cross-posted from citizenshipsolutions by John Richardson
Part 9: Responding to the Sec. 965 “transition tax”: From the “Pax Americana” to the “Tax Americana”
Q. What do #MeghanMarkle and the @USTransitionTax have in common? A. They are two news items of 2018 that will draw attention to U.S. policy of imposing "worldwide taxation" on people who have @taxresidency in other countries and do not live in the USA. https://t.co/G8Q7l3KSdQ pic.twitter.com/Co7OmQiXn7
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) April 16, 2018
This is the ninth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
(Links to the first eight posts in this series can be found at the end of this post)
Introduction – The purpose of this post is …
to demonstrate that the “transition tax” is an example (particularly egregious) of the principle that (1) not only does the United States impose “worldwide taxation” on the “tax residents” of other countries, but (2) it imposes a separate tax regime on certain “tax residents” of other countries that is different and far more punitive than the regime imposed on Homeland Americans. Yes, you read correctly!
It is the “Tax Americana” – a “form” (no pun intended) of an “empire” which is colonizing other countries through taxation.
A recent and most important example of the “Tax Americana” is the “transition tax” : A U.S. resident who has undistributed earnings in a U.S. corporation will NOT be subjected to the “transition tax”. A Canadian resident who has undistributed earnings in a Canadian corporation will be subjected to the “transition tax”!
The United States has a separate and more punitive tax and reporting regime which it imposes on those “non-residents” of the United States which it deems to be U.S. citizens or permanent residents!
How could this have happened? How could the United States have (conclude) concluded that it has the right to impose “worldwide taxation” on “tax residents” of other countries? Why would the United States imagine that it has the right to impose FATCA on a reluctant world while at the same time refusing to join the world in in adopting the “Common Reporting Standard” (CRS)? This combination of arrogance, confidence, disrespect and lack of concern for the rest of the world is possible only in the context of “empire”. The British Empire treated the Colonists with the same disrespect – imposing a “tax Britannica” – in the same way that America now treats other countries. This has been explained in wonderful language by Jackie Bugnion, which includes:
In 1776, the United States declared independence because the mother country on the other side of the ocean was imposing taxes on the colonies for the benefit of England. Resentment started when Britain tried to enforce the Navigation Act after 1763. Resentment increased with the Stamp Act in 1765, a way for Britain to tax the colonies. The British Tea Act of 1773 led to the Tea Party and we all know the outcome – the American Revolution and independence crying out “no taxation without representation”.
Today, the estimated 7 million Americans resident abroad, of whom the majority are long-term overseas residents in high tax OECD countries, face a comparable situation. Their representation in Congress is non-existent in reality. Americans abroad amount to only 1 to 2% of the votes in any particular state; Congressmen and Senators have ignored their tax issues. The unjustified myth that Americans abroad are wealthy and disloyal restricts a rational approach to the problems because of political image issues.
Empire and Taxation –
Part A: From King George of England to King George W of America – How did the empire arise?
Setting the stage for “empire” – Bretton Woods – 1945
Being left to the mercy of an all-powerful United States was intolerable, particularly as the U.S. Government had been determined to show its people that American boys had not been sacrificed to perpetuate the moral abomination of empire. Yet here at Bretton Woods was the American Treasury Secretary tethering the historic event to the mast of his country’s superpower ambitions. The British had been anxious to see themselves as partners with the Americans in creating the ground rules for the postwar order, yet at every step to Bretton Woods, the Americans had reminded them, in as brutal a manner as necessary, that there was no room in the new order for the remnants of British imperial glory.
World War II was NOT prosecuted on North American soil. North America was far less impacted by the War than Europe and Asia. At the end of the War, many countries had to rebuild their infrastructure. North America was left with its infrastructure intact.
Part B: Bretton Woods – The Reserve Currency – Fertile Conditions For Evolution of the Empire
The end of World War II and Bretton Woods led to:
- an international economy, where the U.S. dollar became the dominant world reserve currency
- a “Cold War” where the United States was the leader of a “Free World” which was in opposition to a Soviet led “Communist World” (Think of President Kennedy’s Berlin Wall speech which began with the words: “There are many people in the world, who really don’t understand, or say they don’t, what is the great issue between the free World and the Communist World – Let them come to Berlin!”
- an International Economy that was dominated by the United States and that was favourable to U.S. multi-national corporations
- the beginning (1962) of the U.S. “CFC and Subpart F regime” (of which the “transition tax” is an example) which was designed to keep U.S. corporations from deferring tax on certain kinds of income. (Along with the PFIC regime, the CFC rules are are the “corner stone” of the U.S. anti-deferral regime)
- the exporting of U.S culture (largely through U.S. multi-nationals)
- the exporting of a vast U.S. regulatory regime which was partly the result of the world dependence on the U.S. dollar as the dominant reserve currency
- the exporting of the Internal Revenue Code and the cultural values it enshrines, through the mobility of U.S. citizens, into other countries and into other cultures
The status of the U.S. dollar as the dominant reserve currency made the U.S. imposition of FATCA on the rest of the world (largely) possible.
Part C: Citizenship and The Expansion of The Empire – the United States
As the U.S. Empire Expanded: U.S. citizenship became “easier to get” and “harder to lose”
Since the Civil War the United States has had a policy of “citizenship-based taxation”. At the time of the Civil War “citizenship” and residence were more closely linked. In fact, for the most part, “citizens were residents” and “residents were citizens”.
“Dual citizenship” was almost non-existent. The relevant U.S. nationality statutes made it clear that U.S. citizens who naturalized as citizens of other countries would lose their U.S. citizenship. As a result, “dual citizenship” (to the extent that it existed) was an accident of birth and NOT the result of an affirmative act.
Therefore, for the United States to impose taxation on U.S. citizens living outside the United States was generally NOT to impose taxation on people who were citizens of other countries.
In 1967 the U.S. Supreme Court in Afroyim v. Rusk set the stage for the recognition that U.S. citizens would NOT relinquish their citizenship if they naturalized as citizens of other countries. This decision opened the door to U.S. citizens acquiring dual citizenship.
Over time (1) dual citizenship has become common and (2) it is more common for U.S. citizens to live as dual citizens outside the United States.
Therefore, the U.S. policy of “citizenship-based taxation” has evolved into a system where the United States is imposing “worldwide taxation” on the citizen/residents of other countries (who also hold U.S. citizenship).
The rise of the U.S. Empire has coincided with the expansion of U.S. citizenship.
This post will be continued tomorrow
The first eight posts in my “transition tax” series were: