in the first place and when Canadian taxes have been paid.”
The answer to that question is easy enough although you won’t like it. They simply enact a new section of the tax code, such as in this case Section 965. The so-called “exit” tax regime for assets which were never in the US in the first place is another prime example. The compliance condors then jump in and offer to calculate (for a hefty fee, of course) how much you “owe” even though they are totally making it up.
The good news is that these US taxes are entirely voluntary. Anyone who actually pays can only blame themselves (and the compliance condor who advised them to do it). None of these US taxes make any sense, aren’t collectable if you live outside the US with no US assets, and should be totally ignored.
Of course, but my perspective is intended as more of a rebuttal to the benefits argument we get from homelanders, which jurisdiction plays a big role in.
Here’s an interesting development re jurisdiction. There are those including the NRA who’d like to impose the most liberal handgun rights of any state on all 50 states. Not that I want to go off on a discussion about handguns, but if this lawsuit is successful will open a big can of worms where it comes to individual’s rights and a state’s rights.
“That a black single mom has become the poster-woman for a national concealed-carry reciprocity bill has put Republicans in an unusual position. The party usually arguing in favor of states’ rights finds itself defending federal supremacy.”
$1000 to do an assessment? I was wondering what step the compliance industry was going to take. Better to assume the tax doesn’t apply to you and save yourself $1000+dollars. Getting that same accountant to sign off on your tax return may be another story though.
@maz57 @plaxy thank you for your info..much appreciated! yes, I am currently looking for a new US accountant. I will not request a net calculation or pay the $1,000 nor will I pay the absurd Transitional tax. I don’t need a big accounting firm to take any more of my hard earned money. I already pay taxes in Canada.
Hear, here, lioness.
RE: DACA and FATCA
According to recent media reporting, there are some 1.3 million young undocumented immigrants who are enrolled or eligible for DACA. If working they do pay taxes. What would be their status re: FATCA if Trump has his way and they end up being deported to their parent’s homelands, mostly in Mexaco and South America?
Spending most of their lives in America would they pass the substantial presence test and therefore have a theoretical FATCA tax liability? I think not but perhaps there is an issue here that has not been looked at yet?
Oh boy, a chance for another thought experiment…. Seems to me that if they were stripped of their right to live and work in the US they would be simultaneously stripped of their US tax and reporting obligations. They would be instantly turned into Non Resident Aliens; NRAs don’t have US tax or reporting obligations. (If they happened to still have some US source income, tax is usually withheld at the source and conceivably they could even file a Form 1040NR to claim a refund for the amount withheld, resulting in still less revenue for the US).
Regardless of what the IRS might have to say on the subject, I imagine the person would be mad as hell and not inclined to cooperate with the US government in any way, shape, or form. Can you imagine anyone paying the US any tax at all after their status has just been terminated by a government decree?
Let’s hope this is all moot and the DACA situation is fixed. The situation has gone beyond insane but it just shows how crazy and dysfunctional the US government has become.
There is no FATCA tax liability. FATCA is a reporting obligation imposed on banks. A non-USC not born in the US and not living in the US is not a problem for a bank.
If a green card holder lived in the US for 8 years or more before being deported, they might become covered expatriates. However, if they lived in the US for 8 years or more without a green card, e.g. a different visa type or illegally without a visa, no problem.
However, for the last year or partial year in the US, if they were in the US too long, plus the calculation of previous years, then they have to do a return for the last year or partial year. I can just imagine the US trying to get them extradited to the US if they don’t comply ^_^
Congress has not scheduled any vote to end the shutdown of common sense or the shutdown of human rights.
“In theory, a mischievous foreign government–Dr. Doom’s Latveria, let us say–could bring down the entire government and parliament of Australia by unilaterally awarding all their members citizenship.”
I’ve seen a discussion along these lines on a another forum and I like the idea. Kenya pissed off with FATCA and having its residents and citizens hassled for taxation by the USA?
Adopt US citizenship laws and taxation policies and hey presto, Obama gets to experience total loss of privacy, family and business partners massively pissed off, huge compliance costs, ruinous penalties and gets to pay taxes to Kenya.
Sounds fair to me.
Interesting article here.
Pauline Manos of Democrats Abroad Belgium complaining about a president Trump abusing his power over the world.
Not like Obama would ever have done that.
One minute registration to comment.
Yup, if you accidentally scrolled past the headline and date you could easily assume it was an old article complaining about Obama. Where was Pauline when the Democrats were running the show? They were the ones who inflicted FATCA on the world in the first place.
In the end, it doesn’t matter who is in the White House or Congress. They are all serial abusers.
first: I believe the U S Supreme court would reverse the decision to grant immediate citizenship just because one was born here of foreign parents, is a case could make its way to those lofty heights….. A resident has no standing unless they are living abroad and are of foreign parents. They are the injured parties.
second:If your parents were citizens and you were born here but want to live abroad, the law will have to be changed. Politicians won’t do it unless they have an incentive.Money–Resort to bribery as most people who want the laws changed do.
Here’s another very recent paper from the US which mentions the ‘benefits’ and ‘social contract’ rationales for US taxation of citizens – but doesn’t raise or acknowledge that citizens and residents aren’t synonymous, and that the US is ‘exceptional’ in its extraterritorial system of deeming citizens to be residents for tax purposes.
Are the majority of US tax academics so cripplingly nearsighted that they never learn about other tax systems? Do they never come to know about the exceptionality of US extraterritorial taxation of those millions around the globe deemed by the US to be citizens – some of whom are every day being born as duals and most of whom are living lives entirely outside the US with no meaningful US connection, much less an economic one? Is it impossible for a US homelander to imagine that in fact there is a rest of the globe – where people are being born, and living ordinary lives – and paying taxes to the non-US country they call home. It appears to be almost entirely outside their capacity to imagine or acknowledge, or question.
Apparently it is almost equivalent to a fish questioning water, or perhaps an adherent questioning a central text of their belief system – either something they never notice – like the air we breathe, or so heretical an act that even the thought is forbidden.
The paper I refer to is here;
Mehrotra, Ajay K., Fiscal Forearms: Taxation as the Lifeblood of the Modern Liberal State (December 21, 2017). The Many Hands of the State: Theorizing the Complexities of Political Authority and Social Control, eds. Kimberly Morgan and Ann Orloff (New York: Cambridge University Press, 2017). Available at SSRN: https://ssrn.com/abstract=3091796
Re; the DACA – a group who pay US taxes despite not having citizenship or regularized US resident status. It is fodder for our argument against those in the US who justify US extraterritorial taxation by saying that citizens should pay based on inherited or birthplace citizenship alone (in the absence of any real US residency or economic relationship) because they say that citizenship = membership in the US community or ‘polity’ (ex. https://scholarship.law.nd.edu/cgi/viewcontent.cgi?referer=https://www.google.ca/&httpsredir=1&article=2318&context=law_faculty_scholarship ). Which I think of as the Club USA membership fee rationale for extraterritorial CBT.
I would argue that the DACA people have a more robust economic and residency and cultural relationship with the US than those born and/or living longterm or permanently (many of whom are dual born or naturalized citizens of a non-US country) ‘abroad’ http://money.cnn.com/2017/04/19/news/economy/undocumented-immigrant-taxes/index.html .
@badger: somewhat related to the Mehrotra paper, I was reading this seminar paper that a University of Montreal philosopher presented to an NYU tax conference last week. He kept talking about how “citizens” should be paying this tax and that tax, which got me more and more annoyed as I read, but then at page 11 he finally made this clarification:
And, in the footnote:
Sounds a lot like someone who read his first draft pointed this out to him and he decided to concede the point and expand his paper in the middle to account for it, without reworking all the language in the rest of it.