It’s funny that you can be a foreigner like me (originally from India, now a Canadian citizen) and do most of your business in the US and not get taxed on it. I run an internet company incorporated in Canada and almost all my customers are American. I don’t file anything with the IRS because legally I don’t have to.
But if you happen to have been born in the US or have an American parent and don’t earn income from there they still want to tax you. It’s like a penalty for having any American association. On top of that no foreigners will want to form a partnership with you due to FATCA.
The above comment appeared in the “Fox News Video: Increasing numbers of U.S. citizens Renouncing U.S. Citizenship” thread. The comment reflects the perception of “U.S. citizen toxicity” from a non-U.S. perspective.
Assuming the correctness of his position that he does not have to file with IRS, it is clear that a U.S. citizen would. In other words, let’s say you have:
Unlucky U.S. Citizen A
Lucky Non-U.S. Citizen B
carrying on competing but identical businesses in Canada.
The U.S. law requires U.S. Citizen A to file and pay taxes but not U.S. Citizen B.
Now, I know that this is obvious, but it triggered a thought (to the extent that I have any). It’s this:
The 14th Amendment of the U.S. constitution prohibits discrimination based on citizenship. Now, I know that we are entering a technical legal area. I may do some research on this, but I am interested in your comments. I.e. Have I gone out of my mind or is this worth exploring?
“Citizenship classifications” are caught by the “equal protection” clause of the 14th amendment of the U.S. constitution. But, “citizenship classifications”, at least on the state level, are what are called “suspect classifications“. “Suspect classifications” are presumptively problematic and shift the burden of proof to the government -a burden of justification that is difficult to meet.
To tax a U.S. citizen on income earned abroad (citizenship-based taxation) is a clear extraterritorial application of U.S. law. The U.S. seems to have no problem with the extraterritorial application of U.S. law. (I will save a discussion of the legality of that for another post.) But, assuming the extraterritorial application of the law, the law is subject to the restraints in the U.S. constitution – including the equal protection of the laws.
This should mean that if the U.S. wants to tax income earned outside the United States, and taxes only U.S. citizens, then there is discrimination based on citizenship. In other words, either both Citizens A and B should be taxed or neither should be taxed. The practical consequence would be that neither could be taxed. Although the U.S. would like to tax the world, that is not going to happen.
I may explore this further, but I would in interested in any initial thoughts you may have. The hyperlinks provide some interesting sources to begin.