What exactly is “citizenship taxation”? How/why does citizenship matter? It’s not what the “treaty partner” countries think!
1. Like all countries the United States imposes worldwide taxation on its residents. Individuals living in the United States will meet the “substantial presence” requirements and are therefore taxable on their worldwide income. Citizenship is irrelevant.
2. Like all countries the United States imposes taxation on income sourced in the United States. Generally the United States will have the first right of taxation and has the ability to withhold tax. Citizenship is irrelevant.
3. Like no other country (OK, sort of Eritrea) the United States imposes taxation on the non-US source income of people who do not live in the United States and do live in other countries. The US usually claims this right because those people were “Born In The USA” (making them US citizens). Therefore, the US imposes worldwide taxation on people who live in other countries. Citizenship is relevant because it is why the US claims the right to tax people who don’t live in the US and are residents of other countries.
4. Therefore, the practical meaning of “citizenship taxation” is the United States imposing taxation on the non-US source income earned by people who live in other countries. To be clear: citizenship taxation means that the United States is claiming the residents of OTHER countries as US residents for tax purposes!
5. This means that: Every country in the world who signs a tax treaty with the United States that includes a “saving clause” is agreeing that the United States has the right to tax income earned in the treaty partner country by residents of the treaty partner country. It is obvious that countries signing these treaties have no idea what they are signing. The problem has been further illuminated by the recent US Croatia tax treaty that allows the United States to imposes taxation on Croation residents who ARE and WERE US citizens.
So, US citizenship taxation means that the US can tax the non-US source income of residents of other countries!
(Posted with permission of John Richardson.)
I agree with John that changing the definition of “Citizenship taxation” would have benefits. Both of these words are emotionally charged. They obscure the more basic reasons that make the scheme objectionable to those affected by it.
Few who reside outside the US but have a former connection that makes them eligible for US income taxation would actually owe taxes if they filed with the US. Those who file go to a lot of work and aggravation getting information and putting it in the form mandated. They often require professional help. The bottom line is then $0 tax owing. The filer likely knew that before they started, and so does the receiver in the US government. A lot of work and expense for 0 return, actually for a cost. The only beneficiaries are those paid to prepare and receive the paperwork: cross-border agents, financial institution employees and US tax clerks. I think this negative cost-benefit should receive more attention. Taxpayers in the US and financial institution customers in other countries pay for it.
Many of those who would be eligible for “Citizenship taxation” are more tenuously connected to the US than if they were citizens. So “citizenship” does not include all.
But discussions of US citizenship and tax tend to divert into “fair share,” “highly valued citizenship,” “once a US citizen always a US citizen,” and the conclusion that this is whining with no valid foundation.
For me, the more basic problems are reporting and control. The US expects people resident in other countries to annually report their personal and business finances to the US government for their lifetimes. The US also expects these people to order their financial affairs in accordance with US-made rules.
This scheme has no teeth for enforcement against individuals, so the US has put the pressure on financial institutions in other countries to report on their customers. Many institutions have complied, after pressuring the governments of the country to agree. The result has complicated the lives of many people resident in countries around the world and has caused denial of service to some.
This is discriminatory treatment. If those the US is targeting were more easily identifiable, an anti-discrimination campaign might help. But we are usually indistinguishable from the people in whose neighbourhood we reside. So it’s hard to be taken seriously when we claim discrimination.
So, for me, it is not primarily about “Citizenship taxation,” nor about citizenship or taxation. It about a foreign country imposing reporting requirements and rules in a discriminatory way on residents of other countries. So maybe we should be talking more about reporting and control by the US of a segment of residents in countries around the world outside the US. I don’t know how to summarize that in a brief, attention-getting catchphrase to replace “Citizenship taxation”. But this is the perspective of someone affected by this, not the perspective of the ones who can change it.
Governments around the world who have agreed with the reporting on their residents to the US seem to be unwilling to listen to arguments that it is wrong. They have vigorously defended their complicity in court challenges brought by people affected by it. So these governments and their judicial systems are not likely to be the change agents.
Lawmakers and voters in the US are in a position to change the situation. Perhaps if they were presented with the results of cost-benefit analyses, they might see how expensive it is for their country.
Just because the US claims you as a citizen, does that make you one? I attended a naturalization ceremony several years ago, where the US official conducting it pointed out that the new Americans didn’t lose their old citizenship, it was just that America wouldn’t recognize it. Perhaps those “Americans” with dual nationality should return the compliment, by denying that they are Americans when accused by their banks of being so.
By law, Immigration and Nationality Act, s. 349(a)(1), if you take a new citizenship with the intention of relinquishing your US citizenship, you have relinquished it.
But the US govt currently (following a series of court decisions culminating in the late ‘80s) goes on the
presumption that a person taking citizenship in another country intends to retain their US citizenship.
So, a bank may (and pretty likely will) be leery of a person telling them that they actually relinquished US citizenship because they had the intention to at time of naturalisation.
One can avoid this by renouncing (INA s. 349(a)(5)) and getting a Certificate of Loss of Nationality as this document removes any doubt that the citizenship no longer exists.
Alternatively, one can get a Certificate of Loss of Nationality based on relinquishing due to naturalising INA, s. 349(a)(1), although renunciation is the less complicated method.
In case of relinquishment, to aid in a smooth procedure in getting your CLN, you can do a written statement shortly before your naturalisation ceremony (eg, “I will be naturalising in Canada on February 10th, 2023, and intend to relinquish my US citizenship by so doing”) and get it notarised and submit it with your DS-4079 (Request for Determination of Possible Loss of US Nationality) shortly after your naturalisation.
Notarisation doesn’t make your intention any more “legal” but it locks in the date you declared your intention.
If you’re applying for a CLN years after the fact – which I did, not having heard of a CLN at the time 40 years earlier — you likely don’t have a written statement, notarised or otherwise, but your behaviour after your naturalisation (no US passport, voting, etc., as described on DS-4079), is used to infer you had the intention at the time of naturalisation.
In sum, a CLN is the most incontrovertible way to indicate you are no longer a US citizen, with renunciation being the simplest and surest method of obtaining one. Either method, renunciation (s. (5)) or relinquishment (which can be based on naturalisation (s.(1)), military service (s.(3)) or government employment (s.(4))), the cost is $450.
This is what millions of people in fact do, by simply not answering in the affirmative when asked by financial institutions whether they are US citizens or US tax residents (depending on how the question is phrased). Sometimes they deliberately conceal this information, more often they are simply unaware. FATCA only becomes problematic when banks demand to see ID showing place of birth, and a US birthplace is taken as incontrovertible proof of US citizenship.
@pacifica I was thinking more of someone who was born as a dual national. Or, someone whom the US deemed to be a citizen (perhaps having a US citizen parent) but who was born in another country. in these cases, there would be nothing to indicate that the person was claimed by the US as a citizen, and so, the point I was raising, does the US have the right to determine who its citizens are, apart from its own laws to purport to do so? You quote US legislation and court decisions, but are these relevant to anyone who denies they are American? (An imperfect analogy – all citizens of the People’s Republic of China are deemed by the Government in Taipei to be citizens of the Republic of China (Taiwan) – but that doesn’t make it so!). I agree that, in practice, if there are indications that you might be considered American (having been born there, being the big one, as most countries allow banks to ask for your place of birth) you’re likely to need some sort of evidence to demonstrate you weren’t; but otherwise, why admit to a bank that the US considers you to be a citizen, if you disagree that you are when you’re outside the territory of the US?
Further, if the US considers you to be a citizen, you could even still get a US passport to use solely for visits to the US – you’d just change your nationality, in effect, when you crossed into the US. Of course, while in the US you’re subject to US law; but when you leave for home (or for another country) you can the change back to your non-US citizenship en route.
@Ron. Precisely! My point is that, in doing so, those failing to admit to being “US citizens” are doing nothing wrong or illegal in the jurisdiction that they’re in when making the declaration.
In theory, willfully concealing US citizenship might be breaking some law or other in one’s country of residence. In practice, it’s undetectable and nobody cares (unless it’s part of some vast criminal swindle).
I think it depends on the situation. If a bank knows that someone is a US citizen or finds some indicia of “US personhood,” as defined in the IGA, on a person’s file, then it is relevant to that person. Otherwise, eg, if a person was born here to a US parent, I’d say it’s pretty irrelevant under the current IGA.
I feel it’s up to the individual and IMO it’s generally wiser not to admit US citizenship. Personally, as I have a CLN, it doesn’t matter that I was born in the US; however, being anti-FATCA, anti-IGA, I keep mum about US POB as a matter of principle.
Back in the day, Soviet defectors were welcomed into the USA, with no thought of making them follow Soviet law anymore. Moscow might have still regarded them as Soviet citizens, but was prevented from imposing the requirements of that citizenship (or even imposing Soviet citizenship itself?) on the defectors.I wonder whether any vestige of this remains in US case law, or conceivably international agreements, that might be deployed on behalf of defectors *from* the USA.
I know that the right to have a citizenship (i.e., not be stateless) has gotten a lot of attention (and case law tends to assume citizenship to be a good thing), but what about the right to decline a citizenship? I suppose this would tend to get conflated with renunciation.
Congress addressed this very issue back in 1868:
That law is still on the books.
The problem is that the US government not only ignores international law, they are happy to ignore their own law if and when its convenient because they believe they are “exceptional”.