John Richardson previously wrote of how some of the tax changes proposed in the 2023 Biden Green book would impact US citizens who live outside the United States, pointing out examples of how, as long as the US continues to employ citizenship taxation, any changes in US tax law will continue to have unintended consequences on Americans abroad.” In this article, he examines the reverse situation, how changes in the laws of one’s home country impacts their “tax relationship” with the United States and drains money from their home country’s economy. Examples include Extradition, FATCA IGAs, Capital Gains on Sale of Principal Residence, Reduction in Corporate Tax Rate, and Reducing the Tax Rate in the Home Country Increasing the Tax Due to the US. (Posted with permission.)
The purpose of this post is provide five simple examples. Some of the examples are based on Canada’s tax laws and others are of a more general nature.
1. Enhancing US Criminal Enforcement – Extradition
An article that appeared on the Reuters site on October 6, 2022 by David Lawder began with:
WASHINGTON, Oct 6 (Reuters) – The Internal Revenue Service’s Criminal Investigation unit said on Thursday it has located 79 tax evasion fugitives in Mexico, Belize, El Salvador, Guatemala and Honduras in the first year of a new extradition initiative.
The effort was made possible by a change in Mexico’s tax laws in 2020 that made tax evasion a felony offense as part of a crackdown to improve weak tax collection. The reclassification paved the way for tax fugitives to be extradited to the United States.
(See the Appendix for my interpretation of how this happened.)
It is likely that the number of extraditions for tax and other financial crimes will increase.
The use of extradition treaties demonstrates why the value of citizenship by investment programs is inversely correlated with the treaties (tax or other) the country has with the United States.
2. Legislating US Tax Law As Domestic Law – The FATCA IGAs
In 2014 Canada and many other countries entered into FATCA Intergovernmental Agreements with the United States. The purpose of the FATCA IGAs was for countries to legislate the US FATCA law (Internal Revenue Code 1471 – 1474) as the domestic law of those countries. Canada made specific amendments to the Income Tax Act of Canada to enact the US FATCA law on Canadian soil. A general description of the Canada US FATCA IGA and the constitutional challenge against it is here. FATCA has had the effect of expanding the US tax base into Canada and other countries.
3. Revealing US taxation – Enhancing The Payment of US Capital Gains Tax On The Sale Of A Principal Residence in Canada
In Canada (and many other countries) the tax free gain on the sale of a principal residence plays a significant role in retirement planning. In 2016 the Government of Canada amended its tax laws to require the reporting of the sale of a principal residence. Many US citizens living in Canada have their US tax returns prepared from their Canadian
Please no comments that simply say one can avoid these situations by not filing US tax returns. That can relate to pretty much any aspect of US tax policy, so it can get repetitious and does not foster discussion of issues featured in the article.