In lieu of original content, here is an excerpt from Angelo Nikolakakis’ “Civil Law and Common Law Perspectives: A View from the Left”, in Guglielmo Maisto, Residence of individuals under tax treaties and European Community law (IBFD, 2010). Beginning at page 81 (footnotes omitted):
Generally, non-residents are either not entitled or not in a practical position to enjoy the same public benefits as residents. Why then should they bear similar — or more onerous — income tax burdens as residents (all the while focusing the question on domestic sources), putting aside source-country opportunism? Presumably, in the current state of international fiscal affairs and relations, many non-residents enjoy public benefits, and in principle are liable to bear the burdens of tax liability, in other countries — namely their countries of residence. If source countries occupy the entire tax base on a particular item (say, by taxing non-residents at a high rate such as 50%), then the revenue-raising capacities of residence countries that provide foreign tax credit relief will be compromised considerably. In extreme cases, we would observe the source countries gaining all tax revenues from the relevant sources and the residence countries bearing a disproportionate share of the burdens of providing public or social benefits but without the corresponding revenues. Arguably this is an unsustainable state of international fiscal relations, except between countries where the imbalances are reciprocal and offsetting, at least over some reasonable period of time, such that the “two wrongs make a right”
It is submitted that it would be more appropriate to try to get it right in the first place, by trying to ensure as much as practically possible that residents and non-residents are taxed in a manner that is commensurate with their enjoyment of public or social benefits. There is a practical element to this proposition (as reflected in the example above involving the extreme case), but also a more normative element. It is submitted that the residence determination should be approached as a proxy for a membership determination — who are the members of the relevant community or civilized society? In principle, it must be the members of a community that bear the costs and other burdens of the benefits of that membership, based on reasonable cost-sharing and distribution agreements. Moreover, in most cases it is the factual residents who are effectively in a position to, and do in fact, benefit from the relevant public goods and services, such that it is both practical and appropriate as a normative matter to expect membership to be determined along those lines.
What Nikolakakis refers to above as a “source country” is not one’s country of citizenship, but rather the country where an item of income arises — such as interest on a bond or a dividend on a stock. His argument elides the fact that the source country itself incurs costs in that equation, at minimum by providing the legal system that allows the paying company to exist in the first place. However, his underlying principle is one with which it is difficult to disagree: the payment of tax should have some relationship to the enjoyment of benefit from that tax. He goes on to make an interesting point about the ethical dimensions of this principle:
In some societies, this inevitable practical state of affairs is supported and regulated by appeals to notions such as the duty of solidarity reflected in Art. 53 of the Italian Constitution, and it is perhaps at that level that one might observe the greatest degree of trend as between civil law and common law countries, with the former tending to focus, in their public and legal rhetoric, more on a person’s duty of solidarity (and similar concepttions) and the latter tending to focus more on a person’s individual rights. On the other hand, there is the curious case of the United States, characterized by strong rhetorical appears to the individual rights to “life, liberty and the pursuit of happiness”, while being one of the few countries that conditions its fiscal regime on citizenship, and even on the renunciation of citizenship. Arguably, to tax former citizens as citizens is to assert waht may be described as an irrevocable duty of solidarity. It is to say: “You are and will remain a member of this society whether or not you like it”. This does not sound very consistent with the notion of liberty. Individuals should be free to terminate their membership in a particular society, both physically and fiscally, but while they remain within that membership, they must be cognisant of their duties.
Whether one approaches the questions surrounding the detemrination of an individual’s residence from a civil law or common law perspective — or from a left-wing or right-wing perspective — the fact of the matter is that somebody has to pay for the public goods and services provided by each civilized society. These costs must be shared on some reasonable basis and it is submitted that it is as appropriate between societies as it is within them for these costs to be distributed between categories of persons as a function of benefits enjoyed. Thus, it seems appropriate to determine membership using the proxy of personal physical presence and quite inappropriate to depart too far from that standard. Further, charges on non-members should be commensurate with their lesser enjoyment of public benefits and the recognition that they have duties to their own communities. Ultimately, the fiscal residence determination is not just about taxation; it is about membership in civilized society.
On the whole, Nikolakakis’ argument resembles what Isaac Brock Society participants have long pointed out: every dollar that the IRS manages to steal or intimidate out of us is a dollar that is not circulated in the economy of the places where we actually live, and thus results in a direct decrease in tax revenue to our governments. At the margins, this drain may indeed result in our governments having to spend even more money on us in the form of social assistance. Effectively, the IRS is demanding that the countries we live in subsidise the U.S. budget — and what boggles the mind is that country after country is signing up for this raw deal, thinking only of the alleged fat-cat tax evaders in their own countries whom they could catch through information exchange, and completely overlooking the corresponding drain out of their own economies when they agree to aid the U.S. in imposing citizenship-based taxation.
Here on this blog of ours we have two hundred participants, who no doubt bring with them 200 (or more) different political perspectives. Regardless, I’m sure we’re all aware that homelanders generally stereotype outlanders who complain about paying U.S. taxes as heartless right-wing fat-cats; they picture us whining about our tax dollars funding “welfare programs for the undeserving” while we sip champagne on our private jets and head to our vacation homes in the Caribbean. Indeed, it’s on this basis that U.S. politicians (and increasingly, French politicians too) argue for the taxation of outlanders. So it is interesting to see a cogent left-wing argument against the U.S.’ unique practise of global citizenship-based taxation.
Eric,
Thanks for digging this one out, as I have had a hard time getting those friends on the progressive side of the equation to be interested in the issue at all. The right side friends, the libertarian side, are easy to enlist for the freedom liberty issues, but the left… much more difficult for partisan reasons. Sometimes for just wanting to be opposed to anything that seems right wing. This will help, and I appreciate you digging it out as I have a few targets in mind to send it too..
Well done.
And if you’ve not seen it, there’s a well-argued paper here discussing the unconstitutionality of the US exit tax:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1628568
From the conclusion: “This method of taxation goes to heart of what it means to be a citizen. Is a citizen simply an individual receiving benefits from the legitimate monopolizer of violence or is the citizen a member of a common endeavor to create and sustain a government among equals? If the people are the former, existing in a separated and adversarial relationship with the government, then perhaps the government should be empowered to tax all who it can reach for its own enrichment. If, on the other hand, the citizens are engaged in a collective relationship, with the government merely acting as their representative and agent, then when a citizen elects to leave the community and no longer receive the rights of the community, then the individual should not have lingering obligations upon leaving the state.”
Canada imposes a Departure Tax which I was told is similar to the Exit Tax. I have tried to find a simplified explanation with no luck.
I discussed that with Phil Hodgen last night. A few things to remember first the tax applies on your last day of tax residence in Canada. The idea is by giving up tax residence in Canada you essentially making a sale of all of your Canadian property. Second I don’t believe it has come into effect in terms of Canadian residents departing Canada to a country Canada has a tax treaty with(which is quite a few including some low tax countries such as Singapore, the UAE, Barbados, etc). Many of Canada tax treaty partners have rejected any treaty amendments to smooth the way so to speak. Canada wants its treaty partners to provide a tax credit for newly arriving former Canadian residents against the departure tax paid in Canada. A country like Singapore though for example has absolutely no incentive to go along with this and thus hasn’t. The departure tax was introduced back in 1998 when Canada was still in a bit of a fiscal hole. I don’t get the feeling the Department of Finance considers it a high priority at this point.
The real interesting thing going on are the current negotiations for a Canada Hong Kong DTT. Most countries won’t negotiate tax treaties with Hong Kong and in many cases those that have started end up bogged down in endless negotiations however, I have been told Flaherty has told Department of FInance staff he wants a deal done with Hong Kong soon. Hong Kong given its low number of treaties would very much like a deal with a big country such as Canada too so it will be interesting how a Canada Hong Kong DTT will deal with the departure tax issue.
The U.S. will only change its policy when and if other countries begin to formally refuse U.S. citizens as immigrants.
I would argue that everyone is signing up to FATCA not with an eye to catch the odd FAT CAT here or there, but rather because the US told them to and they have no backbone to say NO!
@recalcitrant
I wonder if the US would even care though in that case, since all of these politicians already view “US persons” overseas as traitors anyway. They want to keep everyone in after all:
http://www.economist.com/node/11554721
@donpomodoro- I think that they would. For the other countries to make such a move would send a clear signal to Washington that there is a price to pay for FATCA and that they refuse to pay it. FATCA would have litle meaning in a world where there are increasingly fewer and fewer Americans living overseas.
Also it would be a public humiliation of U.S. policy and the American populace would eventually begin to ask questions of their politicians.
If nothing more it would serve to reduce any exposure that other countries and their banking system would have to U.S. stupidity. And show the U.S. that they aren’t the only ones capable of running the show.
@peg11 & Tim
As I understand Canada’s exit tax, certain assets would be ‘deemed to be disposed of’ on departure from the country. For example, if you owned Canadian stocks and did not wish to dispose of them prior to leaving Canada, there would be a ‘deemed disposition for tax purposes’ and then you would have a ‘new’ adjusted cost basis on that particular stock. That way, you pay the tax owing on any stock etc that was earned on it while you are resident in Canada.
As far as things like RRSP’s, RRIF’s are concerned, they are not taxed on your departure as long as you fill out the correct forms.
This is what I understand happens ‘severing your residential ties with Canada’.
http://www.cra-arc.gc.ca/E/pbg/tf/t1243/
@recalcitrant
I think you’re definitely might be onto something here. You know what’s sad though, I was just thinking, if I were the head of a government or a key policy maker I would have to seriously consider banning immigration from the US and require dual citizens of my country to renounce US citizenship. I feel for the average person wanting to leave the US, but when push comes to shove FATCA is such a gross violation of national sovereignty that I wouldn’t really see any other responsible choice.
Whether or not some countries begin to adopt this policy in the future will remain to be seen. I imagine that places like the UAE and China might be the first ones, followed Latin America and others. Are there any historical or current examples of countries having an outright ban on citizens from a different country emigrating there? Maybe India/Pakistan or some middle eastern countries banning people from Israel? I would assume that any such move is in somehow a violation of International Law in more than one way..
@Eric, I don’t know if this has been referenced anywhere else or not, but it was interesting. Published in 2010, Florida Tax Review, ‘The Constitutionality of the Taxation Consquences for Renouncing US Citizenship, by William Thomas Worster.
http://thehagueuniversity.academia.edu/WilliamWorster/Papers/1331820/The_Constitutionality_of_the_Taxation_Consequences_for_Renouncing_US_Citizenship
@donpomodoro- I am just speaking off the top of my head but I don’t believe that there is any international law that bars individual countries from having exclusionary categories, when it comes to immigration policy. Such a law would be in violation of national sovereignty. Saying that individuals have a right to change their citizenship is not the same thing as saying that sovereign nations have an obligation to indiscriminately admit citizens of other nations as immigrants. As a case in point I would cite the Palestinian situation.
As you state the most rational route for the other nations of the world to take with respect to people who show evidence of U.S. indicia would be to require them to renounce U.S. citizenship or give up Green Card status prior to immigration. This would require some modifications to the citizenship acquisition laws of their country but in no way should they accept U.S. dual citizenship.
Having people live in your country for whom the country of origin refuses to give up the right of first rule is foolish. In the end I am convinced that rationality has to win out over irrationality but it won’t be easy.
@recalcitrantexpat
The real interesting issue that I am looking into more is can you claim as a US citizen living in Canada the Foreign Tax Credit from the CRA for any tax you paid to the US on Canadian source income. My tentative answer to this question is in fact yes. Going even further if you are a covered expatriate who owes tax upon expatriation you too can claim the Canadian foreign tax credit. The key thing is normally(like in 95%) it is though of as only applying to foreign source income(from a Canadian perspective). However the CRA is quite clear that it can be claimed on Canadian source income due to an obligation to pay tax based on citizenship(I believe the Eritean diaspora tax qualifies for this also). In theory a US citizen living in Canada could fill out his US tax form first, calculate whatever tax he owes to the IRS and pay it then turnaround and extinguish all of his Canadian tax liability using the Foreign Tax Credit and carryover excess credits into future tax years.
@tim- you are correct. This also though clearly illustrates just how the resident nation’s tax base can be hollowed out with regards to the person who is taxed based on citizenship.
If you notice the date for paying your U.S. income tax is on April 15th, even if you live abroad. Whereas the tax filing date this year for non resident U.S. persons is June 17th.
It just so happens that the filing date and date for payment of Canadian taxes is, April 30th. What a coincidence that Canada’s tax obligations are due 15 days after America’s.
Yes. The U.S. Congress is attempting to poach the taxpayers of their resident countries, to the detriment of the treasury of the resident countries. The means by which the U.S. Congress attempts to do this, no less unspeakable than the aim, is to impress the financial institutions of sovereign countries to ferret out former citizens of the U.S. and forward to the IRS all their financial records regardless of the laws of the resident countries. Compliance with the U.S. Congress will mean that customers of financial institutions outside the U.S. will have to waive their rights under the laws of their resident countries or be labelled recalcitrant. Recalcitrant customers will have their accounts closed and 30% of their assets remitted to the IRS, money rightly taxable by the resident countries, now gone to prop up a debt-ridden U.S. Noncompliance will see the access of non-U.S. financial institutions to U.S. markets closed, with possible financial ruin for themselves and devastating financial consequences for their home countries. A battle of Titans, the U.S. Congress vs. the governments and financial institutions of the rest of the world?
Reblogged this on Stop Unconstitutional Double Taxation.
Seems no one mentioned France yet on this thread. Sarko seems to be inspired by the US system of taxing expats and wants to do the same in France. See article link below.
In addition, the article notes that France passed an exit tax law of 19% last year which should have been implemented but has been bogged down by legal/procedural issues.
Apparently, it is modeled after a similar initiative in 1999 that was attacked in the European Court of Justice and was thus annuled. The tax was contrary to the principles of free circulation in the EU.
In french, http://www.swissinfo.ch/fre/politique_suisse/Paris_veut_taxer_les_exiles_fiscaux.html?cid=32284682
If Sarkozy were to enact this there would still legally be a slight layer of protection for French expats: As long as they live in another EU country France couldn’t legally tax them in this way due to a previous European Court ruling banning dual taxation within the EU. Good luck though to all of the French expats in Canada, USA, etc, should this pass…
Note that French expats are the only ones in the world who have to pay income tax in Monaco due to an agreement between the two countries. I’m starting to believe that the best citizenship to have would be from a small rich country like Austria, Switzerland, Netherlands or Luxembourg and then to work somewhere like London. These countries are too small to ever get away with bullying taxing the way that the French want to and the US already does.
Also, I think that many people would simply renounce their home countries’ citizenship should it start to demand extra-territorial taxes. This is entirely subjective and just my personal opinion, but I think that the tradition of patriotism is at its strongest in western countries in the USA and France. I believe that citizens of many other countries would dump their citizenship in a heartbeat if their governments tried to implement a US style taxation system, since most do not feel loyalty to a centralised nation state in the way that the Americans and French do. Most European countries at least do not have any strong tradition of patriotism for a nation state and instead identify with their home region. I can tell you that Belgians identify with either Flanders or Wallonia, Italians with their home province or city, Germans with their home province, etc. All of my British friends have admitted that they renounce their citizenship immediately if the UK had a US system in place. I imagine that many governments realise that their national identity or loyalty of their citizenry is extremely weak and thus have never seriously considered it nor will.
Also, I just had the nightmare scenario pop up in my head of a dual French-US citizen living in, say, Canada, in 5 years’ time. I imagine that there are many people with this citizenship combination worldwide…Why not throw in an Eritrean parent or grandparent for the whole package as well? What a terrible place to be in if Sarkozy gets elected and actually enacts this sort of nonsense. HIs opponent has said similarly tax-hostile remarks regarding French expats as well, so I wonder whether or not it is just a matter of time before France joins the US model.
This sort of nonsense needs to be brought before the UN or stamped out through an international treaty banning dual taxation and signed by every country in the world. Can you imagine the nightmare unfolding before dual citizens worldwide in 10 or 20 years’ time? Every country in the world is going to want to start to follow the US, France and anyone else following the citizenship-based taxation model if it starts to take off. It needs to be stamped out now, starting at its rotten source!