John Richardson discusses how the Saving Clause in tax treaties with the United States prevents persons with US citizenship domiciled abroad from benefiting from tax-advantaged savings accounts in their home countries. (Posted with permission.)
Prologue – The Circumstances Of Your Birth Should Not Determine The Outcome Of Your Life …
This link references a “human interest” story where US citizen children are denied benefits in their country of residence that are available to all people who are NOT US citizens.
The description includes:
New Zealand children born to parents’ who are citizens of the United States face a difficult KiwiSaver choice: Give up your US citizenship, or face a KiwiSaver tax compliance bill of $750 or more a year courtesy of the US taxman.
A petition has been started at Parliament asking MPs to change the KiwiSaver Act to allow people with KiwiSaver accounts facing the unreasonable demands from US tax authorities to close their KiwiSaver accounts.
The issue surfaced as a result of the plight of Auckland dual national Kira Bacal and her four New Zealand-born children, Harper, 13, Rowan, 10 and twins Malachi and Elias, 8.
It appears that the poor (New Zealand born) Bacal children are finding that the US (or at least US tax preparers in New Zealand) consider their KiwiSaver to be a possible vehicle for US tax evasion! Not only is the KiwiSaver a “trust”, but it’s a “foreign trust” which comes with all kinds of penalty laden reporting obligations and no tax advantages. An excellent analysis of the US tax implications of the New Zealand KiwiSaver is here. The story is somewhat comical in that one gets the feeling that the blame should be placed on New Zealand (and not the United States) for New Zealand’s failure to legislate special exceptions for US citizens living in New Zealand.
So what! They’re Americans and therefore they deserve it (you say)!
A previous post explained that for Americans abroad, changes in the laws of their country of residence can change their tax relationship with the United States. The purpose of this post is to expand on that theme by demonstrating that:
US tax treaties presumptively prevent the treaty partner country from establishing tax advantaged retirement programs which will benefit ALL of their residents (US citizens are always left out).
It is my conclusion that nations really have no idea what they signed up to when they signed these treaties. When I told my MP that this applied to tens of thousands of full time US residents and citizens that had lived here for decades and were often born here, she was lost for words for a moment. She had visions of the US expat on a corporate mission in London for a year or two.
Nope, it’s not him getting taxed – it is my UK born UK citizen friend born to a US father that just wants to save, invest and take part in business like anyone else. Yes she gets it now but is she interested in fighting this? Nope.
All roads lead to renunciation.
The irony of the “saving” clause is that it’s a deterrent to saving for a certain class of resided. Thanks for the article.
As ever, any dual citizen born outside the US (like these children in New Zealand) can avoid all this by not disclosing US citizenship to banks and not filing US tax returns. Why Ms. Bacal of Auckland hasn’t figure that out is a bit of a mystery.
Yes Ron, people can go through their lives lying and hoping it never comes back to bite them in the ass.
Some of us don’t think that is a solution. Certainly, if I was the person I mentioned, I would be extremely wary of taking a UK stock and shares ISA or mutual funds, a lot can happen in 45 years and the US is starting to look more like an empire to me.
I didn’t think the world would swallow FATCA either, but they did.
After all, it’s only a few “US citizens resident in the UK” and they can always take up their grievances with their own government, right?
If Auckland mother-of-four Kira Bacal had her wits about her, she wouldn’t be trying to close the kids’ accounts, she’d be smart enough not report them (after ensuring that they opened the accounts without being identified as US citizens). On the other hand, she’s probably making good money on US child tax credits (not to mention the pandemic benefit) which gives her an incentive to maintain a relationship with the IRS.
I had no concept of “selective honesty” until I discovered the US had citizenship based taxation. At that point I realized lying or omitting certain information was going to be necessary for my financial survival.
I can’t speak for other countries, but Canadian front line bank employees show zero interest in enforcing FATCA (assuming they have even heard of it) or any other US silliness, for that matter. They ask the standard questions in robotic fashion, the customer gives the standard replies, the appropriate boxes on the forms are ticked in the standard places, and that is the end of it. Its the same with online forms. Nobody is actively seeking US connections and the only people who get snared are either ignorant or careless. (But if you are ignorant or careless with your finances, far worse things will happen than being outed to the IRS.)
The US government will collapse before any of this changes.
Problem is not everyone knows to be wary of place of birth or citizenship questions. The mass media in Canada covered FATCA/CBT a bit back in the 2010-2014 era, but not much since and has rarely written specifically on tax-advantaged savings account. And if someone has no clue that a US place of birth or US citizenship could be problematic, they wouldn’t know to google and find sites such as this one. So, it’s easy for someone to be caught off guard.
I was asked place of birth at my bank a couple of years ago, as a long-time customer opening a new account, and I knew how to handle it. I know to beware; I’m quite comfortable using a false place of birth, my preferred course of action; and I have a CLN if needed, should push ever come to shove .
But I can see how someone could innocently fall into the trap because CBT is not as widely known as it should be and US citizenship or place of birth was not problematic (it was a non-issue) for most of our lives.
I’m not “ignorant or careless” with my financial life. I take my financial life very seriously and follow developments in Canadian tax law. But I never had any reason to follow US tax law or suspect my having been born in the US would have any impact on my financial life until I accidentally came across an article on FATCA in the Winnipeg Free Press in 2011. Without that, I would not have a had a clue to know that I should google the topic, dig deeper, and take precautions.
So, I don’t blame a person who falls into the trap, and I feel as long as CBT exists, some people will have problems, either because they had no reason to know their citizenship/birthplace was a potential problem or because their circumstances are such that it is unavoidable.
The fact that people like me/us can avoid this doesn’t mean that shutting US persons out of tax-advantaged savings accounts or subjecting them to FATCA is not a problem for many other individuals and IMO immoral in principle.
If Auckland mother-of-four Kira Bacal had her wits about her, she wouldn’t be trying to close the kids’ accounts, she’d be smart enough not report them (after ensuring that they opened the accounts without being identified as US citizens). On the other hand, she’s probably making good money on US child tax credits (not to mention the pandemic benefit) which gives her an incentive to maintain a relationship with the IRS.”
Are you sure you are still in the right place here, Ron?
Those US citizens complaining about US obligations while “enjoying” their US citizenship?