Category Archives: Little Red FATCA Book

“Dual citizenship affords unique opportunities for cross-border tax evasion” claims report issued by @SenateFinance

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As described by AARO (“Association of American Residents Overseas”) in an April 7, 2023 blog post:

On March 29 the Senate Finance Committee Democratic staff issued a report titled “Credit Suisse’s Role in U.S. Tax Evasion Schemes of its investigation of Credit Suisse’s compliance with a 2014 plea agreement with the Department of Justice involving the bank’s participation in a conspiracy to hide offshore accounts from the IRS.

Per Committee chair Senator Ron Wyden’s (D-OR) press release, the report details Credit Suisse’s role in a “potentially criminal tax conspiracy” involving accounts of a U.S. based family that were closed 10 years ago, recycles the Clinton/Bush era tax evasion case by U.S. businessman Dan Horsky, and discusses large undeclared accounts belonging to 23 ultra-high net worth U.S. citizens.

We are surprised that such a large and well-resourced committee working for two years was unable to unearth so little misconduct at a mega-bank that has now collapsed due to mis-management. Most outrageously, the report states that “Dual citizenship affords unique opportunities for cross-border tax evasion,” which gives the impression that ordinary Americans living abroad are prone to criminal tax evasion.

AARO has a meeting scheduled with Senator Wyden’s office in May during our annual Overseas Americans Week, during which we will express our extreme dissatisfaction with this characterization. We will let you know if there are any developments.

AARO deserves thanks and credit from all Americans overseas for publicly pushing back on the report created and published by the Democrat led Senate Finance Committee. The report is outrageous, a waste of public funds and appears to be a “back handed attempt” to justify the hiring of more IRS agents and increasing/justifying the imposition of FBAR penalties. The report is NOT (contrary to media reports) really about Credit Suisse. The report uses Credit Suisse as a “prop” to remind the people of America, that there are some people in America (it all took place ten years ago), who deliberately attempt to evade the payment of U.S. tax. The modus operandi includes moving their money to financial institutions and entities outside the United States. Yes, it’s true. Of course, as an added benefit the Senate Finance Committee gets to demonize Swiss banks (in general) and Credit Suisse (in particular). But make no mistake. The Senate Finance report is NOT about Swiss banks. It’s an advertisement to justify the hiring of more IRS agents funded by the Inflation Reduction Act, to legitimize the imposition of more FBAR penalties and to suggest that Republicans are (somehow) soft on tax evasion.

Why this report is dangerous for U.S. citizens generally and for Americans abroad specifically

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How U.S. Citizenship Tax, The Treaty “Saving Clause” and FATCA Create A Fiscal Prison For Dual Tax Residents

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Introduction – The Problem Of Dual Tax Residency For U.S. Citizens

A “Hell greater than the sum of the parts”

There are people in the world who really don’t understand (or say they don’t) what exactly is the problem with U.S. citizenship based taxation. They claim to not understand why defining “tax residency” based on the “circumstances of birth” rather than the “circumstances of life” is a problem. They fail to consider how taxation based on “circumstances of birth”, interacts with U.S. tax treaties and FATCA to create a “hell that is greater than the sum of the parts”.

This is the third post in a series designed to explore and facilitate the understanding of the U.S. “citizenship based” extra-territorial tax regime. The first post explored the practical meaning of U.S. citizenship-based taxation (it’s primary effects are on people who live outside the U.S.). The second post explored the fact that tax residency based on “citizenship” is tax residency based on the “circumstances of one’s birth” rather than the “circumstances of one’s life” (its effects are primarily based on the circumstance of birth in the U.S.). The conclusion drawn from these first two posts was that the U.S. citizenship based extra-territorial tax regime is one in which:

The circumstance of a U.S. birthplace is used as a justification to regulate the lives of people with no connection to the United States and impose U.S. taxation on income that has no connection to the United States and is received by someone who does not live in the United States.

Citizenship taxation has practical and contextual meaning only its application to tax residents of non-US countries. The U.S. uses the circumstance of a “U.S. birthplace” to reach out and “claim” the tax residents of other countries as U.S. “tax residents”.

The purpose of this post is to explain how the interaction of U.S. citizenship taxation (claiming those with a U.S. birth place as U.S. tax residents when they are tax residents of other countries), the “saving clause” (not allowing U.S. citizens with dual tax residency to assign tax residency to the country where they actually live) and FATCA (the tool to hunt, find and enforce the extraterritorial U.S. tax and regulatory regime on the residents of other countries) creates a whole hell greater than the sum of the parts.

Many people understand the three components of “citizenship taxation”, the “saving clause” and “FATCA” as separate entities. Few appear to understand how those three components interact together to destroy the lives of U.S. citizens with dual tax residency. The U.S. has created a “fiscal prison” for its citizens. Seven video accounts of the impact of the U.S. citizenship tax regime are available here.

This problem can be solved ONLY by the United States redefining its rules for “tax residency” so that “citizenship” (the circumstances of one’s birth”) is not relevant to “tax residency” (the circumstances of one’s life).

This post is to identify the component “Part”(s) of the problem. It is organized in “Sections” and “Parts” as follows:

Section I – How The Problem Was Created

Part A – Tax, Residency and Tax Residency
Part B – The general problem of dual tax residency
Part C – Introducing the treaty tie break and how it can be used to end “dual tax residency” under a relevant Canadian tax treaty”
Part D – The general principles of the U.S. Canada “tax treaty tie break – How “circumstances of life” are used to assign tax residency
Part E – Food for thought – Citizenship the least important factor for the treaty tie break
Part F – Two possible examples of assigning residence to one country by using the “treaty tie break” – Green Card Edition
Part G – U.S. Citizens CANNOT Benefit From The “Tax Treaty Tie Break” – Hello “Saving Clause”
Part H – The “Saving Clause” And The Inability For U.S. Citizens To Use The “Treaty Tie Break” Is How The United States Captures The Residents Of The Treaty Partner Country And Claims Them As U.S. Tax Residents
Part I – The Tax Treaty Tie Break And Implications For U.S. Tax Compliance And For FATCA And The CRS Reporting

Section II – How Dual Tax Residents Experience The Extraterritorial Tax Regime

Part J – The U.S. exports a more punitive from of taxation to tax residents of other countries
Part K – The Problem Of Investing, Retirement planning and Retirement Planning – The Punitive Taxation And Reporting Requirements of PFICs and Foreign Trusts
Part L – The Problem Of Non-U.S. Pensions – How Are They Treated Under The Internal Revenue Code? – Different Rules For Different Countries
Part M – Discouraging U.S. Small Business Abroad – The Treatment Of Small Business Corporations Generally And On A Country By Country Basis
Part N – The “FBAR Marriage”: How Marriage To An Alien Results In Higher Taxation, More Reporting, Difficulties With Asset Transfers, Higher Divorce Costs And Possibly A Requirement To File A Tax Return With As Little As $5 Of Income

Section III – How The U.S. Extraterritorial Tax Regime Attacks The Sovereignty Of Other Countries

Part O – The U.S. taxation of residents of other countries attacks and erodes the tax base of those other countries

Section IV – Solving The Problem: Regulatory And Legislative Solutions

Part P – Regulatory Solution: “A Regulatory Fix For Citizenship Taxation
Part Q – Regulatory Solution: Amending The “Saving Clause” In U.S. Tax Treaties
Part R – Territorial Taxation For U.S. Citizen Individuals
Part S – Redefining U.S. Tax Residency To Move To Residence-based Taxation”

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Part 3 – Notice 2023-11: Is FATCA Aimed At Resident Americans, Residents Of Other Countries Or Both?

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Summary – The Reader’s Digest Version …

Although FATCA was clearly motivated by the behaviour of US citizens resident in the United States, Treasury did NOT interpret the “purpose” as being limited to prevent abuses by “residents of the United States”. Rather Treasury appears to have interpreted the purpose of FATCA (very broadly) to target residents of other countries.

Had Treasury done what it was required by statute to do (consider the purpose of IRC 1471) it might have approached its responsibilities very differently. What began as an attempt to curb the behaviour of US residents became an attack on residents of other countries who happen to be US citizens. The evidence further suggest that the FFIs most heavily impacted by FATCA are located in the high tax jurisdictions where US citizens abroad are most likely to reside. Can it reasonably be concluded that the purpose of IRC 1471 – AKA FATCA – was to attack the residents of other countries and the banks in those countries? If not, then why did Treasury target the whole world, rather than the parts of the world with conditions that facilitated tax evasion for resident Americans? Can anybody seriously make the claim that banks in Canada, the UK, Australia New Zealand and other first world democracies were attractive locations for tax evaders? Yet, this is precisely what Treasury did.

It didn’t have to be this way!

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Part 2 – Notice 2023-11: Non-US Banks May Be Forced To Sever Ties With US Citizen Clients Because Of FATCA

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Introduction – The Readers’ Digest Version

This is Part 2 of a series of posts discussing the world of FATCA and how IRS Notice 2023-11 is likely to impact it. In Part 1 I described how Notice 2023-11 imposes significant additional obligations on both non-US banks and the IGA Model 1 governments. (This post will be best understood by first reading Part 1 and understanding the additional compliance burdens imposed on non-US banks as a result of Notice 2023-11.) The purpose of this post (Part 2) is to suggest that the overall context of FATCA, the FATCA IGAs and US citizenship taxation will incentivize non-US banks to purge US citizen clients. It is reasonable to conclude, that US citizen clients are a clear and present danger to their businesses.

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Part 1 – Notice 2023-11: The Carrot, The Stick And Heightened FATCA Enforcement On Overseas Americans

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Welcome To 2023 – A Year Of Heightened FATCA Enforcement

On December 30, 2022 US Treasury released Notice 2023-11. The broad purpose of the Notice is to prescribe conditions that would allow non-US banks to temporarily avoid a designation of “significant non-compliance” under the FATCA IGAs. It is important to note that Notice 2023-11 is NOT simply a “stay of execution”. It is a “stay of execution” that is conditional on both non-US banks and their governments participating in a significant escalation of FATCA enforcement on US citizens who live outside the United States.

The purpose of this post is to comment on and analyze the provisions of Notice 2023-13 which strongly incentivize non-US banks to purge themselves of existing US citizen clients. In Part 2 I will explain why I believe that non-US banks may be forced to close the accounts of all their US citizen customers.

n-23-11

Prologue And Summary Of The Issue

Through a combination of FATCA (“Foreign Account Tax Compliance Act”) found Chapter 4 of the Internal Revenue Code and the FATCA IGAs (the mechanism for countries to comply with FATCA) the United States has created conditions where US citizen customers are a burden and risk to non-US banks. These provisions have created conditions that threaten punitive financial sanctions on non-US banks who cannot notify the IRS of a US citizen’s Social Security Number. Generally this is because the US citizen has lived abroad for many years and does NOT have a SSN. This situation has created worry for the banks and for their US citizen customers. The fact that the US citizen does NOT have a SSN is NOT relevant to the reporting obligation imposed on the bank. To be clear: The FATCA IGAs mean that non-US banks can easily be in “significant non-compliance” for the failure to comply with something that is impossible to comply with.

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“Bear Necessities”: Argentina US #FATCA IGA Confirms No Obligation Of Reciprocity On US

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The Readers Digest Version: A Tweet By Tweet Explanation

Prologue – Argentina December 5, 2022

The State Department website featured the following announcement:

On December 5, Ambassador Marc Stanley and Argentine Minister of Economy Sergio Massa signed an Intergovernmental Agreement (IGA) to facilitate implementation of the U.S. Foreign Account Tax Compliance Act (FATCA). The IGA advances the shared objective of improving international tax compliance. The United States enters into bilateral FATCA IGAs with foreign jurisdictions to provide for the implementation of FATCA through domestic reporting and automatic exchange of information.

This IGA will enable the reciprocal exchange of certain financial account information between the United States and Argentina, while ensuring appropriate data protection. The United States enacted FATCA in 2010 to combat offshore tax evasion. There are currently 113 FATCA IGAs in effect between the United States and foreign jurisdictions.

Note the inclusion of the word “reciprocal”. Describing an agreement as reciprocal does not make it reciprocal. The US Argentina FATCA IGA is a reminder of how one-sided and unequal these FATCA IGAs really are. The reason for the inequality is that the United States imposes “citizenship taxation” and Argentina (like the rest of the world) imposes “residence taxation”. Therefore, the terms of the FATCA IGAs reflect the attempts of the United States to use its system of “citizenship taxation” to claim the residents of OTHER countries as US tax residents.

Detailing The Inequality Of The US Argentina FATCA IGA

or read the Threadreaderapp version here.

In the spirit of bringing an exciting end to 2022, the United States and Argentina have entered into a FATCA Intergovernmental Agreement. The Model 1 FATCA IGAs are not and were never intended to impose reciprocal exchange of information obligations on the United States. Not only does the US get far more than it gives, but the definition of “reportable accounts” reflects the difference between a US tax system based on citizenship and an Argentine tax system that is based on “residence”. One result is that under the FATCA IGAs information flows from a country (Argentina) where the US citizens are likely to live to a country (the United States) where the US citizens reported on do NOT likely live. On the other hand, the agreement clearly states that the US will send information (what little it is obligated to send) from a country where the person does NOT live (the United States) to a country where they do live (Argentina). An important effect of the FATCA IGAs is they assist the United States in claiming the tax residents of other countries (in this case Argentina) as US tax residents as well. This is one of many respects in which the FATCA (“Foreign Account Tax Compliance Act”) is different from the CRS (“Common Reporting Standard”).

To put it simply: the FATCA IGAs have the effect of expanding the US tax system into the FATCA partner country (in this case Argentina).

Summary …

For the “Bare Necessities” click on the following tweet …

Those interested in a more detailed discussion of why the FATCA IGAs are not reciprocal are invited to read the discussion here.

John Richardson – Follow me on Twitter @Expatriationlaw

Part 2 – Would A Move To Residency-based Taxation Solve The FATCA Problem For Americans Abroad Created By The FATCA IGAs?

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Purpose Of This Post – The “Readers Digest” Version

FATCA is administered through the FATCA IGAs (international agreements) and not through the U.S. Internal Revenue Code (domestic law of the United States). the FATCA IGAs do NOT include a provision to change the meaning of “U.S. Person”. Rather the meaning of “U.S. Person” is permanently defined as a “U.S. citizen or resident”. There is no provision in the IGA to change this definition. Therefore, the IGAs are written so that they will ALWAYS apply to U.S. citizens regardless of whether the U.S. continues citizenship taxation.

In effect, implementing FATCA through the IGAs has had the practical impact that:

– the FATCA partner country has changed its domestic laws to adopt the provisions of the FATCA IGAs which are intended to impose specific rules on “U.S. Persons” who are defined as “U.S. citizens or residents”

– those domestic laws reference the FATCA IGAs which contain no provision to change or adapt the meaning of “U.S. Person” which means that discrimination against “U.S. citizens” is permanent.

– resulting in a situation where the FATCA partner country is obligated under its own domestic law to target “U.S. citizens” for special treatment!

Note that this is irrelevant to how the United States defines tax residency! A move to residence-based taxation will not change this basic fact.

Bottom line: The United States has forced other countries to permanently discriminate against U.S. citizens. Because the discrimination is enshrined in the FATCA IGAs, the United States has effectively created an extra-territorial jail for its own citizens, forced other countries to lock U.S. citizens up and effectively thrown away the key!!

#YouCantMakeThisUp!

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Introduction And Background On FATCA

FATCA has created many difficulties for Americans abroad. It has caused great anxiety, created an awareness of US citizenship taxation, expanded the US tax base into other countries and resulted in a growing number of Americans renouncing US citizenship. Because the US employs citizenship taxation, FATCA has created a situation where information flows from a country where Americans abroad live (for example Canada) to a country where they do not live (the United States). Any suggestion that FATCA and the CRS (“Common Reporting Standard”) are some how equivalent is wrong. Many of the differences between FATCA and the CRS are explained here. Finally, neither the FATCA IGAs nor FATCA as defined in the Internal Revenue Code (Chapter 4) impose any obligation of reciprocity on the United States. This has had the consequence of (1) the United States not providing information about accounts held by the tax residents of those countries in the United States while (2) demanding information about the accounts held by US citizens in those other countries. In other words: the combination of the US FATCA law coupled with the US refusal to adopt the CRS has supercharged the United States as a significant tax haven! All of this has had a considerable and life altering impact on US citizens who live, work and engage in retirement/financial planning outside the United States.

FATCA And Citizenship Taxation

There has been considerable discussion about how FATCA interacts with US citizenship taxation and what can be done to mitigate the effects of FATCA on the community of Americans abroad. There is an obvious correlation between the enactment of FATCA and renunciations of US citizenship. What is the solution? If the United States severed “citizenship” from its definition of tax residency (abolishing citizenship taxation) would that solve the FATCA problem for Americans abroad?

Severing citizenship from US tax residency – how would FATCA continue to apply to Americans abroad?

In Part 1 I considered the question of whether a move from citizenship taxation to residence based taxation would end the FATCA problems for Americans abroad under the Internal Revenue Code. I concluded that severing citizenship from tax residency would solve the FATCA problem for Americans abroad in the Internal Revenue Code. The problem is that FATCA is NOT administered through the Internal Revenue Code. FATCA is administered through the FATCA IGAs (“Inter-governmental Agreements”). It’s important to understand that implementing FATCA through the FATCA IGAs has meant that:

1. The FATCA IGAs (agreed to by both the United States and the partner country) have replaced the Internal Revenue Code (a US law made by and only by the United States) as the vehicle through which FATCA is implemented; and

2. The partner country has enacted the terms of the FATCA IGA as the domestic law of that country.

To put it simply, the use of the FATCA to implement FATCA has meant that other countries (at the request of the United States) have adopted laws for the express purpose of identifying US citizens, reporting their financial accounts to the IRS and ultimately discriminating against US citizens by not allowing them access to financial services! In 2008, Candidate Obama defined his vision as “Change You Can Believe In”. He neglected to say that the change included the United States forcing other countries to change their domestic laws to punish US citizens who live in their country!

In this post – Part 2 – I consider whether a move to residence taxation would end the FATCA problem for Americans abroad as it is defined in the FATCA IGAs. I conclude that it would NOT end the FATCA nightmare caused by the FATCA IGAs.

Therefore, a move to residence taxation would NOT end the FATCA nightmare for Americans abroad.

This issue is explored in the following four parts:

Part A: A Move To Residence-based Taxation Under The Internal Revenue Code Would End The Application Of FATCA To Americans Abroad Under The Internal Revenue Code
Part B: A Move To Residence-based Taxation Under The Internal Revenue Code Would NOT End The Application Of FATCA To Americans Abroad Under The FATCA IGAs
Part C: The FATCA IGAs Have Been Legislated As Domestic Law In The FATCA Partner Countries
Part D: What Amendments To The IGAs Would Be Required If The U.S. Severed Citizenship From Tax Residency?

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Be Careful Of Faulty Logic Claiming FATCA And The CRS Are Similar: Seven Ways They Are Not

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Prologue

For those more interested in logic than in FATCA, you will find a discussion of the logical fallacy here.

Introduction

Last week I participated in a group discussion about FATCA and its effect on Accidental Americans. It’s difficult to have a discussion about FATCA that doesn’t include the CRS (“Common Reporting Standard”). Neither FATCA nor the CRS is well understood. That said, an introduction of the CRS into a discussion about FATCA detracts from a consideration of how FATCA impacts Accidental Americans (and others). Furthermore, there is a generalized assumption that the CRS is a positive development. Associating FATCA with the CRS enhances the “illusion” that FATCA is also a positive development.

In part, the discussion assumed that:

– FATCA (U.S. “Foreign Account Tax Compliance Act”) and the OECD CRS (“Common Reporting Standard“) were similar kinds of information exchange agreements; and

– To attack/criticize FATCA would be to criticize and have the effect of weakening the CRS.

These are absurd claims which are based on faulty logic. The faulty logic is that because FATCA and the CRS overlap in one aspect that they are functionally equivalent in intent, effect, purpose and other aspects. The argument appears to be based on the following reasoning:

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The FATCA IGAs Do Not Impose An Obligation Of Reciprocity On The United States

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Introduction – The Question

Over the past few months, in unrelated contexts, I have heard the question asked:

Is FATCA reciprocal?

For example the Judges hearing the appeal in the ADCS FATCA Canada lawsuit asked (clearly assuming that it did) whether the FATCA IGAs imposed reciprocal obligations on the United States. Surely it must, they assumed. Recently the head of a FATCA fact finding mission asked in a meeting of individuals the same question. In neither case was a clear “yes or no” answer provided. Some participants were adamant that there WAS reciprocity. Others were adamant that there was no reciprocity. Some simply didn’t know. This post is an attempt to analyze the facts as they pertain to FATCA, consider whether the FATCA IGAs prescribe reciprocity of obligation and ultimately explain why there is NO meaningful reciprocity of obligation.

Some Important FATCAoids

The 2010 Statute

FATCA was signed into law by President Obama on March 18, 2010. The general provisions are found in Chapter 4 – Sections 1471 – 1474 of the Internal Revenue Code. The statute is coercive and is a US demand, under threat of sanction, that non-U.S. banks deliver information, about the bank accounts of residents of their country, to U.S. Treasury. The statute contemplates a one way flow of information to the United States without ANY reciprocity from the United States. (Any discussion of “reciprocity” must take place within the context of the FATCA IGAs.)

The 2014 Implementation Of FATCA Via The IGAs

The implementation of FATCA (via the FATCA IGAs) began (in many countries) on July 1, 2014. Because the statute does NOT (IRC 1471 – 1474) obligate the United States to provide any information to other countries, any obligation of reciprocity must be found in the IGAs.

Do Bilateral Obligations Mean Reciprocity?

Non-U.S. countries are required – pursuant to the FATCA IGAs – to transfer information about the holders of local financial accounts in their country to the United States of America. Notably the vast majority of account information transferred to the United States is information about accounts held by tax residents of the transferor country. In other words: pursuant to the FATCA IGAs, account information is transferred about accounts located in a country where the account holder actually lives to a country where the account holder does NOT actually live! To put this in context, imagine the following scenario:

You have a neighbour in a Canadian small town, who earns his income in Canada and pays tax on that income to Canada. That income is deposited into a bank account at a branch located in his community. That neighbour may be having his bank account information transferred to the United States. How could this be you ask? Surely this must be a mistake? The answer is “No it is not a mistake”. It’s the result of Canada enacting a U.S. law (“FATCA”) on Canadian soil. Pursuant to that FATCA law (described in numerous CBC articles), the transfer of account information is required because your neighbour was either born in the United States or was born in Canada to a U.S. citizen parent. So what you ask? Surely the circumstances of a person’s birth shouldn’t mean that a country where they don’t live has access to their banking information in the country where they do live? Wrong again. It’s about tax residency and about the U.S. unique definition of tax residency. You see, the United States defines any U.S. citizen as a tax resident of the United States (regardless of where that citizen lives). By defining “tax residency” in terms of citizenship, the United States is claiming that the tax residents of other countries are U.S. tax residents. U.S. citizens are subject to all (tax, forms and penalty) the provisions of the U.S. Internal Revenue Code. But wait you ask! My neighbour lives in Canada, pays tax in Canada and is a tax resident of Canada! (In fact the FATCA IGAs allow the United States – by tying the definition of U.S. citizen to a definition in the Internal Revenue Code – to define ANY individual in Canada as a U.S. tax resident.) Yes, it’s true. Pursuant to the FATCA IGAs the United States is claiming Canadian tax residents as U.S. tax residents. This means that the United States is claiming the right to impose U.S. taxation on the Canadian employment income, earned by residents of Canada, which is already taxed in Canada. Yes it’s true.

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@ADCSovereignty #FATCA Appeal – March 30, 2022 – Reporting On The Hearing In Twitter Time

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As reported by American Expat Finance and the Isaac Brock Society, the ADCS-ADSC.ca FATCA appeal was heard on March 30, 2022.

As I watched the hearing I tweeted my thoughts. Win, lose or draw the goal is to get the case before the Supreme Court of Canada. Therefore, today’s appeal should be seen as an important step down that road.

I suggest that you:

1. Read this summary of the ADCS FATCA lawsuit to understand the context

2. Read this article from a Canadian law firm which references the FATCA lawsuit

3. Read the article at American Expat Finance

4. Click on the link below to see my thoughts and observations as the hearing unfolded.

https://threadreaderapp.com/thread/1509210940167892997?refresh=1648676869

In addition, a bit more history on this lawsuit …

John Richardson – Follow me on Twitter @Expatriatonlaw