Category Archives: territorial taxation

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?
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Americans abroad opposing "taxation-based citizenship" should retire the "Taxation Without Representation" argument

In a recent comment reproduced as a post at the Isaac Brock Society and at Citizenship Taxation, I argued that it’s time for people to unite with one simple message. The message captured in the following tweet:


“The United States must not impose “worldwide taxation” on those who have “tax residency” in other countries and do not live in the United States!”
I propose this for the following reasons:
1. There is not a single person or organization on the planet that could not support this and credibly claim that they want to end U.S. extra-territorial tax policies.
2. It places the focus of U.S. tax policies on how the policies affect the citizens and residents of other countries and NOT on those who identify as U.S. citizens living abroad AKA “Homelanders Abroad”. There is no suggestion of seeking exemptions for certain “tax compliant people”, …
3. It resonates with “accidentals” (AKA those carbon life forms that the United States considers to be life long tax slaves) because they were born in the United States.
4. It naturally leads to a discussion of how U.S. extra-territorial taxation affects the economies (“steals from their tax base) of other countries.
5. By focusing on “tax residents” of other countries, it avoids alltogether the idiotic “baff gablle” of: “Well, you are a member of the political community”, “patriotism”, “right to live in the USA” and all of these “academically focussed) distractions.
6. It avoids getting into the incredibly difficulty problem of explaining precisely HOW the Internal Revenue Code applies in different countries (in practical terms it applies differently in different countries). Almost nobody understands how the Internal Revenue Code actually applies in other countries (including the IRS) …
7. It bypasses arguments like: “What do you mean you are complaining? I hear you exclude about 100,000 using this thing called the “Foreign Earned Income Exclusion”. If you can exclude 100,000 when you don’t even live in the USA, then why can’t I as a Homelander exclude at least 100,000″ …
Again to agree to the message:
“The United States must not impose “worldwide taxation” on those who have “tax residency” in other countries and do not live in the United States!”
should avoid the distractions described in points 1 – 7.
“Taxation without representation argument”
But, I want to focus on an argument/point that I think is a particular time waster and probably hurts the cause rather than helps it.
The ONLY Americans who have representation in the political process are those who have the money to “buy the laws” that they want. The American legislative process is nothing more and nothing less than a “pay to play casino”. It’s that simple. America is one of the world’s most dysfunctional democracies. In fact it is a democracy only in the sense that some Americans (including some but not all Americans abroad) have the right to vote. Having a vote is a necessary but not a sufficient condition for a functioning democracy. A vote matters only if there are viable candidates to vote for. In the America of today, who the candidates are, is tightly controlled by the political parties. Do you really think that if America had a functioning democracy, that allowed for democratically selected candidates, that the 2016 election would have come down to:
Donald Trump vs. Hilary Clinton?
Not a chance. My point is that almost no Americans have political representation in any case. By making the “taxation without representation argument”, Americans abroad are asking for something that Homelanders don’t have!

So, please let’s retire the:


“Taxation without representation argument”!

John Richardson
My morning thoughts on this were generated by the comments in the following tweets (all of which were generated by the Financial Times discussion on the Sec. 965 Transition Tax:

Part 2: The problem is NOT “worldwide taxation”. The problem is imposing “worldwide taxation” on people who don’t live in the South Africa or the USA and are “tax residents’ of other countries.

As goes taxation, so goes civilization.
This is Part 2 of my post discussing the South Africa tax situation. Part 1 is here.


This is a follow up to my post exploring whether South Africa is moving to a tax system that is based on “citizenship-based taxation” or (in the case of the United States of America) “taxation-based citizenship”. That post was the result of a “special request”. The response from that first post included:

I now understand the difference between the SA system and the US. I believe that the similarity that caused the consternation when this first came up was the issue of “tax residency”. CBT mandates that those declared US citizens by the US are simultaneously declared US tax residents. In a similar fashion SA has a concept of tax residency that *does* include some people who do not physically reside in SA but NOT just because they’re citizens. I get it. Thanks again for clarifying this!
That being said, I think the term “tax residency” is crazy. I wish that someone with the power to influence terminology in the general usage of language could come up with something that accurately describes the basis on which a person can be taxed by a country in which that person does not live. Taxes don’t reside; people do, and they can only live one place at a time. Any ideas? 🙂

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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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#Taxreform17 means that the USA should stop imposing U.S. taxation on the residents of other countries! @SpeakerRyan @RepKevinBrady @SenateJamLdr @OrrinHatch @Stevenmnuchin1

Some of you may be interested in the “short letter” that I sent by regular mail to the “powers to be” in Washington who are working on “Tax Reform”.
A “Town Hall” interview with Speaker Ryan suggests that Tax Reform is going to happen.


The interview confirms that there is pressure to move U.S. corporations to “territorial taxation”. See also the following tweet from the House Ways And Means Committee.


The question is whether individuals will also be considered. In January of 2017 Republicans Overseas proposed “territorial taxation” for individuals. This week the Republican National Committee adopted a resolution from Republicans Overseas urging that “territorial taxation” for individuals be adopted.


Both U.S. corporations and U.S. citizens are “U.S. persons”. If the United States moves to “territorial taxation” for corporations then “territorial taxation” for individuals should follow.
The United States would be will advised to stop imposing U.S. taxation on the tax paying residents of other countries.
What follows is my “short letter”. A PDF copy of the letter is here:
taxreform
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Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?

This is post is “based on” (not identical to)  one of two submissions that I submitted in response to Senator Hatch’s request for submissions regarding tax reform.
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Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?
The Internal Revenue Code mandates that ALL “individuals” , EXCEPT “non-resident aliens”, are subject to full taxation, on their WORLDWIDE income, under the Internal Revenue Code. The word “individuals” includes U.S. citizens regardless of where they live and regardless of whether they are citizens and residents of other countries where they also pay tax. This means that, by its plain terms, the United States imposes full taxation on the citizens and residents of other nations, because they are also (according to U.S. definitions) U.S. citizens. The United States is the only country in the world that has a definition of “tax residency that mandates full taxation based ONLY on citizenship.
How “U.S. citizenship” and U.S. “taxation” interact
Principle 1: The United States is one of the few countries in the world that confers citizenship based SOLELY on birth on its soil.
Principle 2: The United States is the ONLY country in the world that imposes full taxation ON THE WORLD INCOME of its citizens, REGARDLESS OF WHERE THE U.S. CITIZEN LIVES IN THE WORLD.
Bottom line: The United States is the ONLY country in the world that imposes full taxation, on WORLDWIDE income, based ONLY on the “place of birth”!
A practical example: A person whose only connection to the United States is that he was born in the United States, who lives in Canada (and may have never lived in the United States and whose only income is earned in Canada), is required to pay U.S. tax on that income. This resident of Canada is treated AS THOUGH HE WAS A U.S. RESIDENT. NOTE ALSO THAT THIS INDIVIDUAL IS REQUIRED TO PAY TAX TO CANADA! He is subject to “double taxation”. (This “double taxation” is only partially mitigated through “foreign tax credits”, tax treaties and the “foreign earned income exclusion”.)
Therefore: What academics and government officials refer to as “citizenship-based taxation” (they really don’t understand its practical effects) is PRIMARILY  “place of birth taxation” and therefore a convenient way to impose U.S. taxation on the citizens and residents of other countries. As a blog devoted to “citizenship taxation” (noting the difference between the theory and reality) points out:

“A supporter of citizenship taxation is someone who THINKS about “citizenship taxation”. An opponent of citizenship taxation is anybody who has tried to LIVE under citizenship taxation.”

How did this happen? It certainly didn’t start this way!

The evolution of “U.S. citizenship”
The result of legislative change and various U.S. Supreme Court decisions (primarily Afroyim ) has meant that “U.S. citizenship” is far easier to obtain and far harder to lose. 
Furthermore, as people become more and more mobile, it is not unusual for somebody to have been “Born In The USA” but live outside the USA. Global mobility is now the rule, rather than the exception.
The evolution of U.S. taxation and the Internal Revenue Code
The Internal Revenue Code has become more and more complex and impacts more and more activities of daily life. Because “U.S. citizens” (even though they are citizen/residents of other countries) are subject to U.S. taxation, they have been tremendously impacted by the “creeping complexity” of the Internal Revenue Code (which applies equally to ALL Americans wherever they may live).
This “creeping complexity” has evolved slowly through the years. The problems have been exacerbated because Congress does NOT consider that when amending the Internal Revenue Code they are impacting the lives of tax paying residents of other nations (who happen to be U.S. citizens). Congress is “indifferent” to the plight of Americans abroad (indifference being one of the worst forms of abuse).
Through the years, slowly and consistently …

The evolution of the Internal Revenue Code combined with ease of retaining U.S. citizenship has built a “fiscal prison” (legislative brick by legislative brick), in which  to keep the tax paying residents of “OTHER NATIONS”, who just happen to have been born in the United States.

Tax Reform 2017
The United States is “making noises” about “tax reform”. Senator Orrin Hatch requested submissions from “steak stake holders” on what should be included in tax reform. He has clearly received (as did the Ways and Means Committee in 2013 and the Senate Finance Committee in 2015) many suggestions advocating the repeal of “citizenship-based taxation”.
As noted at a site compiling the submissions of those affected by U.S. extra-territorial taxation:
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