Category Archives: OECD tax residency

Ongoing Updates: Compilation of legal challenges against FATCA And The CRS

The automatic exchange of information under FATCA and the CRS have defined tax administration in the 21st Century. At the risk of over generalization:

FATCA: The United States requests information about individuals (that include the tax residents) of the IGA partner country be sent to the United States. In other words: information is transferred from a country where people do live to a country where they don’t live.

CRS: Countries request information from a country where the individual is NOT tax resident to the country where they are tax resident.

Collectively, FATCA and CRS are referred to as AEOI. There have been and continue to be challenges to both CRS and FATCA. These challenges have arisen in different countries and are based on FATCA and CRS violating the laws/constitutions of those countries.

A list of these challenges includes:

FATCA Related Challenges

1. The Republicans Overseas FATCA Legal Action Lawsuit

Basis of lawsuit: Primarily based on the claim that FATCA violates various U.S. constitutional provisions (including 4th Amendment – unreasonable search and seizure).

Status: Dismissed in the U.S.Courts because the plaintiffs lacked standing. None of the issues were ever argued on the merits.

Twitter: @FATCALawuit

2. FATCA Canada – Alliance For The Canadian Sovereignty FATCA lawsuit

Basis of lawsuit: This is a lawsuit in the Federal Court of Canada against the Government of Canada alleging that the FATCA IGAs violates Sections 8, 7 and 15 of the Canadian Charter of Rights and Freedoms. It also includes the claim that the FATCA IGA cannot be justified under the provisions of the Canada U.S. Tax Treaty.

Status: The plaintiffs lost at trial in the Federal Court. The decision is being appealed to the Federal Court of Appeal.

Twitter: @ADCSovereignty

3. Association of French Accidental Americans

Basis of lawsuit: The plaintiffs argued that FATCA infringes the privacy rights of Accidental Americans and the the FATCA IGA could not be sustained because of a lack of U.S. reciprocity. Note that this case introduces the notion of “privacy rights” directly into the argument.

Status: Lost

Twitter: @USAccidental

4. Jenny’s Crowd Funded U.K. FATCA lawsuit

Basis of lawsuit: The U.S., Canadian and French lawsuits were primarily based on violations of entrenched constitutional rights. This U.K. based lawsuit is based on the claim that because the FATCA demands are disproportionate that FATCA conflicts with the (relatively) new GDPR. The GDPR has given the U.K. plaintiffs an avenue of attack that has not been available in the U.S. or Canadian FATCA lawsuits.

Status: In the process of being funded.

Twitter: @CrossBriton

So, you have received bank letter asking about your tax residence for CRS or FATCA – A @taxresidency primer

Prologue: In the 21st Century, The Most Interesting Thing About A Person Is His/Her Tax Residency

Introduction – So, what’s this “tax residence” stuff about? What does “tax residence” mean?

In 2014, as people started to receive “FATCA letters” I wrote a lengthy post describing “What to do if you receive a FATCA letter“. Information exchange under the Common Reporting Standard “CRS” has begun in 2018. As a result, I am writing this post which is to explain what the CRS is and how it relates to the FATCA letter. It is important to understand that the “CRS letter is actually a combined “CRS/FATCA” letter which is more likely to be received than the original FATCA letter. I urge that those who have received a letter of this type to read this post PRIOR to seeking professional advice!!!

You are reading this post because you have received a letter from your bank that is asking you to identify the countries where you are a “tax resident” and/or whether you are a “U.S. Person”.

The purpose of this post is to help you understand:

– why you are receiving the letter
– what the letter means
– what is the meaning of “tax resident”, “tax residence” and “tax residency” (terms which are used interchangeably)
– why “tax residency” is important to you
– the significance of being a U.S. citizen or Green Card holder
– how to identify where you may be a “tax resident”

Why are you receiving this letter?

The letter is intended to fulfill the bank’s due diligence obligations under both the OECD Common Reporting Standard (all countries of “tax residence” except the United States) and FATCA (whether you are a “tax resident” of the United States).

In other words, the letter is for the purpose of satisfying bank “due diligence” under two separate reporting regimes – FATCA and the OECD Common Reporting Standard “CRS”

This is long post which is broken into the following parts:

Part A – How does FATCA differ from the “CRS”?

Part B – The Combined FATCA/CRS Letter

Part C – “Tax Residency 101”: It’s about where you should be paying your taxes

Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way

Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?

Part F – A “U.S. citizen” cannot use a “tax treaty tie breaker” to break U.S. “tax residence”. How then does a “U.S. citizen” cease to be a “U.S. tax resident”?

Part G – How a “permanent resident” of the U.S. – AKA “Green Card Holder” – ceases to be a U.S. tax resident

Part H – Are you, or have you ever been a U.S. citizen or Green card holder? Sometimes it’s not what it seems.

Part I – “Relinquishments of U.S. citizenship and loss of U.S. citizenship for tax purposes

Part J – Beware! You don’t sever “Tax Residency” From Canada or the United States without being subject to massive “Exit/Departure Taxes!” – You may have to buy your freedom!

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"Tax residence" for US Estate and Gift and "tax treaty tiebreakers with overlapping domicile

Introduction – Two kinds of tax systems – Two kinds of “tax residency”
Title 26, the Internal Revenue Code of the United States is composed of twelve subtitles. Subtitle A deals with “Income Taxes”. Subtitle B deals with “Estate and Gift Taxes” AKA the “transfer tax regime”. The two subtitles are administered separately. They also have different definitions of “tax residence”.
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On what date does an individual (other than a U.S. citizen) begin or end @USTaxResidency

This is an interesting and important question. This question is always important for determining how the Sec. 877A “Exit Tax” applies to “permanent residents” AKA “Green Card Holders” who with to abandon their permanent residence. There are many other many other reasons why this matters. U.S. tax residency (which is an example of “deemed tax residency“) can be a complicated thing. With the exception of U.S. citizens, U.S. tax residency is usually a function of some form of “physical presence”.
U.S. tax residency can trigger:
– income tax payable
reporting requirements with respect to non-U.S. assets and more (dual tax residents may be able to use a “tax treaty tie-breaker” to opt out of U.S. tax residency)
Remember that “residence” for purposes of taxation can be different from residence for the purposes of immigration. As the Topsnik case makes clear, it is entirely possible to NOT have the right to have lost the right to live in the United States, but still be subject to taxation as a U.S. resident.
Rather than reinvent the wheel, I am please to reproduce this post from Daniel Gray – a Toronto based CPA. Thanks to Daniel for allowing me to reproduce this post from his blog.


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Part 1: South Africa is NOT attempting to compete with USA by challenging the US monopoly on citizenship-based taxation

As goes taxation, so goes civilizations
This is Part 1 of my posts discussing the South Africa situation. Part 2 is here.


There have been a number of suggestions in various blogs that South Africa is somehow taxing on the basis of citizenship. American citizens (whether by accident or design) are most sensitive to any discussion of “citizenship-based taxation”. After all, U.S. tax policies combined with FATCA (which is part of the Internal Revenue Code) are destroying the lives of those who have entered the U.S. tax system.
I recently received an email that asked:

They’re talking about SA expats, people who no longer live in SA, being taxed by SA. Like us, these people are residents and earners in countries other than their country of origin (and, I would assume, citizenship). http://www.internationalinvestment.net/regions/south-african-expats-hit-tax-exemption-removal-plans/ If this is not CBT, on what basis are they being taxed? If SA is just wanting to expand its definition of tax residency on what basis do they feel they can apply this to someone who no longer lives in their country?

The short answer …
South Africa imposes “worldwide taxation” on those who are “tax residents” of South Africa. The rules for an individual to qualify as a “tax resident” of South Africa are here. South African “tax residency” is irrelevant to citizenship.
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Russia's new CFC rules: All #offshore profits (are deemed to) run to and through Russia


The article referenced in the above tweet from Norton Rose, provides an introduction to Russia’s CFC (“Controlled Foreign Corporation”) rules. The Russian CFC rules include both:

  • an attribution of income for purposes of taxation; and
  • penalty laden reporting requirements.

 
There are presently huge incentives for Russian high net worth individuals to to break “tax residence” with Russia and find more favorable jurisdictions. It is a “perfect storm”. These incentives include:
• The “De-offshorisation” initiative of the Russian government, including introductions of CFC rules that came into force on January 2015
• The enforcement of pre-existing rules established by Russian Federal Law Nr. 173-FZ “On Currency Regulations and Currency Control” (CCL) by amending RF Administrative Offence Code (AOC) in February 2013 (Russian FBAR coupled with “Russian citizenship reporting“)
• The adoption of the OECD’s Common Reporting Standard (CRS) in May 2016 and what that means for those with “tax residency in Russia

Part 2: OECD Common Reporting Standard ("CRS"): "tax residence" and the "tax treaty tiebreaker"


This is Part 2 – a continuation of the post about “tax residency under the Common Reporting Standard“.
That post ended with:

Breaking “tax residency” to Canada can be difficult and does NOT automatically happen if one moves from Canada. See this sobering discussion in one of my earlier posts about ceasing to be a tax resident of Canada. (In addition, breaking “tax residency in Canada” can result in being subjected to Canada’s departure tax. I have long maintained that paying Canada’s departure tax is clear evidence of having ceased to be a “tax resident of Canada”.)
Let’s assume that our “friend”, without considering possible “tax treaties” is or may be considered to be “ordinarily resident” in and therefore a “tax resident” of Canada.
Would a consideration of possible tax treaties (specifically the “tax treaty residency tiebreaker) make a difference?
This question will be considered in Part 2 – a separate post.

What is the “tax treaty residency tiebreaker”?
It is entirely possible for an individual to be a “tax resident” according to the laws of two (or more countries). This is a disastrous situation for any individual. Fortunately with the exception of “U.S. citizens” (who are always “tax residents of the United States no matter where they live), citizens of most other nations are able to avoid being “tax residents” of more than one country. This is accomplished through a “tax treaty tie breaker” provision. “Treaty tie breakers” are included in many tax treaties. (Q. Why are U.S. citizens always U.S. tax residents? A. U.S. treaties include what is called the “savings clause“).
Some thoughts on the “savings clause”
First, the “savings clause” ensures that the United States retains the right to impose full taxation on U.S. citizens living abroad (even those who are dual citizens and reside outside the United States in their country of second citizenship).
Second, the U.S. insistence on the “savings clause” ensures that other countries agree to allow the United States to impose U.S. taxation on their own citizen/residents who also happen to have U.S. citizenship (generally because of a U.S. place of birth.)
Where are “tax treaty tie breakers” found? What do they typically say?
Many countries have “tax treaty tie breaker” provisions in their tax treaties. The purpose is to assign tax residence to one country when a person is a “tax resident” of more than one country.
As explained by Wayne Bewick and Todd Trowbridge of Trowbridge Professional Corporation (writing in the context of Canadian tax treaties):
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Determining Tax Residency in Canada: Deemed resident vs. factual resident


Let’s begin with the law as stated in the Income Tax Act of Canada …
Taxation in Canada is governed by the Income Tax Act of Canada. Sections 1 and 2 of the Act read in part as follows:

Short Title
1 This Act may be cited as the Income Tax Act.
PART I Income Tax
DIVISION A Liability for Tax
2 (1) An income tax shall be paid, as required by this Act, on the taxable income for each taxation year of every person resident in Canada at any time in the year.

(This does NOT say that ONLY those “resident in Canada” are required to pay Canadian tax. In fact there are circumstances under which nonresidents of Canada are also required to pay different kinds of Canadian tax.)
Searching for the meaning of “resident in Canada” …
Tax Residency” is becoming an increasingly important topic. Every country has its own rules for determining who is and who is not a “tax resident” of that country. The advent of the OCED CRS (“Common Reporting Standard”) has made the determination of “tax residence” increasingly important.
At the risk of oversimplification, a determination of “tax residency” can be based on a “deeming provision” or decided by a determination “based on the facts”. Some countries base “tax residency” on both “deeming provisions” and a “facts and circumstances” test.
Tax Residency in Canada – “Deemed residence” or “ordinary residence based on the facts” …
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Tax residency vs. physical presence: The four questions you must ask before making a country your home

An introduction to “tax residency” …
Most people equate residency with physical presence. They assume that where you are physically presence determines where you live. They further assume that where you live is where you pay your taxes. Conclusion: The country where you live is the country where you must be “tax resident”. Not necessarily!
There is no necessary correlation between where one lives and where one is a “tax resident”. In fact, “residency for tax purposes” may be only minimally related to “residency for immigration (where you live) purposes”. It is possible for people to live in only one country and be a tax resident of multiple countries. The most obvious example is “U.S. citizens residing outside the United States”.


The concept of “tax residency” is fundamental to all systems of taxation. The fundamental question, at the root of all tax systems is:
“what kind of connection to a country is required to assume tax jurisdiction over an “individual”, over “property” or over an “entity”?”
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Part 1: Tax Treaties, determining "tax residence" and new OECD Common Reporting Standard ("CRS")


 
The above tweet references an article from Stikeman Elliot which includes:

For CRS purposes, the term “reportable person” generally refers to a natural person or entity that is resident in a reportable jurisdiction (excluding Canada and the United States) under the tax laws of that jurisdiction, or an estate of an individual who was a resident of a reportable jurisdiction under the tax laws of that jurisdiction immediately before death, other than: (i) a corporation the stock of which is regularly traded on one or more established securities markets; (ii) any corporation that is a related entity of a corporation described in clause (i); (iii) a governmental entity; (iv) an international organization; (v) a central bank; or (vi) a financial institution.  See definitional subsection ITA 270 (1).

This morning I received an email that included the following question:
My friend lives and works in country A, and has bank accounts in Country B. He is a permanent resident of Canada. Will the banks in either Country A or Country B, report his accounts to the Canada Revenue Agency? Country A (where he resides) has no income tax system. This is common in Gulf Countries. Country A has not signed on to Common Reporting Standard. Country B (a European country) has signed on to the Common Reporting Standard.
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