Category Archives: Little Red Tax Treaty Book

Of all the different kinds of residency, the one that matters most is your “tax residency”

Introduction

In a world of information exchange (FATCA and CRS), fiscally challenged governments (United States and other Western Democracies) and expanding notions of taxation (GILTI, France Digital Tax, etc.), your “tax residency” matters. In fact, in the 21st Century the most interesting thing about a person is his tax residency (or residencies).

At the same time, we are living in a world of increased Global Mobility. There are more and more opportunities for residency and citizenship. As people and capital have become more global, tax authorities have worried more and more about how human migration impacts their their tax bases. For example, people are severing tax residency with high tax states like New York and California. The level of (and form) of taxation impacts investment and migration decisions.

Taxation matters. Tax residency matters. People must keep track of both their “citizenship” and “tax residency” portfolios. It’s important to understand how the concepts of “citizenship”, “nationality”, “domicile”, “deemed residency”, “actual residency” and “tax residency” relate.

I recently came across the following article that explores these concepts. Please note that the article uses the term “fiscal residency” as synonymous with “tax residency”.

The following post was authored by Marios S. Kalochoritis, Managing Partner of Loggerhead Partners. We are reproducing this with the full permission of Loggerhead Partners.

Loggerhead Partners is a provider of “multi-family office” services including, estate planning, transaction advisory, corporate structuring and tax planning.

Loggerhead Corporate Services is the Dubai-based specialized entity of Loggerhead Partners that optimizes tax and preserves the wealth of its clients, through tailor-made, corporate structuring solutions with a focus in the UAE

Enjoy …

John Richardson – Follow me on Twitter

Continue reading

The common law "revenue rule": From whence it came to where it's going

Introduction – What is the Revenue Rule?


The “Revenue Rule” can be overridden by statute of by treaty. The United States is attempting to override the “Revenue Rule” through changes to tax treaties. Because the United States imposes worldwide taxation on the residents of other countries, the United States would be advantaged overriding the “Revenue Rule”.
Putting the “Revenue Rule” in historical context. Does the Revenue Rule still matter?
Continue reading

Breaking Down The Revenue Rule: Proposed US Japan Tax Treaty enhances ability of US to enforce taxation on #Americansabroad in Japan

Prologue – Tax Enforcement And The Revenue Rule


The common law revenue rule was designed so that one country will not enforce tax debts owed to another country. There is general agreement that the “revenue rule” is gradually disappearing. Specifically, the United States has negotiated tax treaties with at least five countries (Canada, Denmark, France, Sweden and the Netherlands) which abrogate the revenue rule. To learn more about the Revenue Rule, see the “Appendix” below.
I have previously suggested how the “assistance in collection provisions” facilitate U.S. citizenship-based taxation. My 2016 comment on “assistance in collection provisions” suggested that U.S. citizenship-based taxation gives the United States strong incentives to end the revenue rule. Specifically …

My point is this:
The “assistance in collection” mechanism in these five treaties can and will be used to allow the United States to enforce direct taxation on those who are “tax residents” of other nations AND on the economies of those other nations.
Given the U.S. practice of “citizenship-based taxation” I can’t understand why any country would enter into an “assistance in collection” treaty with the United States. Interestingly the Canada U.S. Tax Treaty does create an exemption for those who were Canadian citizens at the time tax debt arose. The Denmark U.S. Tax Treaty has a similar provision exempting citizens of Denmark.
Conclusion: It is quite clear that tax treaties which include “assistance in collection provisions” (abrogating the Revenue Rule) are overwhelmingly to the benefit of the United States. Only the United States (and the nation of Eritrea) impose taxation based on citizenship (and therefore impose taxation on the residents of other nations). These five treaties allow the United States to extend its tax base into the economies of other nations.

Present Day – June 25, 2019

The following tax treaty protocols were approved by the Senate Foreign Relations Committee:
The Protocol Amending the Convention between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and its Protocol, signed at Madrid on February 22, 1990 (Treaty Doc. 113-4).
The Protocol Amending the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, signed at Washington on October 2, 1996, signed on September 23, 2009, at Washington, as corrected by an exchange of notes effected November 16, 2010 and a related agreement effected by an exchange of notes on September 23, 2009 (Treaty Doc. 112-1).
The Protocol Amending the Convention between the Government of the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and a related agreement entered into by an exchange of notes (together the “proposed Protocol”), both signed on January 24, 2013, at Washington, together with correcting notes exchanged March 9 and March 29, 2013 (Treaty Doc. 114-1).
The Protocol Amending the Convention between the Government of the United States of America and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed on May 20, 2009, at Luxembourg (the “proposed Protocol”) and a related agreement effected by the exchange of notes also signed on May 20, 2009 (Treaty Doc. 111-8).

Each of these four treaty protocols has updated information exchange and/or collection provisions. The proposal in the treaty with Japan is most interesting and most worrying.
The Japan protocol includes a provision for assistance in collection that is somewhat more expansive than is contained in similar treaties (Canada, Sweden, Denmark, France and Netherlands). Japan does NOT normally allow dual citizenship. Therefore the collection provision in ARTICLE 27 the collection provision could possibly be used as a mechanism to force Japan to enforce U.S. taxation on U.S. citizens who are resident in Japan!!
Time will tell.
The new ARTICLES 26 and 27 of the U.S. Japan Tax Treaty (if approved by the Senate) will be:
Continue reading

Article 4 paragraph 2 of the US UK Tax Treaty: A clause preventing the use of the tax treaty tie breaker for some Green Card holders

Introduction – In The 21st Century The Most Important Thing About A Person Is His Tax Residency

Green Card holders are deemed to be U.S. tax residents under the Internal Revenue Code. In most circumstance,s Green Card Holders are also treated as U.S. tax residents under U.S. tax treaties.
U.S. Green Card holders have traditionally been able to use tax treaties to sever “tax residence” with the United States. This decision carries both burdens and benefits and should never be undertaken without competent professional advice. (For Green Card holders who are “long term residents“, the use of a “tax treaty tie breaker” will result in expatriation. Expatriation may trigger the imposition of the Sec. 877A Expatriation Tax.)

The tax treaty tie breaker is available if and only if the individual is, according to the tax treaty, a tax resident of BOTH the United States and the treaty partner country.
Typically the tax treaty tie breaker is a mechanism where one uses the provisions of the tax treaty to assign tax residency to one and only one country according to the tax treaty.

To repeat: a condition precedent to the use of the tax treaty tie breaker is that the individual be a tax resident of both countries according to the tax treaty.

Most tax treaties provide that if an individual is a tax resident of Country A according to domestic law, then the individual is a resident of Country A under the treaty. In other words, tax residency under the terms of the treaty follows from tax residency under domestic law.

Prior to the U.S. UK Tax Treaty of July 24, 2001, tax residency for Green Card holders according to the tax treaty, followed from tax residency under domestic law.

The U.S. UK Tax Treaty of July 24, 2001 changed this basic rule. The July 24, 2001 tax treaty contains a provision that provides that tax residency under the U.S. UK tax treaty, does not necessarily follow from tax residency under U.S. domestic law. Specifically Article 4 Paragraph 2 states that Green Card holders will NOT be treated as U.S. tax residents under the U.S. UK Tax treaty except as follows:

2. An individual who is a United States citizen or an alien admitted to the United States
for permanent residence (a “green card” holder) is a resident of the United States only if the
individual has a substantial presence, permanent home or habitual abode in the United States
and if that individual is not a resident of a State other than the United Kingdom for the purposes of a double taxation convention between that State and the United Kingdom.

Paragraph 2 of Article 4 provides a presumption against U.S. tax residency for Green Card holders resulting in U.S. tax residency under the U.S. U.K. tax treaty.

The purpose of this post is to explore the implications of this unusual provision and how it impacts Green Card holders who are tax residents of the UK.
Continue reading

"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”.
Continue reading

Canada U.S. Tax Treaty: Why the 5th protocol of the Canada US Tax Treaty Clarifies that the TFSA is a pension within the meaning of the Canada U.S. Tax Treaty

Article XVIII of the Canada U.S. Tax Treaty Continued – The question of the TFSA
In a previous post I discussed how a U.S. citizen moving to Canada with an existing ROTH will be treated under the Canada U.S. Tax treaty.
The purpose of this post is two-fold:
First,to argue that the the TFSA should be treated as a “pension” within the meaning of Article XVIII of the Canada U.S. Tax Treaty; and
Second, to argue that the 5th protocol (which clarifies that the ROTH IRA) is a pension within the meaning of the Canada U.S. Tax Treaty means that the Canadian TFSA has the same status.
This will be developed in three parts:
Part A – How the Canada U.S. Tax Treaty affects U.S. Taxation of the Canadian TFSA
Part B- Wait just a minute! I heard that the “Savings Clause” means that the treaty would not apply to U.S. citizens?
Part C – The TFSA and Information Returns: To file Form 3520 and 3520A or to not, that is the question
Continue reading

Bye Bye Storify, Hello Wakelet – My "Stories" will live in this post and be moved to https://wakelet.com/@Expatriationlaw

Today is May 15, 2018. Tomorrow Storify closes forever (unless it provides a last minute_ reprieve.
Therefore, I am creating this post to “store” copies of my 6 Storify Stories.
They are being saved here in pdf format. I have also moved them over to my Wakelet account where I will continue posts of this type.
‘Will you walk into my parlour?’ – #Americansabroad and IRS “amnesty” offers in the 2009 #OVDP
Australian Greens Senator @LarissaWaters resigns because of her CANADIAN place of birth. Too bad she was born in Canada
Can the common law “revenue rule” be used to stop the enforcement of U.S. “citizenship taxation” on non-U.S. residents?
My tax professional told me my “non-U.S. mutual fund is a #PFIC! What is a #PFIC and what do I do?
Tax, culture and how the USA uses #citizenshiptaxation to impose US culture (and penalties) on other countries
The “Pax Americana” to the “Tax Americana”: How the USA is imposing a separate, punitive tax regime on “nonresidents”

Canada U.S. Tax Treaty – Article XXVIA: How the 5th Protocol Enhances protection for Canadian citizens


Introduction – The Purpose of this post
This is an addition to “The Little Red Tax Treaty Book“.
I was recently asked the following question:
I heard that the Canada U.S. Tax Treaty means that the Canada Revenue Agency will not help the United States collect a U.S. tax debt on a Canadian citizen, provided that the person was a Canadian citizen at the time the U.S. tax debt arose. But, what if the person was NOT a Canadian citizen when the U.S. tax debt arose? Will the Canada Revenue Agency help the United States collect U.S. tax debt?
My answer to the question:
On September 21, 2007 Canada and the United States signed the 5th Protocol to the Canada U.S. tax treaty (first entered into in 1980). As a result of the 5th protocol, Paragraph 8 (a) of Article XXVIA now reads:
Continue reading

Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of "Homeland Americans" to the treatment of "nonresidents"


Attorney Monte Silver has organized a worldwide petition to prevent the application of the “transition tax” and GILTI to “tax residents” of other countries. Please support him by participating. You will find his petition and further information here:
https://www.democratsabroad.org/remedy_repatriation_gilti_taxes
And now, back to our regularly scheduled programming.
Introduction
This is the fourth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by tax paying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
The first three posts were:
Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”
Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”
Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!
Last night I was discussing the “transition tax” with an “individual” who is impacted by the tax AND is a Homeland American. He is a “tax resident” of ONLY the United States. For Homeland Americans who are subject to ONLY the U.S. tax system the “transition tax” is NOT a bad thing. For “non-residents” it is a terrible thing, which may destroy their retirements. The reason is that “nonresidents” are subject to both U.S. taxation and taxation in their countries of residence. The “transition tax” is an extremely egregious example of the terrible effects of the U.S. practice of imposing “worldwide taxation” on the residents of other countries. I hope that “the transition tax” will be the “straw that breaks the Camel’s back” and ends the U.S. practice of imposing taxation on people who don’t live in the United States.
After the discussion, I summarized our conversation in the following letter to him. Here is the letter.
Continue reading

Part 3: Responding to the Sec. 965 "transition tax": They hate you for (and want) your pensions!


Introduction
This is the third in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by tax paying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
The first two posts were:
Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”
Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”
Those who fail to learn from history are doomed to repeat it
Immediately prior to the passing of President Obama’s “Affordable Care Act” (which was subsequently ruled to be constitutional BECAUSE it was a “tax”), legislators were faced with a comprehensive, complex and incomprehensible piece of legislation. Very few members of Congress understood the details and impact of what they were voting for.


Nancy Pelosi secured her in place of history by suggesting that:
“We really need to pass the law so that you can see what’s in it!”
Ms. Pelosi meant (I think) that it’s one thing to know what a law says. It’s quite another to know how it actually impacts people.
Notwithstanding the April 15, 2018 deadline for the first “transition tax” payment, very few “tax professionals” understand what the Internal Revenue Code Sec. 965 “transition tax” says, (let alone what it actually might mean – assuming it applies).
What the application of the “transition tax” might actually mean in the life of an individual owner of a Canadian Controlled Private Corporation
Continue reading