Category Archives: Issues regarding US persons abroad

Fabien Lehagre of l’Association des Américains accidentels has provided an update on the Belgian FATCA IGA case, which includes:

“The Belgian State has appealed the Belgian data protection authority (DPA) decision ordering the prohibition for the Belgian tax authority to process personal data of accidental Americans in the context of FATCA and to transfer the data to the IRS, the US tax authority. An introductory hearing took place at the Brussels Court of appeal yesterday [29 June 2023]. The Court of appeal decided to suspend the effects of the Belgian DPA decision.  . . . ”

Fabien notes that, “this prohibition . . . is now suspended by the Brussels Court of Appeal [pending the appeal decision].  The main reasons for doing so are to avoid the risk of damaging Belgium’s international reputation towards the United States and the diplomatic relationship with the United States as well as the difficulties for FIs who can no longer meet their FATCA obligations.”

Key Dates:

24 May 2023.  Decision.  Press Release. “The Belgian Data protection authority today declared unlawful, and decided to prohibit, the transfers of personal data of Belgian ‘Accidental Americans’ by the Belgian Federal Public Service Finance (FPS Finance) to the US tax authorities under the intergovernmental FATCA agreement.”

30 Jun 2023 From Fabien’s Update. “The Belgian financial institutions (FI) must, in principle, transfer FATCA relevant data to the Belgian tax authority for the fiscal year 2022. As the Belgian DPA prohibited the Belgian tax authority to process these data, this also means that the FIs cannot transfer the data to the Belgian tax authority as reception of these data by the latter also constitutes a form of prohibited processing.”

30 Sep 2023. “Belgian tax authority is supposed to transfer the data to the IRS.”

15 Nov 2023.  “Pleadings on the merits are scheduled for 15 November 2023.”

Several of us are getting together to celebrate Travis’ new CLN with dinner at The Keg, 75 York Street, Ottawa, on Tuesday, June 20^th, 6 pm.  Good food and drink and, important for us, it’s a good place for conversation, quiet and comfortable.  We’re currently expecting nine people.  All Brockers are welcome, whether local or visiting Ottawa from out-of-town.  On that latter note, we’re pleased that John Richardson of Toronto will be attending. 

Hope you can join us!   Please RSVP by leaving a comment or emailing pacifica.isaacbrocksociety@gmail.com

“The Belgian Data protection authority today declared unlawful, and decided to prohibit, the transfers of personal data of Belgian “Accidental Americans” by the Belgian Federal Public Service Finance (FPS Finance) to the US tax authorities under the intergovernmental FATCA agreement. According to the Belgian DPA, the data processing carried out under this agreement does not comply with all the principles of the GDPR, including the rules on data transfers outside the EU. It also asks the FPS Finance to alert the competent legislator of the shortcomings identified by the DPA.

. . . .

“Hielke Hijmans, Chairman of the Litigation Chamber: ‘Tomorrow we celebrate the 5th year of application of the GDPR. Article 96 cannot be intended to allow that international agreements remain contrary to the GDPR over time. The exception provided for international agreements concluded before the implementation of the GDPR does not exempt EU member states from (re)negotiating an agreement to make it GDPR compliant.’

“The Litigation Chamber also finds that the FATCA agreement does not contain appropriate safeguards to ensure that exported personal data is afforded a similar level of protection as data within the EU.

“The Litigation Chamber concludes that the transfers of data of Americans residing in Belgium to an authority located in a country outside the EU (which cannot offer an adequate level of data protection) are unlawful. For this reason, the Belgian DPA prohibits the FPS Finance from processing the complainants’ data and asks it to alert the competent legislator of this prohibition and of the shortcomings found”.

. . . .

https://www.dataprotectionauthority.be/citizen/belgian-dpa-prohibits-the-transfer-of-tax-data-of-belgian-accidental-americans-to-the-usa

The DPA has given the Tax Authority three months to confirm its compliance. The TA can also appeal the ruling.

Thanks to Ron Henderson for posting news of this decision on our Media thread.

Further reading:

Decision

American Citizens Abroad statement on the recent Belgian Data Protection Authority ruling on FATCA

Belgium stops ‘unlawful’ sharing of Accidental American’s data, Isabel Gottlieb, Bloomberg Tax.

John Richardson examines the US Supreme Court’s Cook v. Tait decision, a seminal case in US citizenship law, and the role it had in the “weaponization of citizenship”:

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Introduction And Purpose

The focus of this blog has always been on citizenship, taxation and citizenship taxation. Although taxation has always been perceived as a necessary burden, citizenship has sometimes been a benefit and sometimes been a burden. James Dale Davidson, writing in “The Sovereign Individual”, expressed the view that in the 20th Century US citizenship was generally a benefit. In the 21st (digital) century US citizenship based taxation has transformed US citizenship into a burden. The numbers of people renouncing US citizenship are a testament to this new reality.

The Weaponization Of US Citizenship – Two Methods

The history of US citizenship as documented in Amanda Frost’s “You Are NOT American”, is an epic story of the “weaponization of citizenship”. I highly recommend Professor Frost’s book – “You Are NOT American” to those interested in the evolution of US citizenship.

Method 1: Weaponization By Claiming The Individual Does NOT Meet The Requirements Of Citizenship

Regardless of the benefits or burdens of US citizenship, it is clear that the United States has a long history of “weaponizing US citizenship”. Professor Amanda Frost in her superb book “You Are NOT American” provides many examples of how the United States has used the concept and status of citizenship to either punish or reward individuals. Generally, Professor Frost describes a history where the use (or misuse) of America’s “nationality laws” has created hardships for people. Citizenship is a part of who people are. It’s part of their personal identity. Citizenship (presumptively) gives people a place or country they can call home. Citizenship (presumptively) gives people a place where they can live without fear of removal. Citizenship matters and the loss of citizenship can be a frightening and destabilizing event in the lives of an individual. It was not until 1967 that the United States Supreme Court in Afroyim ruled that US citizenship was conferred by the Constitution, belonged to the individual and could not (at least if born or naturalized in the US) be taken by the Government. (Of course that is of little comfort to those who can’t prove their US citizenship.)

Method 2: Weaponization By Claiming The Individual Does Meet The Requirements Of Citizenship

A minority of countries in the world confer citizenship based on and only on birth in the country.

Only two countries in the world impose worldwide taxation based on and only on the fact of citizenship.

The United States is the ONLY country that does both!

FATCA assisted the United States in exporting US taxation into other countries and on to the individuals who live in and are tax residents of those countries. In short: the accusation of being a US citizen living outside the United States subjected one to the “disabilities” and “criminalization” imposed by the US extra-territorial tax regime.

The US tax treaties have been discussed on Brock, most frequently those the US has with Canada and Australia but not so much about the others. In this article, John Richardson examines facets of the France-US Tax Treaty.

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Introduction, purpose And summary

It is clear that US citizens, who are tax resident of countries outside the United States are generally subjected to a more punitive system of taxation than US residents. That said, the U.S. has different tax treaties with different countries. Some treaties (example Australia) make living outside the United States very difficult. Other tax treaties (Canada and the UK) make living outside the United States easier in a relative sense. The relative difficulty is somewhat dependent on the extent to which the treaty contains provisions for U.S. citizens who are “resident” in the treaty partner country. These treaties are an additional recognition of U.S. citizenship taxation.

If a U.S citizen contemplating a move abroad asked the following question:

Q. How will I be taxed if I move outside the United States and live as a tax resident of another country?

The answer will be:

A. I don’t really know. It depends what country you are considering moving to.

Not only are US citizens living outside the United States taxed more punitively than U.S. citizens living inside the United States, but their taxation by the United States depends on the country they move to! (In addition, both income tax treaties and estate tax treaties may contain provisions that affect the way U.S. citizens may be taxed by the treaty partner country!)

The curious case of the U.S. France Tax Treaty and U.S. Citizens resident in France

In 1994 the United States and France entered into a new tax treaty. The 1994 treaty replaced the previous treaties. Generally, the 1994 treaty continued the “spirit” of the earlier treaties. Of particular note in the introduction to the 1994 treaty is the paragraph:

The new Convention preserves the special French tax benefits for U.S. citizens residing in France and for French residents who are partners of U.S. partnerships.

https://www.irs.gov/pub/irs-trty/france.pdf

(Note also that the 1994 Treaty has been revised by various protocols in 2004 and 2009.)

Much of what follows is rather technical. Therefore, I will begin with a summary of the main points gleaned from an analysis of the U.S. France Tax Treaty. What are those “special French tax benefits for U.S. citizens residing in France”?

The Supreme Court decision in Afroyim v. Rusk was a key decision in the evolution of US citizenship law, leading to the current policy that, in order to lose one’s citizenship when performing a potentially relinquishing act, one must have the intent to lose it when so doing.  Previously, a person performing such an act could lose their citizenship regardless of intent.  In this decision, the Court refers to depriving a person of their US citizenship involuntarily as “forcible destruction of citizenship.”  John Richardson discusses the Afroyim decision and questions whether the punitive taxation of US citizens abroad also results in the “forcible destruction of citizenship.” (posted with permission)

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Prologue

The United States of America is the ONLY country in the world that both:

1. Confers citizenship by birth inside the country; AND

2. Imposes worldwide taxation and regulation based on citizenship.

Therefore, it is reasonable to conclude that:

US citizenship is the world’s only true “taxation-based citizenship”.

Afroyim – Should extending constitutional status to US citizenship be understood as a new gift or exacerbating an old curse?

US Citizenship Stripping Before 1967 – The Significance Of Afroyim

The US government was stripping US citizens of their citizenship if they committed various “expatriating” acts. This was codified in statutes that mandated that certain kinds of conduct would result in the loss of US citizenship. At various times the expatriating conduct included (but was not limited to): naturalizing as a citizen of another country, voting in a foreign election, serving in the armed forces of a foreign country and even marrying a non-citizen.

US Citizenship Stripping After 1967 – Afroyim

The 1967 US Supreme Court decision in Afroyim clarified that Congress lacked the power to strip US citizens (who were born or naturalized in the United States) of their citizenship. The Afroyim ruling clarified that:

1. US citizenship belonged to the citizen and could be lost by the citizen only if the citizen voluntarily relinquished US citizenship by voluntarily committing an expatriating act with the intention of relinquishing US citizenship; and

2. Congress cannot enact laws or engage in practices that result in the forcible destruction of citizenship.

How this happened

1967 – Beys Afroyim Visits The Supreme Court Of The United States

On May 29, 1967 the Supreme Court of the United States delivered its judgment in Afroyim v. Rusk. It is inconceivable that Mr. Afroyim, his lawyers, the Supreme Court justices or the public could have foreseen the monumental consequences of the decision. Although citizenship taxation was never mentioned in the ruling, the truth is that Justice Black’s majority decision in Afroyim planted the seed which grew into the FATCA and citizenship taxation problems leading to the renunciations of today.

John Richardson previously wrote of how some of the tax changes proposed in the 2023 Biden Green book would impact US citizens who live outside the United States, pointing out examples of how, as long as the US continues to employ citizenship taxation, any changes in US tax law will continue to have unintended consequences on Americans abroad.” In this article, he examines the reverse situation, how changes in the laws of one’s home country impacts their “tax relationship” with the United States and drains money from their home country’s economy. Examples include Extradition, FATCA IGAs, Capital Gains on Sale of Principal Residence, Reduction in Corporate Tax Rate, and Reducing the Tax Rate in the Home Country Increasing the Tax Due to the US. (Posted with permission.)

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Prologue

The purpose of this post is provide five simple examples. Some of the examples are based on Canada’s tax laws and others are of a more general nature.

1. Enhancing US Criminal Enforcement – Extradition

An article that appeared on the Reuters site on October 6, 2022 by David Lawder began with:

WASHINGTON, Oct 6 (Reuters) – The Internal Revenue Service’s Criminal Investigation unit said on Thursday it has located 79 tax evasion fugitives in Mexico, Belize, El Salvador, Guatemala and Honduras in the first year of a new extradition initiative.

The effort was made possible by a change in Mexico’s tax laws in 2020 that made tax evasion a felony offense as part of a crackdown to improve weak tax collection. The reclassification paved the way for tax fugitives to be extradited to the United States.

(See the Appendix for my interpretation of how this happened.)

It is likely that the number of extraditions for tax and other financial crimes will increase.

The use of extradition treaties demonstrates why the value of citizenship by investment programs is inversely correlated with the treaties (tax or other) the country has with the United States.

2. Legislating US Tax Law As Domestic Law – The FATCA IGAs

In 2014 Canada and many other countries entered into FATCA Intergovernmental Agreements with the United States. The purpose of the FATCA IGAs was for countries to legislate the US FATCA law (Internal Revenue Code 1471 – 1474) as the domestic law of those countries. Canada made specific amendments to the Income Tax Act of Canada to enact the US FATCA law on Canadian soil. A general description of the Canada US FATCA IGA and the constitutional challenge against it is here. FATCA has had the effect of expanding the US tax base into Canada and other countries.

3. Revealing US taxation – Enhancing The Payment of US Capital Gains Tax On The Sale Of A Principal Residence in Canada

In Canada (and many other countries) the tax free gain on the sale of a principal residence plays a significant role in retirement planning. In 2016 the Government of Canada amended its tax laws to require the reporting of the sale of a principal residence. Many US citizens living in Canada have their US tax returns prepared from their Canadian

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.)

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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).

As John Richardson calls it, the US’ confiscatory tax on a covered expatriate’s pension in their home country is indeed “a particularly difficult and unfair aspect of renouncing US citizenship.”  This policy is very egregious as it concerns tax on income that hasn’t even been received yet by the person and which has no connection to the US in the first place.  It’s a serious potential problem to beware of in planning your renouncing/relinquishing. (Posted with permission.)

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Prologue

To see examples of the deemed income inclusions and the U.S. tax owing click on the links to Appendices, B, C and D below.

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Outline And Structure

This post is for the purpose of alerting Americans abroad and their advisors to a particularly difficult and unjust aspect of renouncing U.S. citizenship. The punitive treatment of the non-U.S. pension is a reason for many Americans abroad to consider renunciation earlier (when they are not “covered expatriates”) rather than later (when they may be subject to the confiscatory rules applied to “covered expatriates”).

Part I – Introduction – The General Message
Part II: Relinquishment and the confiscatory case of the “ineligible” (non-U.S.) pension … A Deeper Dive
Part III: Relinquishment and the retention of the “eligible” (U.S.) pension … A Deeper Dive
Part IV – Conclusion
Appendix A – How Internal Revenue Code Sections 877A and 877 Lead To The Confiscation Of The Non-U.S. Pension
Appendix B – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation
Appendix C – Dual Status tax return with a 1 million USD income inclusion on the day before expatriation with a $100,000 tax credit carry forward
Appendix D – Dual Status tax return with (1) a full actual distribution of the pension in Canada on the day before expatriation (generating a foreign tax credit in the current year)

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Part I – Introduction – The General Message

The warning! Some Americans abroad who renounce U.S. citizenship can expect to have punitive taxation imposed on the value of their non-US pensions. This is a tax imposed by a “deemed distribution” (not actual) of the the pension. Because there was no “actual distribution” those affected will need to find another source of funds to pay the tax. Significantly, the tax does NOT apply to U.S. pensions. Those renouncing who have U.S. based pensions may NEVER be taxed on the value of those pensions.

Once an individual’s net worth reaches 2 million USD, that individual is generally subject to this tax. This means that renunciation may become very costly. Americans abroad with non-US pensions and their advisors should be aware of (and plan around) this problem.

In this post I am joined by CPA Olivier Wagner who has generously provided excerpts from mock U.S. tax returns which demonstrate how confiscatory the U.S. Exit Tax rules are when applied to non-U.S. pensions (and therefore to Americans abroad). You will find his returns in Appendixes B, C and D at the end of this post.

The mock tax returns show that a U.S. citizen living outside the United States who:

– is a “covered expatriate”

– has a non-U.S. pension with a present value that includes a taxable amount of $1,000,000 USD

will be subject to an immediate tax of $344,963 triggered by renunciation of U.S. citizenship.

Because this tax is NOT imposed on those with U.S. based pensions, this tax applies disproportionately to Americans abroad, who earned their pensions while living outside the United Sates.

While US lawmakers decry recent Canadian legislation (Underused Housing Tax) as being unfair to US citizens, John Richardson considers how the US’ own Citizenship Based Taxation causes USCs bigger problems. (Posted with permission.)

Introduction

Canada’s Underused Property Tax came into force effective January 1, 2022. The return for the 2022 year is due on April 30, 2023. Generally, a tax of 1% of the value of the property will be imposed on the owners of property that are not occupied in an acceptable manner (principal residence or rented out) for at least six months of the year. The rules are drafted in a way that would appear to exclude short term rentals (think AirBNB) from meeting the test for “occupancy”. In addition, individuals who are are neither Canadian Citizens nor Permanent Resident are (1) required to file a return and (2) may (depending on whether the property meets the test for occupancy) be subject to the 1% tax. To put it simply: U.S. Citizens and Residents May Be Subject to “Canada’s Underused Property Tax”. New York Congressman Brian Higgins is been very active in drawing attention to the unfairness of “Canada’s Underused Property Tax” being applied to U.S. citizens. He has launched a public and visible campaign to pressure the Government of Canada to offer an exemption to U.S. citizens.

The basic structure of Canada’s “Underused Housing Tax”

In contrast to the Municipal (Toronto, Ottawa and Vancouver) “Vacant Home Taxes“, Canada’s Underused Property Tax is complicated. It is likely that those required to file the return will need assistance.

I am confident that people will be “trapped” and unfairly penalized by Canada’s Underused Housing law. On its face, the law does not apply to property owned by Canadian citizens and permanent residents of Canada. The law creates various categories of owners ranging from those who are “excluded” from reporting, to those are required to report but are “exempt” from the tax and to those who are required to report and are subject to the tax. (It appears that those owning properties through Canadian Controlled Private Corporations will be required to report!) This law is far more complex than its city counterparts. The best (and evolving) information sources about Canada’s tax may be found at:

Canadian Government Summary Of Canada’s Underused Housing Tax Law:
https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/underused-housing-tax.html

The Text Of Canada’s Underused Housing Tax Law:
https://laws-lois.justice.gc.ca/eng/acts/U-0.5/FullText.html

The Actual Tax Return – Form UHT-2900 – Due April 30
uht-2900-22e

Many U.S. Residents May Not Be Aware Of A Potential “Reporting” Penalty Coming From The U.S. Government

Although not discussed, it is likely that many U.S. residents who own residential property in Canada have Canadian bank accounts located near their properties. They even be U.S. dollar bank accounts. Although these accounts are “local” to the property owned in Canada they are “foreign” to the United States. This raises the question of whether the existence and account balances are required to be reported to the IRS. The answer is maybe. The United States has VERY extensive (continued, see lower left)