Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part Two
Ask your questions about Renunciation and Relinquishment of United States Citizenship and Certificates of Loss of Nationality.
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NB: This discussion is a continuation of an older discussion that became too large for our software to handle well. See Renunciation and Relinquishment of United States Citizenship: Discussion thread (Ask your questions) Part One
Heidi:
“The Swiss also wanted to tax the whole of my SS even though there was a 15% withhold in the US. Thankfully Watcher was able to find me the Swiss/US treaty on the treatment of SS benefits and confront them and now I get a tax credit for the 15% paid. ”
In other words, it turned out that you were entitled to a treaty benefit, which you’re receiving. What is the oroblem?
@Heidi
Right. Unfortunately, you and I are very much the outliers here. Most Brock denizens probably retain no effective financial connections with the US, and so are free to completely ignore every IRS compliance requirement.
Those of us with sizeable sums of money trapped in the US must tread much more carefully. The IRS has no power over non-residents, but it certainly does over their US based account providers. So non-compliance is perilous, with double-tax or worse a constant and lifelong threat. Sadly, this nuance is often lost in the wider discussion.
@Plaxy: “By filing Form 8854 you accept that the US has the right to treat you like shit (i.e. label you a leper “covered expatriate” not entitled to human status).”
Not exactly. The primary reason for filing an 8854 would be to avoid being labelled a ‘covered expatriate’. Clean for five years and under $2MM? Then file it and you are not ‘covered’, meaning that the US will treat you a little less like something found on the bottom of their shoe than if you do not file it.
Watcher:
“The IRS has no power over non-residents, but it certainly does over their US based account providers. So non-compliance is perilous, with double-tax or worse a constant and lifelong threat.”
Where US-source income is received by a non-US citizen of Xland who lives in Xland, any double-taxing that happens can only be done by Xland, not the US. The US has the taxing rights on US income, when not modified by treaty.
The Xland resident needs to sort the problem out with Xland, as per Heidi’s social security problem described above.
The problem is that you have to prove you can claim the Tax treaty benefit.
By not filing 8854, I would be deemed covered in the US and would not have qualified for the treaty benefit on my 401K, currently the treaty states it is 0% in the US and can be taxed entirely in CH at my current swiss tax rate. With covered status, it would be taxed in the US with a 30% withhold and then taxed again in CH as income as it would not qualify for the US/CH tax treaty status on pensions.
Watcher:
“Not exactly. The primary reason for filing an 8854 would be to avoid being labelled a ‘covered expatriate’.”
Indeed, but the US only has the power to label you if you hand them that power by filing the form.
By all means file the form to certify past compliance and avoid any risk of exit tax assessment, if you feel that’s safer; but don’t get confused into thinking the US can force you to surrender your rights as a punishment for not agreeing to surrender your rights.
@Plaxy “The US has the taxing rights on US income, when not modified by treaty.”
It is not as simple as you suggest. The US simply overrides or unilaterally reneges on treaty clauses it finds inconvenient. Have you looked at form W-8CE, a required ‘waiver’ of treaty rights for US pensions if a ‘covered expat’? Or even the purpose and function of form 8854, which you currently assume is only filed to trigger ‘covered expat’ status rather than (as noted above) also to avoid ‘covered expat’ status?
Now, of course you can (and doubtless will) argue that a ‘covered expat’ should not file a W-8CE and surrender treaty benefits. If they don’t, maybe nothing will happen. Or maybe the IRS will assess an ‘exit tax’ against the 401k, which would likely be worse than the double-tax that comes from W-8CE.
As for sorting this out with Xland …. here we have the US refusing to provide a treaty benefit it previously agreed to. Xland is not going to simply surrender up their taxing rights because of that, to avoid a double-tax outcome. One could appeal to the ‘competent authorities’ for relief, but that could take years or decades and with no guarantee of success. When a treaty partner reneges on a treaty clause, in reality the individual has no effective recourse to remedy.
Heidi:
“The problem is that you have to prove you can claim the Tax treaty benefit.”
You claim the treaty benefit by showing the residence country that the income has already been taxed by the source country. The residence country can’t tax income which has already been taxed by the source country, unless the source country concedes the taxing rights under the treaty.
@Plaxy “Indeed, but the US only has the power to label you if you hand them that power by filing the form.”
Nope. They will do so unless you file it.
At this point, I give up. Plaxy, I am a covered expat and have filed more than ten 8854 forms in my life, to your zero, so I think that qualifies me to comment on this topic with more authority than you. Nevertheless, you are free to stick to your beliefs. I would just ask that you stop pushing them as if fact rather than merely musings not backed up by any practical experience.
Watcher:
“It is not as simple as you suggest. The US simply overrides or unilaterally reneges on treaty clauses it finds inconvenient. ”
Of course it does. That’s a hazard of having US income.
“Now, of course you can (and doubtless will) argue that a ‘covered expat’ should not file a W-8CE and surrender treaty benefits. If they don’t, maybe nothing will happen. ”
Exactly. If the NRA receiving US income doesn’t sign a form surrendering treaty benefits, the US can tax them on the US income but the residence country cannot unless the treaty says it can.
Where US income is concerned, the treaty benefit is that you get taxed only by the US. The residence country is in the wrong if they try to make you pay tax on US income that’s already been taxed by the US, because they don’t have the taxing rights on that income.
@Plaxy
The residence country can’t tax income which has already been taxed by the source country,
Of course they can, the resident country have a treaty that stipulates the US withhold should be 0%, and they have complete taxing rights to the income. The resident country have not reneged on the treaty the US has.
I too give up, you will argue black is white.
Watcher:
“I am a covered expat and have filed more than ten 8854 forms in my life, to your zero, so I think that qualifies me to comment on this topic with more authority than you.”
You comment from your experience, I comment from mine. Independent of both of us, there is the actual fact that
a) the US can tax US-source income as it pleases, regardless of whether treaty rights have been surrendered; and
b) the residence country cannot tax US-source income, unless the US agrees to forego its own right to tax.
There is an obvious reason for this: the US has the power to tax US-source income, by simply requiring the US payer to deduct the tax before it’s paid.
Any double-taxing of US income is a problem to sort out with the residence country, same as with Heidi’s SS problem.
“Covered expatriate” is a meaningless label. What matters is what a tax agency can actually do, and what they can’t do. If citizens and former citizens just do what the IRS tells them they “must” do, they’ll get screwed.
Heidi:
“the resident country have a treaty that stipulates the US withhold should be 0%, and they have complete taxing rights to the income.”
The residence country has signed a US treaty agreeing with the US as to which country will tax, and which country will concede the right to tax, in cases where their tax laws conflict. If the taxpayer believes s/he is entitled to claim a treaty benefit (such as not being taxed by the residence country on US income that the US has already taxed), it’s down to them to claim the benefit by asking the residence country to allow credit for the tax that’s already been paid.
If the residence country refuses to allow credit, the taxpayer can use the Mutual Greement Procedures to argue that the failure to allow credit for tax already paid is resulting in double taxation. The Competent Authorities of the two countries then consider the problem and reach agreement as to whether double taxation is happening, and if so, how it should be resolved.
The resident country have not reneged on the treaty the US has.”
Mutual Agreement Procedures, that should be.
“The resident country have not reneged on the treaty the US has.”
Neither country has reneged, in a case where the residence country is refusing to allow credit for US tax withheld from US-source income. ; it’s simply a question of whether the residence country should be granting the credit which the taxpayer has requested.
I said:
“Where US income is concerned, the treaty benefit is that you get taxed only by the US. The residence country is in the wrong if they try to make you pay tax on US income that’s already been taxed by the US, because they don’t have the taxing rights on that income.”
Should have said:
“Where US income is concerned, the treaty benefit is that by default you get taxed only by the US. The residence country is in the wrong if they try to make you pay tax on US income that’s already been taxed by the US, because they don’t have the taxing rights on that income unless the treaty provides for the source country to concede taxing rights to the residence country for that particular category of income.”
OK plaxy
I will leave it for you to fight it out with the relevant ‘incompetent’ authorities, for non covered expats the 8854 is the easier and safest route to take .
Amen
Heidi – As I said before – I agree that it may be advisable for a renunciant with US income to file Form 8854 to certify past compliance with US tax law and safeguard against any possible attempt by the IRS to assess an exit tax liability.
But it’s not advisable, IMO, for a renunciant to file Form 8854 because they wrongly believe that if they don’t they’ll lose treaty benefits.
Heidi – “I will leave it for you to fight it out with the relevant ‘incompetent’ authorities”
You didn’t have to use the Mutual Agreement Procedures, did you? Didn’t it just turn out that there was a treaty benefit which you could claim?
@plaxy
The resident country with treaty rights to tax your US pension would refer you right back to the US and tell you to take it up with them. You would get little joy from US courts.
But then it is not your decision, you do not have a 401k and those here that do can chose their own paths.
Its a beautiful day here in Switzerland and I am off to enjoy it.
Heidi –
“The resident country with treaty rights to tax your US pension would refer you right back to the US and tell you to take it up with them. You would get little joy from US courts.”
But that’s not what happened with your SS pension, if I understand correctly?
You claimed the relevant benefit, and received it.
And it’s not what happened with your 401(k), if I understand correctly?
You didn’t have to claim the benefit because the US payer correctly set the withholding rate to zero, in accordance with the treaty.
“…those here … can chose their own paths.”
Indeed. Hopefully, with a clear understanding of the consequences. Unlike the OVD* victims, who got hit by FATCA before information on self-protection was available, and were deliberately confused by tax advisers into joining an IRS programme for tax evaders even though they were not tax evaders.
@Plaxy
Just reread your post
“You didn’t have to use the Mutual Agreement Procedures, did you? Didn’t it just turn out that there was a treaty benefit which you could claim?”
Yes, but I am not talking about SS. They have different treaties for the treatment of SS and private pensions. SS is 15% US withhold. Private pension is 0% US withhold.
There is NO threat to SS covered or not. I just gave that as an example to show the onus is often on the receiver to claim treaties
The Swiss treaty with the US 401K’s etc gives the treaty right to the Swiss to tax (with a 0% US withhold.)If the US break that treaty by claiming the right to tax covered 401’s at 30%, the Swiss will not concede their right to also tax NRA’s 401K pension. They will refer me back to take up the fight with the US.
Heidi – the same thing happened with both pensions. You claimed and received a treaty benefit. Different benefits, but in both cases, you claimed and received a treaty benefit.
“The Swiss treaty with the US 401K’s etc gives the treaty right to the Swiss to tax (with a 0% US withhold.)If the US break that treaty by claiming the right to tax covered 401′s at 30%, the Swiss will not concede their right to also tax NRA’s 401K pension. They will refer me back to take up the fight with the US.”
No, you do have a right to bring it up through the Mutual Agreement Procedures, should you find that the withholding is not in accordance with the treaty.
If US tax policy changes, and the US wants to stop participating in the reciprocal arrangements agreed with the Swiss for the treatment of tax-favoured private pensions, obviously it has a right to do so. After discussion between the two countries, a Letter or a Protocol may be signed, negating or modifying the current provision. At which point, the treaty withholding rate may change; if so, Switzerland must allow credit for any US tax withheld.
Until that happens, the taxpayer is entitled to claim the treaty rate. If the treaty rate is zero and more is withheld, the taxpayer should take it up with the payer to find out what’s going on, and then raise it with the Competent Authority. The taxpayer plays no part in the discussion, it’s entirely up to the two countries to agree as to how the problem should be resolved.
Obviously, as I’ve said before, IANAL and that’s just my non-expert interpretation and may be wrong.
@Plaxy
I will lay it out for you one more time, and then I am out. Ignore SS and focus only on 401k accounts.
The US ‘deems’ you a covered expat if you do not affirm that you have complied with all US tax laws for five years before renouncing. Form 8854 is where you do this. A covered expat then has the choice of ‘voluntarily’ waiving treaty rights on 401k withdrawals, or paying full US income tax on the 401k balance as if taken the day before renouncing. Form W-8CE effectuates this. Neither option is good relative to drawing this gradually in retirement (and perhaps under treaty) as designed.
Now, not filing an 8854 make you a covered expat in the eyes of the US. And a lack of W-8CE means the 401k is fully taxable now under the exit tax. You may consider that the treaty protects it from this, but the US may not, and unlike for folk with no US assets, in this case it is in a position to enforce the exit tax against your 401k.
If it does — and that may be a big if — your choices are to fight the US side of things through competent authorities or through the courts, or to try to persuade your home country that 401k withdrawals now have a ‘basis’ (despite what they will see on the 1042S that the provider will send them). Neither will be quick or assured of success, and death will probably arrive before resolution. I am not prepared to be the test case, and neither, I suspect, is anyone else. Certainly not for want of filing a silly bit of paper that does not increase my tax burden one little bit.
So, feel free to live in your own constructed reality where the US is really entirely powerless to do anything to any non-US resident, even those with accounts trapped in the US. I believe differently, as do the various tax consultants I have consulted on this. Heidi is exactly right here.
@Duchesses. Congratulations on your reununcition and I know exaclty how you are feeling. I have my appointment early next year in January and when that e miakl came through my heart went into all sorts of spins and I am having a roller coaster of a ride going from should I do this should Ii not, Navigating the monefield of paperowrk after and what if this what if that, and emotionally going up and down about the momentous decision. I get up some mornings thinking maybe Ii should cancel and others where I should go ahead. One thing I know is I cannot live with the perpetual cloud over my head of filing year in year out and the constant worry if one has filled out some form, fabar or tax form incorrectly. Like you & Heidi as a natulralised citizen in a way I do feel I am giving up a part of my life and my history but then I tend to look back and not forwards which is a bad thing to do. I know this emotionall roller coaster will go on into the new year so this maybe the last Christmas I am a US citizen. I am not sure how I feel about that. I know how you feel Duchesse