Category Archives: citizenship based taxation

The Issue Is Not @CitizenshipTax. The Issue Is Whether The US Can Claim The Tax Residents Of Other Countries As US Tax Residents!

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Introduction – The United States has the “sovereign right” to define who are its “tax residents, but …”

Prologue

There is presently heightened advocacy directed toward the goal of influencing the United States to take action to end (what is described as) U.S. citizenship taxation. Notably this goal is for the purpose of influencing the United States to take action.

Perhaps it would be equally useful to define a separate goal of:

Not allowing the United States to claim the residents of other countries as U.S. tax residents!

Notably this goal would be to engage the governments of other countries!

Ideally both Americans abroad and their countries of residence should seek to stop the United States from reaching into those other countries and claiming the residents of those countries as U.S. tax residents!

In FATCA related discussions it has been common for Government Officials to claim that the United States has the sole right to determine who are its tax residents. Although true, this cannot mean that the United States (or any country) has the right to claim the residents of another country as its tax residents. (The debate is illuminated here and here.)

(Interestingly when the European PETI delegation visited Washington in July of 2022 they made it clear that they did NOT question the right of the United States to define European residents as U.S. tax residents. Rather, they just wanted to find a way to make it easier for European residents to be permitted to have access to bank accounts in the European countries where they live.)

It is appropriate for other countries to accept that the United States has the right (like any country) to define who are U.S. tax residents. It is completely inappropriate for Europeans to accept that the United States has the right to treat European tax residents (who actually live and work in Europe) as U.S. tax residents. By protecting European residents from the United States, European countries would be acting in a manner that is consistent with the OECD tax treaty which anticipates situations of “dual tax residency”. In circumstances of dual tax residency, the model OECD tax treaty (Article 4) provides that the treaty “tie break” will be used to assign tax residency to the country that correlates with the “circumstances of life”. (See page 111 in the document linked to in the previous sentence.) Interestingly, citizenship which absent naturalization, is based on “circumstances of birth” is considered to be the least important criterion under the treaty “tie break”rules.

The treaty tie break rules presumptively assign tax residency based on the “circumstances of life” and not on the “circumstances of birth“.

The bottom line is that, it’s time for the world to simply say:

Of course the United States can define who are its tax residents. But, the United States will NOT be permitted to treat the tax residents of our country (who actually live in our country) to be treated by the U.S. as though they are the tax property of the United States! That is the simple message that must be conveyed!!

Let’s now analyze how the United States goes about claiming the residents of other countries as U.S. taxable property. It’s explained by Mr. Paolo Gentoloni as follows …

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Afroyim v. Rusk – A New Perspective: Do The Specific Rules Of US Citizenship Taxation Result In The Forcible Destruction Of US citizenship?

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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.

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How US Tax Treaties And The “Saving Clause” Prevent Countries From Establishing Retirement Programs For US Citizen Residents

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Prologue – The Circumstances Of Your Birth Should Not Determine The Outcome Of Your Life …

The above tweet 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:

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Cook v. Tait: More About The Meaning Of Citizenship Than About The Scope Of Taxation

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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 Supreme Court, Justice Joseph McKenna, And Citizenship In The Early Part Of 20th Century
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Thinking About Financial And Life Planning For US Citizens Living Outside The United States

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Introduction

This week I am giving a (short) presentation on this topic. I created some slides that are designed to provide the categories for discussion. I thought I would share the slides in this blog post.

John Richardson – Follow me on Twitter @Expatrationlaw

Part 1 – For Americans Abroad: Ending FATCA Would Not End Citizenship Tax, But Ending Citizenship Tax Would End FATCA Under The Internal Revenue Code

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Introduction

Americans Abroad are crumbling under the weight of the application of US citizenship taxation to their “every day lives”. Pursuant to America’s “citizenship taxation regime”, the United States is actually imposing a more punitive and more penalty laden reporting regime on US citizens who do NOT live in the United States than on those who do live in the USA.

Think of it:

For every other country in the world, if one ceases to be a resident of the country and establishes residence in another country, one ceases to be taxed by the first country. US citizens who move from the United States: (1) not only continue to be subject to US taxation, but (2) are “subject(s)” to a more punitive taxation than if they remained in the United States!

In 2010 President Obama signed FATCA into law. The effect of FATCA was to (1) institute a “world wide search” for US citizens living outside the United States and (2) to create significant public awareness of US citizenship taxation. I have previously argued that the effect of FATCA was to expand the US tax base into other countries.

FATCA applies to Americans abroad because and only because of US citizenship taxation (the rule that says that Americans abroad are treated as US tax residents even if they don’t live in the United States). Because FATCA created awareness of US citizenship taxation many people have trouble understanding the difference between US citizenship taxation and FATCA. It is understandable that many believe that FATCA and citizenship taxation are the same.

How to understand how/why citizenship taxation is different from FATCA:

1. US citizenship taxation is the rule that says that all US citizens regardless of where they live are subject to all the provisions of the US Internal Revenue Code. These provisions include taxation, reporting penalties and of course full US taxation on all income earned earned while they are living outside the United States. Many US residents do NOT end up actually owing any US tax. Similarly, many US citizens living outside the United States do NOT end up owing any US tax.

2. FATCA is part of the Internal Revenue Code. Because the Internal Revenue Code applies to all US citizens, FATCA (as part of the Internal Revenue Code) applies to all US citizens (including US citizens living outside the United States). Generally FATCA is a provision to require non-US financial institutions to identify their US citizen customers and report their identity to the Internal Revenue Service. FATCA also imposes additional “reporting requirements” on US citizens (including those who live outside the United States) who have non-US bank and financial accounts.

Ending FATCA Would NOT End Citizenship Taxation, But Ending Citizenship Taxation Would – Under The Internal Revenue Code – Likely End The Application Of FATCA To Americans Abroad

The US Internal Revenue Code applies to ALL “individuals”. Because US citizens are “individuals”, the Internal Revenue Code applies to US citizens wherever they live. FATCA is just one part of the Internal Revenue Code. Even if FATCA were repealed the Internal Revenue Code would continue to apply to all US citizens AND its discriminatory impact on Americans abroad would continue.

But, if the United States ended citizenship taxation by severing citizenship from US tax residency (people can no longer be taxed by the United States just because they are a US citizen) the application of FATCA to US citizens abroad would (under the Internal Revenue Code) likely end.

Here is why – some technical “mumbo jumbo” for those interested

1. The Existing Statute Which Under The Citizenship Tax Regime: IRC 1471 (the operative FATCA section) refers to IRC 1473 for the definition of “Specified United States Person” which is defined partly in terms of “United States Person”. The point is that by ceasing to be a “United States Person”, one ceases to be a “Specified United States Person” for FATCA purposes.

The sequence of reasoning under the existing Internal Revenue Code is:

1. If “United States Account” then FFI has FATCA reporting obligations (1471(b)).

2. If account held by “specified United States Person” then “United States Account” (1471(d)(1)

3. If individual “United States Person” then “specified United States Person” (1473(3)).

4. If US citizen or resident then “United States Person” (7701(a)(30)).

The key point is that if an individual is a “US Citizen” (or resident) the FFI must treat the account as a “United States Account”. A “United States Account” exists if and only if there is a US citizen or US resident which triggers the sequence of 1. Becoming a “US Person” and 2. Then becoming a “Specified United States Person” 3.Then becoming a “United States Account” and 4. As a “United States Account” subjecting the FFI to reporting obligations.

The statute is written so that “United States Accounts” that are reportable. By changing the definition of “US Person” one changes whether an account is a “United States Account”. If Congress were to amend the definition of “United States Person” to include “All Blue Eyed Individuals” then accounts held by “Blue Eyed Individuals” would become United States accounts and therefore subject to FATCA reporting.

Bottom line: The disclosure obligations of FFIs applies to “United States Accounts”. Accounts held by “United States Persons” are “United States Accounts”. But any change in the definition of “United States Person” will change the characteristics/definitions of “United States Accounts”. Congress controls the meaning of “United States Account” by controlling the definition of “United States Person”.

2. A Proposed Statute Pursuant To Which The US Transitions To Residence-based Taxation: As part of ending citizenship taxation IRC 7701(a)(30) would be amended to exclude “citizen” from the definition of “United States Person”:

(30)United States person

The term “United States person” means—

(A)a citizen or resident of the United States,
(B)a domestic partnership,
(C)a domestic corporation,
(D)any estate (other than a foreign estate, within the meaning of paragraph (31)), and
(E)any trust if—
(i)a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii)one or more United States persons have the authority to control all substantial decisions of the trust.

By changing the definition of “United States Persons” to be “residents” the FATCA obligations imposed on FFIs would be determined under the following sequence of reasoning:

1. If “United States Account” then FFI has FATCA reporting obligations (1471(b)).

2. If account held by “specified United States Person” then “United States Account” (1471(d)(1)

3. If individual “United States Person” then “specified United States Person” (1473(3)).

4. If US resident then “United States Person” (7701(a)(30)).

A change to the definition of “United States Person” which defines a “United States Person” as a “resident” would mean that FFIs would no longer be required to disclose accounts held by US citizens but only by US residents.

Conclusion

Ending “citizenship taxation” AKA “severing US citizenship from US tax residency” should solve the FATCA problem for Americans abroad. That said, ending FATCA for Americans abroad would leave the citizenship taxation problem intact!

Ending FATCA would solve “A problem” for Americans abroad. Ending “citizenship taxation” would solve “THE problem” for Americans abroad! At, least under the Internal Revenue Code.

In Part 2, I will explore why ending citizenship taxation under the Internal Revenue Code would NOT solve the FATCA problem for Americans abroad under the FATCA IGAs!

John Richardson – Follow me on Twitter @Expatriationlaw

Appendix – How Severing Citizenship From Tax Residency Would Impact The FATCA IGAs

The definitions section of the Canada US FATCA IGA (see page 7) includes:

ee) The term “U.S. Person” means

(1) a U.S. citizen or resident individual,
(2) a partnership or corporation organized in the United States or under the laws of the United States or any State thereof,
(3) a trust if
(A) a court within the United States would have authority under applicable law to render orders or judgments concerning
substantially all issues regarding administration of the trust, and
(B) one or more U.S. persons have the authority to control all substantial decisions of the trust, or
(4) an estate of a decedent that is a citizen or resident of the United States.

This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.

For the full text of the US Canada FATCA IGA see:

FATCA-eng

Assuming citizenship were severed from US tax residency, either:

1. The definition of “U.S. Person” would require amendment to exclude “U.S. citizen” in (1); and/or

2. The FATCA IGA would simply be interpreted to exclude “U.S. citizen” from the definition of U.S. tax residency.

In other words, the IGAs might require amendment to ensure that its provisions are not triggered by and only by a finding of U.S. citizenship.

Part II: Biden Proposal Changes the Taxation Game for Gifts and Inheritances – Americans Abroad Hit Hard

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Today’s post, Part II, was written by Virgina La Torre Jeker, J.D. and John Richardson, J.D.

Part I of this blog post discussed President Biden’s Green Book proposal that would change the tax rules for unrealized capital gains when assets are gifted or passed at death. To recap, the major thrust of the Green Book proposal (starting at page 30) is to treat gifts and bequests as “deemed sales at fair market value” triggering a capital gains tax which would be payable with respect to the year of the transfer. The net investment income tax / 3.8% surcharge looks as if it can certainly apply in addition to the capital gains tax (full detail on the 3.8% surcharge is here). The Green Book contains no proposals to eliminate or change the current Estate and Gift Tax rules and we believe that taxing gifts and bequests from an income tax perspective while keeping the Estate and Gift Tax regime in place is only a recipe for tax disaster.

Today’s post, Part II, looks at how the proposal will particularly impact the American abroad, its exemptions and carve-outs and how it complicates tax planning for individuals wishing to give up their US citizenship or green card.

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Biden 2023 Green Book: Six Ways The Proposals Would Affect Americans Abroad

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Update April 13, 2022 …

Here is yet a seventh way – the treatment of gifts as capital gains – that the Biden Green book would impact Americans Abroad

Introduction

As long as the United States employs citizenship taxation any proposed changes to the US tax system will have an impact (some intended and some unintended) on Americans abroad.

The Biden Green Book for fiscal year 2023, released on March 28, 2022, contains a number of proposals to both increase tax rates and increase the tax base by increasing the number of activities that are taxable events. Generally the proposals include a number of provisions to create and enhance taxation on both income from capital and capital itself. These provisions continue to generate discussion in the mainstream media including: The New York Times, Washington Post and Wall Street Journal. This is certain to generate much discussion in the tax compliance community.

The 2023 Green Book is available here.

Much will be written about how the proposals would affect resident Americans. Far less will be written about how the proposals would affect Americans abroad. The US rules of citizenship taxation steal from Americans abroad (and the countries where they reside) in hundreds of ways. Some are intended and foreseeable. Others are the unintended consequences that result from tax changes that apply to people who are not considered in the political process.

Significantly the Green Book does not suggest a move away from US citizenship taxation toward resident taxation as embraced by the rest of the world. In their totality, the proposals (particularly those that create income realization events when a gift is made) suggest a worsening of the situation for Americans abroad. That said, one proposal “might” (depending on Treasury) allow for the relaxation for the 877A Exit Tax rules, for a narrow group of Americans abroad under certain circumstances.

The purpose of this post is to identify six ways (and I assure you that there are more) that the Green Book would impact Americans abroad. The “Group Of Six” includes:

1. Raising The Corporate Tax Rate To 28 percent – Creating Subpart F Income and Making More Americans Abroad GILTI – Page 2

Verdict: This will have the effect of increasing the number of Americans abroad subject to taxation on income earned by their small corporations but not received by them personally.

2. An increase in the Corporate rate would increase the GILTI rate (suggesting to 20 percent) – Page 2

Verdict: More Americans abroad will be GILTI and will possibly (depending on a combination of country specific factors and their specific circumstances) be subject to GILTI taxes at a higher rate).

3. Reducing Phantom Gains And Losses: Simplify Foreign Exchange Rate And Loss Rules For Individuals And Exchange Rate Rules For Individuals – Page 90

Verdict: This in interesting. While reinforcing that Americans abroad are tethered to the US dollar it does suggest a recognition of the unfairness of how the phantom gain rules harm the purchase and sale of residential real estate outside the USA). Imagine how this would interact with the proposed rules converting gifts to taxable capital gains?

4. Strengthening FATCA: Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For the Exchange Of information – Page 97

Verdict: This is an attempt to reinforce the core principles of FATCA which are about the identification of US citizens outside the United States.

5. Expatriation – The Stick: Extend The Statute Of Limitations For Auditing Expatriates To Three Years From The Date From Which 8854 Should Have Been Filed (Possibly Forever) – Page 87

Verdict: This is theoretically very bad. It means that those who renounce without filing Form 8854 would be subject to a lifetime of risk. Practically speaking these provisions are not understood on the retail level. Hence, I doubt this will influence many people.

6. Expatriation – The Carrot: Exempting Certain Dual Citizen Expatriates From The Exit Tax – Page 87

Verdict: This is good news for the narrow group of people impacted by this – mainly “Accidental Americans”. It is bad news for the rest because the existing rules will continue to apply to those “who are left behind”.

I assure you that the Green Book contains a large number of ways that Americans abroad will be impacted. I will leave it to others to add to this list.

The principle is:

Citizenship taxation can steal from Americans abroad at least a thousand ways. If you can understand even one hundred of them you are doing well!

Summary: Once again this shows how all proposed changes to US tax law impact Americans abroad in a world of citizenship taxation. There is nothing in this that suggests a move toward residence taxation. There are few crumbs which might make citizenship taxation easier to live with (example relaxing phantom gains). But, on balance these provisions are a “doubling down” on the problems of citizenship taxation. The provision to allow easier expatriation for “Accidental Americans” does nothing to make life easier for the rest.

If you have seen enough you can stop here. For those who want more of the details and explanation, continue on …

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The Story of US Citizenship Taxation and FATCA: Documenting The Issues

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Few US residents are aware of US citizenship-based taxation and FATCA. Legislative change will be aided by educating US residents and politicians about US citizenship-based taxation, FATCA and how they interact.

Citizenship-based taxation and FATCA are difficult to explain in short clips. It’s simply too difficult. At it’s core:

Citizenship-based taxation is a form of taxation where the USA imposes direct taxation on income earned outside the United States by individuals who do not live in the United States. FATCA is the law that is the enforcement tool for citizenship-based taxation.

In order to provide a summary of resources which can be used to better explain US citizenship-based taxation and FATCA, I have compiled the following resources.

https://www.linktr.ee/fatca

Please circulate this link widely!

John Richardson – Follow me on Twitter @Expatriationlaw

The Competent Authorities Should Agree That the Canadian TFSA Has The Same Treaty Status As The US Roth IRA

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2018 Prologue

In 2018 I wrote a post arguing that it is reasonable to conclude that the text of the Canada US Tax Treaty should be interpreted to mean that a Canadian TFSA is – like a US ROTH IRA – a pension within the meaning of the Canada US Tax Treaty. The 2018 post was arguing for equal treatment without the intervention of the respective Canadian and American Competent Authorities.

The Punitive Taxation Of US Citizens Living Outside The United States Continues

I have previously and repeatedly made the point that:

The United States imposes a separate and more punitive system of taxation on US citizens living outside the United States than on US citizens living in the United States.

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