In a 76-page tour de force, international tax lawyer and University of London School of Law Ph.D. candidate Bernard Schneider takes on the U.S.’ unique practise of taxing people who do not live in the country nor receive any benefits from it. His paper, published in the Virginia Tax Review in October, was posted on SSRN yesterday. A sample quote:
The worldwide taxation of nonresidents can also be seen as a form of tax imperialism – the United States is overriding the incentives that foreign countries have put in place to attract U.S. taxpayers and investment. A foreign country’s decision to impose a lower tax rate than the United States reflects its judgment on how to tax and may even be specifically designed to attract foreign labor or capital. To the extent that the United States arrogates to itself the right to tax the difference between the foreign country’s effective tax rate and its own, even when its citizens reside in that foreign country, the United States is breaching inter-nation equity.
Schneider goes into copious detail to demolish every one of the myths and lies that Homelanders have come up with to justify extracting tribute from U.S. Persons abroad. Unlike many previous papers on the topic, he not only discusses the issue of tax owed (which is typically dismissed by Homelanders with snide and uninformed comments about the “great tax breaks” we get), he also covers the difficulties of compliance — such as the significant costs of filing Form 8621 under PFIC rules which apply to non-U.S. retirement plans — and goes on to bring up the issue of green card holders abroad, who face the same tax issues as citizens but without even having a vote, a U.S. passport, or a guaranteed right to return to the United States.
Interestingly, Schneider also takes the time to dismiss one of the popular but logically weak arguments in support of the FEIE, that U.S. citizens abroad deserve “tax breaks” because they are helping the U.S. economy. He concludes his paper with a detailed proposal for the U.S. to adopt a departure tax system similar to Canada’s.
Bernard Scheider. “The End of Taxation without End: A New Tax Regime for U.S. Expatriates”. 32 Virginia Tax Review 1, 2012.
*Thanks for locating this – it is a must read – one of the best discussions I have seen.
This is required reading for your congressmen. I’ve gotten through the first 20 pages so far. Excellent. Carried in the Virginia Law Review. As a scholar, he ought to be invited to submit his paper for presentation at many scholarly and trade conferences.
Love it: ” it is taxation that requires representation, not representation that justifies taxation”
The article, unfortunately appears to be caving in to the absurdites:
“Having established that the worldwide taxation of long-term expatriates and accidental, nominal, and unaware citizens is unjustified, and that it is unfair and unwise to force U.S. citizens overseas to give up their citizenship to avoid a tax regime that should not apply to them, there are various alternatives to the perpetual worldwide taxation of expatriates. The simplest approach, which is the one followed by most countries, is not to tax nonresident citizens and to treat a departure from the country as a nonevent for tax purposes. Given the history of U.S. taxation of nonresidents, the attitude of Congress, and the unjustified perception that U.S. persons abroad are not “paying their fair share,” this option is clearly not politically viable”
He goes on to recommend an exit tax, which he calls equivalent to Canada, and what looks like a tax upon the gains in personal assets over the course of residence. This is a really bad ending to a story with a good beginning.
I look forward to reading this. I like the fact it was not written in 1992.
@Mark Twain
What I understand Canada’s exit tax to be and I am not a professional is that if you have non-registered assets (your personal residence would not be included), you would be taxed on the gain as if there were a ‘deemed disposition’. Those assets would then ‘enter’ your new country at market value not book value. I also believe for registered assets, such as, Canada’s RRSP or RRIF, there are special forms you can file upon departure so they are not taxed at the time of departure. (Or not deemed to be disposed of at time of departure.)
I don’t personally believe that is unfair. If you had stayed in Canada, Canada would have taken its’ share of the Capital Gain either when you sold the asset or upon your death.
Here are our descriptions. Why are we all lumped into the same US Citizenship Taxation regulations? Would it not make sense for those intending long-term residence abroad or intending NEVER to return to the US to have much different rules than for those who will return? Punitive consequences should not be the goal.
Or, do as Renounce suggests:
And, if you want to remain a US citizen, fine: you now know your responsibilities and the consequences. And, be sure to check in with the US often to see if you’re missing any newly legislated regulations.
I could see taxing the gain on a financial asset, then it could be understandable.
It appeared in my first reading that they did not exclude house, cars, pencils, motorcycles
A world wide renunciation day or even short period of time would be great but it would have to have a mechanism that allowed parents of minor USP’s to renounce on for said child with possibly a provision allowing child to reclaim citizenship as an adult by age 21 if they chose. If it’s adults only, the problem still persists for a future date.
Really, the birth citizenship thing and inherited citizenship has to be abolished in addition to the world-wide til death (and beyond) taxation thing. Also, it would be nice if the US recognized the spousal rights of our non-USP partners. As it stands, my husband is no better than “just a random guy” in the eyes of the US should something happen to me.
@Eric,
I will read this over the weekend. Thank you for posting it!
@ a,
And, importantly, a mechanism for Parents, Guardians or Trustees of developmentally-delayed or other mentally incapacitated persons the RIGHT to renounce US citizenship on behalf of their family member for whom they make important legal and financial and medical decisions! I don’t really care about any provision to give such a child choice to choose US citizenship as an adult if I were able to free my adult son from the US. It would, of course, be a great provision for many — choice: why isn’t there any?
@Abused Expat, Eric,
Perhaps only we USPs Abroad will think this a best seller to read, hanging onto every literate thought included.
@Calgary
To think I wouldn’t have even given this stuff a second glance a year ago, let alone make an active search of it. But I am getting weary, and if Canada capitulates, I will be crestfallen for sure.
The US has clearly taken the stance that there is no downside to US citizenship. Period.
Thanks for finding this Eric. I’ve already looked at the parts regarding green card holders. I can see that Mr. Schneider really understands the situation. What I don’t understand is where to go with this. A US legislator would not be interested in green card holders living abroad (no vote, no money, no influence) and I doubt my local MP or any other Canadian parliamentarian would take the time to read such a long paper. I like the idea of a world-wide renunciation day but for someone living permanently outside the USA with a green card lying forgotten in a drawer there would have to be automatic absolution because you cannot renounce citizenship which you never had in the first place.
@Eric,
Thanks again for your valued contributions. I now have another long treatise to add to my endless reading list which is almost as endless as “Taxation without End!”
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I’m still not seeing the rationale for his exit tax. Anyone who has financial assets, will be taxed when they are extracted, no matter where they are. A 1099 would be generated and the cap gains would get taxed then. In most instances people can take their money with them when they leave and get a final 1099. In the other cases, they could leave their money behind and it wouldn’t be too big a deal to be taxed where it is at. And they could use foreign tax credits to move the taxes from USA to their new home.
Calgary, choice is a freedom that the USG has never really been okay with. And I wouldn’t personally be okay with leaving citizenship open for children whose parents relocate them or who renounce due to accidental status. Parents make decisions all the time for their kids that have lifelong ramifications but it is our job. We have our kids best interests at heart and that isn’t being acknowledges by the USG at all. Our rights as parents and guardians are being ignored for reasons that have nothing to do with the “right of citizenship”.
I’d renounce on my dd’s behalf without a qualm if I could and the USG is delusional if they think she will regret this someday when she is an adult. I am the one raising her. I know where her allegiance lies now and that isn’t going to change the longer she is outside the sphere of the US propaganda factories sometimes aka as public schools. Canadian schools are no slouches when it comes to teaching citizenship themselves.
@a
‘Parents make decisions all the time for their kids…..but it is our job.’ Absolutely! When I think back to the years when I had three teenage sons at home, my husband and I made decisons for them almost on a daily basis. If we had not made those decisions, they would possibly have been playing hooky from school, driving friends around in our cars, taking courses at school that might have been lots of fun but not allowed them entrance to University etc. etc. All three of them, I believe would thank me today for some of those decisions and will most likely make similar decisions for their own children.
Anybody who reads this article in its entirety will renounce U.S. citizenship at the earliest possible moment. The article is a wonderful summary of Form Nation stupidity, unfairness and irrationality that will absolutely destroy your life. Oh by they way, did you know you know you might have to pay an excess tax for buying an insurance policy from a Canadian company?
@Eric, Thanks for finding this article.
@Mark Twain, I’m still not seeing the rationale for his exit tax. Anyone who has
financial assets, will be taxed when they are extracted, no matter where
they are.
This is not true. The US claims that “in general” any income generated there is taxed, but buried in the tax code there are large exemptions for foreign investment. For example, capital gains of US stocks, bonds and shares of corporations, owned by nonresident foreigners, are not taxed at all by the US. Same thing for interest in bank accounts. Many countries also have similar policies, and this is the main reason why international tax evasion exists in the first place. I don’t like the idea of an exit tax either, but it does make some sense due to the current exemptions for foreign investment.
bubblebustin –
If Canada capitulates, I will be crestfallen for sure.
If Canada does not capitulate, I will be astonished. UnderStand what “Canada” is. Dig the recent words supposed to be coming right out of Flaherty’s mouth. Compliance city on the near horizon.
as I read the article, I had interpreted the exit tax to be placed upon any person moving their long term residence out of USA, not just renunciators. THe Exit tax could be justified for renunciators, but not for those who remain citizens. Credits could easily be applied for citizens of USA with residence elsewhere using existing tax treaties. In addition,if fairness in the code came, the main reason for renunciating would be removed and there would be little need for an exit tax anyways.
@Mark, If taxation is based on citizenship, the exit tax applies when the person renounces citizenship. If it is based on residence, it applies when the person ends residence by moving to another country permanently. The article discusses the exit tax assuming that the US would tax based on residence.
Some countries have an exit tax because they view capital gains as tax-deferred income (accumulated during several years but only taxed when finally realized), but don’t tax capital gains of nonresidents. So a resident of country A may buy assets, let them appreciate over several years, move to a country B that doesn’t tax capital gains accumulated before residence started (or doesn’t tax foreign income), and sell these assets as a nonresident of country A. In this arrangement, neither country A or B would tax the capital gains from these assets when they are sold. This is considered a “loophole”. With an exit tax, the portion of the gains accumulated during the period of residence in country A is taxed when that residence ends.
All of this, of course, assumes that assets always appreciate over time, which is not really true. The exit tax would become a mess if the assets are located in a country C that does tax capital gains of nonresidents, if country B taxes the entire capital gains, or if the assets depreciate (this happened with Eduardo Saverin’s Facebook shares). Countries that consider that assets may appreciate or depreciate, and that therefore capital gains can only be taxed when assets are sold, don’t consider them as tax-deferred income and don’t have an exit tax. The following countries have an exit tax: US, Canada, France, Germany, Denmark, Norway, Israel and Australia (there might be others but I’m only aware of these).
@Shadowraider: The following countries have an exit tax: US, Canada, France, Germany, Denmark, Norway, Israel and Australia…
Thanks for the list. The US exit tax applies not just to the usual stuff but also, outrageously, to retirement savings, likely accumulated over past decades and inaccessible until decades into the future. Do you happen to know offhand if any of the other countries you mention take the same line, or if the US an outlier here?
@Watcher, The exit tax in France, Germany, Denmark and Norway applies to stocks, bonds and shares of corporations, but in Denmark it also applies to tax-deferred pension contributions made in the previous five years. In these countries the exit tax does not apply to real estate. In Canada and Australia, the exit tax does not apply to capital gains that would still be taxable from nonresidents, such as on real estate located in the country. In Israel, the exit tax applies to all assets. Canada exempts retirement savings from the exit tax, but I don’t know if Australia or Israel do. Denmark, Norway and Israel allow a redetermination of the exit tax after the assets are sold, lowering the tax or providing a refund if the assets depreciated.
In the US, the person may choose to have tax-deferred retirement savings that are located in the US either subject to the exit tax or withheld at a 30% rate in the future, when the savings are cashed. So in this case the tax can still be deferred until the savings are actually accessible. The problem is that this option is not available for foreign retirement savings, since the US can’t withhold tax on these when they are cashed, so the person has to pay tax on these savings even before they are accessible. This is another problem specific to citizenship-based taxation: the existence of foreign retirement savings in an exit tax means that the person was still subject to worldwide taxation while working abroad. This situation does not occur in a country with residential taxation. Even if such country taxes retirement savings upon termination of residence, these savings are most likely located in the country itself because that’s where the person was just residing and working, and the tax therefore could be deferred until the savings are cashed.