cross-posted from citizenshipsolutions
Update January 2018: This post has been updated with some new links and discussion
Part I is here.
Part II is here.
Part III is here.
Part IV is here.
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Taxation of #AmericansAbroad in the 21st Century: “Country of birth” Taxation vs. “Country of Residence” Taxation- Part V (Final)
What the U.S. calls citizenship-based taxation is actually a U.S. claim that it has the right to impose “worldwide taxation” on the residents and citizens of other countries.
Specifically the U.S. claims the right to impose taxation on:
1. Who: residents and citizens of other countries; and on
2. What: income earned in other countries or property situated in other countries.
(The U.S. also taxes U.S. corporations on profits earned in other countries when those profits are taxed by those other countries. This has led to “inversions” which are the corporate equivalent to renouncing U.S. citizenship. Note that the 2017 “Tax Cuts and Jobs Act” has resulted in “partial territorial taxation” for certain U.S. corporations.)
Under the guise of what the U.S. calls “citizenship-based taxation, it actually taxes people who are neither U.S. citizens nor people with an actual residential connection to the United States and are “tax residents” of other countries.
The two obvious examples are:
A. Permanent residents of the United States (AKA Green Card holders) who do NOT live in the United States (having either moved away or in some cases having never moved there – see the story of Gerd Topsnik); and
B. Non-citizens who are NOT Green Card holders. The obvious example are people who have lost their U.S. citizenship for immigration purposes but are still treated as taxable U.S. property for tax purposes. The S. 877A Expatriation rules clearly contemplate this reality. Furthermore, there are certain U.S. tax treaties that specifically allow the U.S. to tax people who were but are non longer U.S. citizens. (Furthermore, the “savings clause” found in all U.S. tax treaties “saves” the right of the United States to impose full taxation on its citizens.)
My point is that the U.S. has long since separated the idea of being “taxable U.S. property” from being a U.S. citizen for nationality purposes.
Therefore, although birth in the U.S. makes one a U.S. citizen, a U.S. birth should NOT make one taxable U.S. property for life. Surely citizenship should mean more than taxation.
The U.S. is laying claim to people because they were born in the USA. There is no reason why it has to. They just do it because they think they can. The U.S. is the only developed country in the world that attempts to control the lives of its citizens (under the guise of taxation) when they move from the United States. This is an intolerable and grossly unfair policy.
The discussion and debate at the Toronto Conference on “U.S. Citizenship-based taxation” demonstrated that citizenship should be neither a necessary nor a sufficient condition for taxation. Taxation should be based on some kind of voluntary connection to the United States. It is submitted that those in Categories:
(A) Border babies
(B) Those who move from the U.S. with their parents as children
(C) Those non-U.S. residents who were born outside the U.S. to U.S. citizen parents
(D) People who left the U.S. as young adults, have never returned to the U.S., and have accumulated all of their economic assets outside the U.S.
do NOT have any connection to the U.S. that could possibly justify U.S. taxation. In each of these cases, taxation is NOT based on a connection to the U.S., but only on the circumstance of a U.S. birthplace! Can it really be that the United States of America is the only advanced country in the world where:
“The circumstances of your birth determine the outcome of your life?”
To tax those who are not residents of the United States solely because they were born in the United States:
“Is unjust and is inhumane. People do NOT choose where they were born!“
What about the person in Category (E) above? This is the U.S. citizen and resident who leaves the United States temporarily with the intention of returning. This is the ONLY kind of U.S. citizen that could rationally be subjected to U.S. taxation while living temporarily outside the United States. But, to tax even this person is incompatible with the realities of the modern world.
Citizenship imposed vs. citizenship chosen
The current practice of U.S. “place of birth taxation” is much more analogous to a “property interest” that a country has in it’s citizens than a voluntary commitment to the engagement that should characterize good citizenship. It is respectfully submitted that “citizenship” should imply a voluntary connection to a country and not a form of “ownership” where the citizen exists only to serve the government.
Yes, rights and responsibilities are two sides of he same coin. What rights do we abroad enjoy? If we are denied rights our homelander bretheren enjoy, it is only just that we be relieved of the responsibilities.
When, exactly, did resaon for taxing the US populace depart from providing funds for the services the US Gov. provides?
“(D) People who left the U.S. as young adults, have never returned to the U.S., and have accumulated all of their economic assets outside the U.S.”
This category needs more thought. How young do you have to be to be a “young adult”? And do you really want to exclude all those who have visited the USA at some point, or have/had some sort of assets there?
In other words, this category requires three types of arbitrary boundaries–an age limit (here left vague), the amount of time one can have spent in the USA (here given as zero), and the amount of financial connection one can have (here again set to zero).
If (E) consists of all those who live abroad temporarily, then (D) logically ought to include all those living abroad permanently. Of course, we can’t really know what our future holds–many people leave “temporarily” but end up staying “permanently”–so this forces us to consider intent, which is hardly the most objective standard.
“Of course, we can’t really know what our future holds–many people leave “temporarily” but end up staying “permanently”–so this forces us to consider intent, which is hardly the most objective standard.”
Yep. And intent can change over time. I intended to stay in Japan 3-5 years….that was 20 years ago. Obviously, my intention changed at some point.
I left “my” country for a 12 month stint and ended up staying away nearly two decades. So much for intent.
And now I’m desperately trying to extricate myself from any financial involvement in the countries I left.
The USA is not alone in punishing people for foreign financial lives with reporting requirements and disproportionate fines and penalties.
For example, a UK resident fails to properly report rental income then he gets a slap on the wrist and there’s even a sort of amnesty program running right now.
However, should that rental income be from his Spanish holiday villa, expect to get screwed with penalties three times those of the same offence within the UK.
Countries are all building walls to keep people and money in.
Yep, the dam has broken and the USA was the dam buster.
@JapanT it was OECD and US together as in 2009 OECD wanted Obama to crack all tax havens and they needed the power of US govt to crack it as OECD alone did not have the power. US is a power house and the most powerful country since the Roman Empire. Obama and congress passed FATCA and then OECD took down everything from it and passed GATCA ( CRS). However CRS is RBT based and banks don’t care too much about CRS as FATCA for them is the most scary regulations and they have pointed out to me sorry it’s your govt that is making us deny you as a client. As you Canadians are one lucky nation your banks are not as strict as some of the other countries of the world. I am shocked as they don’t even see the place of birth ( all IDs usually list the country of birth don’t know about Canadian IDs as US ID has place of birth ). This is the first clue that bankers look at.
It is also noted that it was the campaign promise of Obama to break all tax havens. I guess living in HK as a permanent resident of HK also got into a problem as HK is also tax haven. But so is US a tax haven for all foreigners as all big trusts and high net worth folks (foreigners) are moving their stash to US now from EU and South America. Google it up.
@Harrison
While not yet quite as troublesome, Brits in Japan and Japanese in Germany have to give their Japanese My Number to Their banks in GB and Germany respectively. My Japanese friend was allowed to close the account and not provide their My Number, it was not frozen. Do not know what options the Brits have.
I knew OECD did not have the clout to get this started and was certain that they had long wanted to impose such a monstrosity on the planetand were eager the start their own once the US got the ball rolling. Did not know but would not be surprised if what who say about them asking the US to get it started is true. Not that I doubt you, just waiting for more on their unholy alliance to surface.
Not that it matters too much. The US got the ball rolling and it did not take them long to get their system up and running, perhaps even quicker than FATCA.
@JapanT I was quoting it directly from news that it was OECD which asked Obama to bring the power of US behind them as they did not have the clout and Obama had made this his campaign promise in 2008 election time as I was watching his speeches. OECD then copied FATCA later to have it signed by all world govts except US refused as you know it is a hypocrite as always. It is providing bank data to some countries only on need basis.
@JapanT all this info I am qouting is from web archive since they have taken a lot of those websites down now. I watched people in HK lining up in huge numbers to US embassy to give up their US passports. I had no idea one day I would join them too as I certainly did not have a clue as to this would lead one day to bank denials since I was always in compliance.
I’m not so sure that the US is not complying with FATCA or will long be not complying. While everyone keeps saying that legislation is required, there has been a court case over regulations requiring US banks to comply. The banks lost in the “standing” part of the trial and I think still trying to appeal the ruling.
@Harrison – US passports do have place of birth, but driver’s licenses/state IDs generally don’t.
@Kelly. You are correct. It’s been a very long time since I have carried a US driver license or state ID in my wallet since I have been out of US for almost 9 years now. What I carry now in my wallet is multiple countries IDs which all have country of citizenship noted!!. Even one has country of birth noted and country of citizenship noted too.
@JapanT I believe it is from 2015 that Mexico is getting data from IRS about its citizens having accounts in US. It is country by country specifically . I believe some of EU countries too are getting data of their citizens from IRS. Yes I know US banks lost their case and IRS is already giving info to some EU countries only. I don’t have specifics but I read news from different websites noted on this blog too.
Old paper from June 1943:
The Importance of Citizenship, Residence and Domicile in Federal Income Taxation
Frank M. Keesling
According to Mr Keesling, the purpose of the FEIE is to “increase foreign trade by exempting incomes of citizen while employed abroad selling our merchandise”.
If you don’t want to read it in it’s entirety, please read the conclusion.
https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?referer=https://www.google.ca/&httpsredir=1&article=3637&context=californialawreview
The conclusion is the one I would expect any logical analysis to come to – Citizenship is not a good reason to tax people. Don’t we know it!
Just read the conclusion.
Boy, that sure ain’t what has happened, is it.
Nor is supposed intent or loyalties.
@Harrison
I believe the US only reports interest earning accounts of foreign persons to other countries and only the interest on 1042s, not the account balance, so if you have a non interest account, it won’t be reported.
FATCA reports account balances of US persons, to the US regardless.
I am not aware that this has changed?
@Harrison and Heidi,
Interesting.
My FATCA letter says everything they have on me is being reported to the IRS, transactions and home address included.
Was not aware that the US was sharing any info with anyone, nor was I aware that if is was, that it was sending less than it demanded to receive.
@japanT
Yes, it says it has started reporting. It consists of a little slip of paper a 1042s which is only generated if over $10,00 of interest is earned. I received one from a credit union I had had an old bond invested that I had forgotten about, (grand sum of $15 interest), a copy is then sent to the IRS who are then meant to forward it on to my tax authority. I very much doubt the IRS even has the address of my tax authority, the last letter I received from the IRS had SZ postcode for Switzerland rather than CH!
@Heidi. I don’t know the specifics of what is being shared with other countries I read this article from 2015 that bank account info from US is being shared with Mexico and some EU countries. It did not say interest or anything but it only stated bank account information. I do know as per CRS all bank account info is required not just interest alone. As JapanT stated all his transactions including his home address is being shared to IRS just like my FATCA letter (I did not care as I reported everything to them anyways). There are pitfalls to even reporting anything that I found out later.
If they report me to HK, they don’t care as HK does not tax offshore income or requires reporting from offshore banks. Living in HK has a lot of benefits and I now wish I was one of the people queuing up in 2010 to give this toxic passport away. Renounce and rejoice is the best way. It is better to throw away this yoke of slavery before it chokes you permanently. Unfortunately I was not on this blog in 2010 or I would have renounce too. Thank again Patricia Moon for having this informative blog. I welcome you all who are contributing to this forum.
@Heidi I guess you got the letter from your CU so you know better what is being reported to other countries. The article never stated only interest it stated bank account information. But since you received a 1042 I guess that is what is being reported. Most of the foreigners only keep in current accounts not paying interest so I guess they are okay with that and I still see an influx of high net worth people investing in USA and putting in US banks now instead of Switzerland earlier. US real estate is prized as ultimate possession to have among locals here who only visit US once in a decade. However locals in HK do not wish to deposit in US bank accounts only HK accounts as they consider HK safer than US for banking needs.
@Harrison,
If back in 2010 I had any idea this was coming, I would have renounced then too. Now trapped.
I do care if my transactions are being reported to the IRS. As transactions are not taxed, they have absolutely no justification knowing about them.
As they can not bother themselves to keep taxpayer data secure, I do not want my employers’ known nor to whom I make payments to. Again, they have business knowing this anyway.
@ Harrison
There has been a lot of discussion here and in the press about the lack of full reciprocity of the agreement.
FATCA does report full information of US citizen/person ‘foreign’ (outside the US) accounts. Required is address, SSN, full balance, interest earned.
US accounts held by foreign persons in the US are at present just starting to report interest only (not account balances) to their home tax authorities.