I recently wrote a post describing some of the objective tax, immigration and financial planning issues surrounding the renunciation of U.S. citizenship. For all people tax and financial planning issues should be objectively considered. But objective issues can take one only so far. We are all individual human beings who experience the world differently. We all ascribe various degrees of importance to different things. Citizenship is about more than immigration, tax and financial planning. Citizenship is also a huge component of how we see ourselves in the world. Citizenship is part of who we are!
Therefore, for many people the renunciation of U.S. citizenship is very much a psychological and emotional process. It is a process of transitioning to a both a new stage of life and a new stage of self! This is because citizenship is very much a component of (1) who we are today, (2) our personal histories and (3) how we see our futures. I was recently seated at a lunch table with a new Canadian citizen who immigrated to Canada from China. By becoming a Canadian citizen he ceased to be a citizen of China. I asked him how he felt about losing Chinese citizenship. He said that he felt very bad and very sad. But, he said his present and future was in Canada and that he wanted to be and identify as a Canadian citizen. (U.S. citizens do NOT automatically lose their citizenship by naturalizing as Canadian citizens.) To think about citizenship is to think about life planning and (especially for U.S. citizens) financial planning. Citizenship can deprive people of opportunities or open up new opportunities.
As I was counselling a people who was renouncing in February 2024, I was asked:
“Do many people regret renouncing U.S. citizenship?”
In all the years I have been assisting people I have had exactly two people regret their renunciations. But, this was immediately after renunciation and the regret was short lived. In most cases, people comment that they wish they had renounced sooner. That said (especially for those who grew up in the United States) people wish they were not placed in a position where they feel they must renounce.
When it comes to renouncing U.S. citizenship:
People are NOT renouncing because they want to.
People are renouncing because they feel they have to.
Two podcasts to help people overcome the regret of renouncing U.S. citizenship
1. The Retired Citizen – You can always identify as a U.S. citizen if you want to
Outline, table of contents and purpose of this post.
Because U.S. citizenship taxation impacts different groups in different ways, it is hard to garner a significant mass of people to committed to the mission of ending citizenship taxation. There are five different groups who are impacted by citizenship taxation. Yet they would seem very different if you were to meet them in heaven.
Part A – “The Five People You Meet In Heaven” – the notion of interconnectedness Part B – Barack Obama and the revival of citizenship taxation – how did his administration “slice and dice” Americans abroad? Part C – Different kinds of Americans abroad with different attitudes toward the taxation of Americans abroad Part D – Fault Lines Among Americans Abroad – The discussion in Keith Redmond’s American Expatriates Facebook group Part E – The Five Types Of Americans Abroad Obama Would Meet In Heaven Part F – Conclusion
This post is a continuation of of my first post about Joe Grasmick’s “Free Trade Professionals” conference that took place in September of 2023 in Mexico City. The first post described the conference and why “citizenship matters”. The morning after the conference ended I boarded a plane for a long flight. I was still thinking about citizenship and immigration.
Usually I don’t watch movies on flights. This time (who knows why) I went through the movie selection and saw two movies where “citizenship/immigration status” played a huge role (whether directly or indirectly) on the lives of individuals. (I didn’t realize this until I watched both movies.) The new 2022 movie “Elvis” and the 1942 old movie “Casablanca” were on the menu. I watched both. Some thoughts on each …
“Elvis” the movie:
A great movie. Sure, it’s about the life and times of Elvis Presley. But, the story of Elvis also includes the role of his manager’s status as an illegal alien in the United States. A partial description includes:
Afterwards, Elvis headlines at the largest showroom in Las Vegas, the International Hotel, and resumes concert tours. Parker’s control of Elvis’ life tightens as he refuses Elvis’ request for a world tour. Motivated by gambling debts, Parker manipulates Elvis into signing a contract for a five-year Las Vegas casino residency. Elvis’ problematic behavior and prescription drug addiction overtake him, and a despondent Priscilla divorces him on his 38th birthday, taking their daughter Lisa Marie with her. After discovering that Parker cannot leave the country because he is a stateless illegal immigrant, Elvis attempts to fire him. Parker subsequently informs Vernon that the family owes him an $8.5 million debt accumulated over the years and convinces Elvis of their symbiotic relationship; though the pair rarely see each other afterward, Parker continues as his manager
How might the life of Elvis Presley been different if Colonel Tom Parker had either been a U.S. citizen or had a Green Card? Would Elvis’s career have unfolded differently? For that matter would he have died at such a young age? Clearly he would have toured outside the United States.
But, enough on Elvis. The more interesting story of the role of citizenship and immigration (and how they relate to Americans abroad) is found in the 1942 classic movie “Casablanca”.
. “Casablanca” the movie:
Casablanca is a true classic. Classics (whether books, movies or art) are interpreted in different ways, by different people at different stages in their lives. As the flight took off, I was still thinking about immigration and how everybody is an immigrant or alien somewhere. How certain people (because of their lack of citizenship are subject to a form of “citizenship apartheid“. Because my mind was in the world of immigration and because I had clearly been a “foreigner” in Mexico City, I saw Casablanca in a completely different light. As described by Wikipedia
“Casablanca is a 1942 American romantic drama film directed by Michael Curtiz, and starring Humphrey Bogart, Ingrid Bergman, and Paul Henreid. Filmed and set during World War II, it focuses on an American expatriate (Bogart) who must choose between his love for a woman (Bergman) and helping her husband (Henreid), a Czechoslovak resistance leader, escape from the Vichy-controlled city of Casablanca to continue his fight against the Germans. The screenplay is based on Everybody Comes to Rick’s, an unproduced stage play by Murray Burnett and Joan Alison. The supporting cast features Claude Rains, Conrad Veidt, Sydney Greenstreet, Peter Lorre, and Dooley Wilson.”
Although Casablance may be in part a “romantic drama film” it is certainly a story about oppression, refugees, human mobility, citizenship, chance, injustice and human survival. Coming off the immigration conference, I interpreted the movie largely through the lens of circumstance, citizenship, fortune driven by the accident of birth and how little is required to disrupt the life any person. As the movie makes clear from the outset, people came to Casablanca because they were fearing and trying to escape from tyranny and were generally trying to get to “the Americas” (the safe haven of the time).
This is the trailer.
It’s a great movie. It’s great entertainment for people of all ages. But, seen through the perspective of citizenship and immigration it exhibits many parallels to the lives of Americans abroad.
What follows are some clips that exhibit analogies to common scenarios.
Some meaningful clips from the movie Casablanca ..
A: Rick experiences an “Oh My God Moment”: On random events – sometimes bad things happen to good people…
B: About U.S. Citizenship and taxation – “It’s based on the circumstances of birth”
C: About the forced imposition of citizenship – Reminds me of the Accidental Americans – “I have never accepted tha privilege. I am now on French soil.”…
D: About the importance of the visa, passport and mobility documentation – It’s all relative … One way or the other, “citizenship matters”. Apparently Rick is always free (from an immigration and citizenship perspective) to return to the USA
E: “To renounce of not to renounce, that is the question”: On the meaning of the decision (including the renunciation decision) – If you don’t get on that plane (renounce), you’ll regret it …
F: Here’s looking at you kid – The U.S. extra-territorial tax regime (although a big problem is a “first world problem”)
G: I finally understood the origins of the title of the Wood Allan movie “Play It Again Sam” …
Advocates for fairer tax treatment of American expats by their government, including both the Republicans Overseas and Democrats Abroad, are urging such expats not to hesitate in posting comments on a U.S. State Department proposal to lower the fee currently charged those seeking to renounce their U.S. citizenships, the deadline for which expires in less than three days.
In the Moore MRT appeal the U.S. Supreme Court will consider whether “income” requires the actual receipt of income or whether “deemed income” meets the 16th Amendment test for income. Does the 16th Amendment require objective tests that must be satisfied before “income” can exist? The answer to this question will have profound implications for both the “U.S. citizen” residents of other countries and (2) the countries where they live. As previously discussed, if income does NOT have to be actually received, this opens the door for the U.S. tax the residents of other countries on income they have never received. Often the taxable event in the U.S. will take place before the taxable event in that other country.
— U.S. Transition Tax – Subpart F and #GILTI (@USTransitionTax) June 26, 2023
“Tell me who you are. Then I’ll tell you how the law applies to you!” I’ll also tell you whether you are a “winner” or a “loser” under this law.
At the end of 2017, Congress was enacting the TCJA. A major purpose of the TCJA was to lower U.S. corporate tax rates from 35% to 21%. This was a huge benefit to U.S. multinationals. One Congressional concern was how to find additional tax revenue in order to compensate the Treasury Department for the reduction in tax revenue which would result in lower receipts from corporations. Congress needed to find some additional tax revenue. They found this additional tax revenue by creating “new income” from the past and taxing that newly created income in the present. In fact, Congress said:
Significantly, Congress didn’t create any real income. No taxpayer actually received any income. The income created by Congress was not “real income”. Rather it was “deemed income”. But, this “deemed income” was intended to appear on tax returns. Real tax was payable on this “deemed” income.
Such, is the beginning of the story of the IRC 965 Transition Tax. The Transition Tax was a benefit to U.S. multinationals and destroyed the lives of individual U.S. citizens living outside the United States who organized their businesses, lives and retirement planning (as did their neighbours) through small business corporations.
This post identifies different groups impacted by the Transition Tax and the “winners” and “losers”.
26 U.S. Code § 965 – Treatment of deferred foreign income upon transition to participation exemption system of taxation
(a) Treatment of deferred foreign income as subpart F income
In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018, the subpart F income of such foreign corporation (as otherwise determined for such taxable year under section 952) shall be increased by the greater of—
(1) the accumulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or
(2) the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.
Part II: The Reader’s Digest Version – The Six Faces Of The Transition Tax
The six “faces” of the 965 transition tax include the faces of five different kinds of “U.S. Persons”. The sixth face is the country where a U.S. citizen was living. Some are winners and some are losers. A list of winners and losers includes:
1. Winner: A U.S. C corp: Typically a U.S. multinational – Received value in return for being subjected to the transition tax
2. Winner: The individual shareholder of a U.S. S corp: Can opt to have the “deemed income inclusion” of 965 to NOT apply – Escaped the application of the transition tax
3. Winner: Green Card holder who is a “treaty nonresident”: Can escape U.S. taxation on “foreign source income – Escaped the application of the transition tax
4. Loser: A U.S. resident individual (U.S. citizen or resident): The Moores – Subject to the transition tax, received nothing in return and likely subject to double taxation
5. Biggest Loser: A U.S. citizen living outside the United States who is a tax resident of another country: More of a loser than the Moore’s – what if the Moores had lived in British Columbia Canada? – Subject to the transition tax, received nothing in return, likely subject to double taxation on business income earned and retained by their “foreign corporation”. But unlike the Moore’s they live outside the United States as “tax residents” of another country. Unlike the Moore’s their CFC was likely not a simple investment in the shares of another company. Rather their CFC was likely the equivalent of a pension, created and encouraged by the tax laws of their country of residence. While the Moore’s experienced “double taxation” on an investment, the U.S. citizen abroad experienced the confiscation of their retirement pension. Individual shareholders of a CFC who live in the United States were affected quite differently from individual shareholders who live outside the United States.
6. Indirect Loser: The countries where overseas Americans are resident were also damaged by the transition tax: Many countries (example Canada) incentivize the creation of private pension plans through the use of private corporations. The effect of the transition tax was effectively to “loot” the retained earnings of those private corporations that were intended to be pension plans for residents of other countries. This is a particularly ugly manifestations of U.S. citizenship taxation and is a graphic example of how US citizenship taxation operates to extract working capital from other sovereign countries.
Significantly the biggest losers in the application of the 965 transition tax are Americans living outside the United States!
The transition tax confiscated the retained earnings of their local business corporations. Because they are tax residents of other countries, there was no prospect of the corporation’s earnings being repatriated to the United States. The corporation’s earnings were the pension/retirement plans for those individuals.
To put it simply:
The Treasury Department – via IRC 965 – effectively “looted” the retained earnings of small business corporations located outside the United States. The justification for the “looting” was that more than 50% of the shares were “owned” by U.S. citizens. The 2017 US Transition Tax was the ugliest face of the Transition Tax and a particularly ugly manifestation of U.S. citizenship taxation!
During the presentation Professor Zucman reinforced his view that “Fair Share Taxation” should include a wealth tax. Interestingly he recommends that FATCA be replaced by the CRS.
But, most interestingly he expressed his view that the current U.S. system of citizenship taxation (as it applies to most Americans living outside the United States) simply cannot be justified. Based on this video, I would say that Professor Zucman may be an ally in the fight to reform the taxation of Americans abroad.
I have put together a short twitter thread to highlight his main points. But, I do recommend that people watch the entire video. The discussion at the end is every bit as interesting (and revealing) as Professor Zucman’s presentation.
A threadreader version of the twitter thread is here:
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 19, 2023
Canada’s Underused Housing Tax is NOT a tax imposed because the “foreign owner” doesn’t spend enough time in the property. Rather Canada’s Underused Housing Tax is a tax imposed because the “foreign owner” doesn’t make the property sufficiently available to non-owners!!
This is the fourth in my series of posts about Canada’s “citizenship-based” Underused Housing Tax.
First: to explain what “Canada’s Underused Housing Tax” really means for “foreign owners” of certain Canadian property:
Conclusion: It means that foreign owners who own property that is NOT in a designated recreational location and who do NOT release their property into the rental market will be forced to pay the 1% tax.
Second: to explain that owners of most Canadian residential property that is not in a designated recreational location, who are neither Canadian citizens nor permanent residents of Canada can avoid releasing their property into the rental market ONLY if they either:
1. Pay Canada’s Underused Housing Tax
2. Sell their property in Canada
In my opinion U.S. (and other foreign residents) should be advised to simply pay the annual tax.
The Government Of Canada’s “Underused Housing Tax” is designed to force “foreign owners” of property to choose among the choices of: releasing their property into the rental market, paying the 1% tax or selling their property!
Explaining this conclusion.
This post ignores the “fringe situations” of properties that are newly purchased, uninhabitable, etc. I am focussing on the situation as it is likely to affect the majority of people. I urge people to read the actual legislation.
Final warning!!! All individual owners of residential housing in Canada who are neither Canadian citizens nor permanent residents of Canada are required to file the Underused Housing Tax return even if the tax is not payable! The penalty for failing to file the return is $5000 CDN.
This is a second post exploring what is the true meaning of U.S. citizenship-based taxation. In an earlier post – “Toward A Definition Of Citizenship Taxation” – I explored the contextual meaning and effect of U.S. “citizenship taxation”. The only “contextual effect” and “practical meaning” of U.S. citizenship taxation may be described as:
Therefore, the practical meaning of “citizenship taxation” is the United States imposing taxation on the non-US source income earned by people who live in other countries. To be clear: citizenship taxation means that the United States is claiming the residents of OTHER countries as US residents for tax purposes!
That’s amazing stuff! Most countries believe that they are sovereign and that includes sovereignty over matters of taxation. Yet, any country that is a party to a U.S. tax treaty has actually agreed that a subset of the treaty partner’s tax residents are ALSO U.S. tax residents! Although nobody questions the right of the United States to prescribe its own definition of tax residency, few would agree that the United States has the right to claim the residents of other countries as U.S. tax residents. Yet, this is what the U.S. citizenship taxation regime means. This U.S. extraterritorial claim of taxation is at the root of the FATCA administration problems and at the root of the the events that led to Treasury Notice 2023-11 (released on December 30, 2022).
The term “citizenship tax” is abstract and meaningless without context. What does it really mean? In this short post I attempt to describe the defining aspect of US tax residency in simple terms.
The ONLY contextual meaning of taxing based on citizenship is that it allows the US to impose tax on income earned outside the United States by people who live outside the United States.
Here is why …
What exactly is “citizenship taxation”? How/why does citizenship matter? It’s not what the “treaty partner” countries think!
1. Like all countries the United States imposes worldwide taxation on its residents. Individuals living in the United States will meet the “substantial presence” requirements and are therefore taxable on their worldwide income. Citizenship is irrelevant.
2. Like all countries the United States imposes taxation on income sourced in the United States. Generally the United States will have the first right of taxation and has the ability to withhold tax. Citizenship is irrelevant.
3. Like no other country (OK, sort of Eritrea) the United States imposes taxation on the non-US source income of people who do not live in the United States and do live in other countries. The US usually claims this right because those people were “Born In The USA” (making them US citizens). Therefore, the US imposes worldwide taxation on people who live in other countries. Citizenship is relevant because it is why the US claims the right to tax people who don’t live in the US and are residents of other countries.
4. Therefore, the practical meaning of “citizenship taxation” is the United States imposing taxation on the non-US source income earned by people who live in other countries. To be clear: citizenship taxation means that the United States is claiming the residents of OTHER countries as US residents for tax purposes!
5. This means that: Every country in the world who signs a tax treaty with the United States that includes a “saving clause” is agreeing that the United States has the right to tax income earned in the treaty partner country by residents of the treaty partner country. It is obvious that countries signing these treaties have no idea what they are signing. The problem has been further illuminated by the recent US Croatia tax treaty that allows the United States to imposes taxation on Croation residents who ARE and WERE US citizens.