Category Archives: U.S. tax treaties

US Tax Treaties Should Reflect The 21st Century And Not The World Of 100 Years Ago

Prologue

The rules of taxation should follow changes in society. The ordering of society should NOT be hampered by the rules of taxation!

As the world has become more digital, companies can carry on business from any location. Individuals have become more mobile. Multiple citizenships, factual residences and legal tax residencies are not unusual. It has become clear that the rules of international tax as reflected in tax treaties (as they apply to both corporations and individuals) are in need of reform.

The purpose of this post is to identify two specific areas where US tax treaties are rooted in the world as it was one hundred years ago and NOT as it is today.

First: The “Permanent Establishment” clause found in US and OECD tax treaties

Second: US Citizenship-based taxation which the US exports to other countries through the “saving clause” found in almost all US tax treaties

Each of these will be considered.

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German tax authorities reported to be imposing German taxation on US military personnel stationed in Germany

Prologue

This post draws heavily from the reporting of John VanDiver who has written a number of articles in Stripes. His most recent article is here:

“You don’t want to be chased and harassed by a government office. It is scary,” said Melissa Howell, the spouse of a U.S. soldier who is being targeted by a tax office in Germany’s Landstuhl area. “I don’t know how they expect people to come up with that money.”

Howell, a German who lives with her American husband and children, said she ran into trouble in June when she went to file her taxes at the local finance office.

She said she was interrogated about her husband and told to fill out a questionnaire that probed information about his employment.

She then received a letter ordering her to hand over her husband’s W-2 and other tax forms.

“I did it because I didn’t know. I found out that

was a mistake,” she said.

After that, she got a phone call from the tax office, saying that their case was getting handed over to a case manager who handles “American-German couples.”

As reported by John VanDiver in Stripes – July 27, 2020 – ‘Harassed’ by German tax offices, more US military families face financial threats

Certain US Soldiers In Germany Targeted By German Tax Authorities For Taxes On Their Military Wages – Reminiscent Of The “Oh My God Moment

Many Americans abroad have experienced the “Oh My God Moment.” This is the moment that they learn that they are targeted by the USA – a country that they don’t live in – for taxes on their non-US source income. Well, it appears that for some, the shoe is now on the other foot. Germany is apparently targeting certain US soldiers – stationed in Germany – for taxes on their US military pay! The US claim is NOT based on any connection with the United States (other than circumstances of birth). At least (to its credit), Germany’s claim is based on a connection to Germany that makes these US soldiers “tax residents” of Germany. Therefore, the “moment” may be the same. But, the justification for taxation is not he same. To put it simply: Germany is claiming that when the circumstances of a US soldier’s stay in Germany ceases to be “solely” for military service AND their factual circumstances meet the test for tax residency in Germany, they are are subject to German taxation.

Analysis

In an ongoing story, that is certain to be of interest to Americans abroad, Germany has begun treating certain US Military Personnel as tax residents of Germany. In other words, Germany is imposing tax (and apparently penalties) on the income earned by US military personnel stationed in Germany. The starting point is that US Forces in Germany (and other countries) are governed by the SOFA (“Status Of Forces Agreement”) agreement. Among other things, the SOFA agreement exempts US service personnel from being treated as tax residents of the country where they are serving. In simple terms: As long as the individual serviceman meets the conditions in the SOFA agreement, he/she would NOT be treated as a tax resident of Germany.

The provisions of the NATO SOFA are unremarkable. What is remarkable is that Germany appears to be the first country, to determine that certain US Military Personnel, are not entitled to use SOFA as a “shield” against being treated as a tax resident and therefore subject to taxation.

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Circa 2014 – A trip Down Memory Lane: #FBAR #FATCA And The Use Of Non-US Banks

This 2014 hearing held by the US Senate on Permanent investigations is very interesting.It features Senators Levin and McCain and includes discussion of tax evasion, Swiss banks, tax treaties, FATCA the Offshore Voluntary disclosure programs and more.

The logic of the United States is approximately this:

Homeland Americans use non-US bank accounts.

Americans abroad use non-US bank accounts.

Therefore, (but not acknowledging Americans abroad) both Homelanders and Americans abroad use non-US banks for the same (nefarious) reasons.

SECURE Act of 2019 Erodes Future Capital Growth In Order To Pay For The Present Expenses

Introduction – The SECURE Act aims to: “Set Every Community Up for Retirement Enhancement”

The above tweet references an excellent article by Daniel Kurt, describing the pros and cons of IRA reform. Significantly, the article includes:

One other key change in the new bill is paying for all this: the removal of a provision known as the stretch IRA, which has allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The new rules will require a full payout from the inherited IRA within 10 years of the death of the original account holder, raising an estimated $15.7 billion in additional tax revenue. (This will apply only to heirs of account holders who die starting in 2020.)

Legislative/Socioeconomic Background

There is a “retirement crisis” in North America. Neither Canadians nor Americans are saving enough for retirement. At the same both governments are operating with huge deficits. Individuals have failed to plan for financing their retirements. As a result, any and all honest attempts to improve the situation are welcome. That said, governments seem to reflexively attempt to solve problems by generally increasing taxes. In some cases, governments increase the rate of taxation on income. In other cases governments broaden the tax based by subjecting new things to taxation. There is however a worrisome trend toward governments simply imposing taxation on existing capital. Examples include: the Section 965 transition tax and Section 877A expatriation tax. In both cases these laws create “fake income” by deeming there to be a distribution where there was in actual fact, no distribution to be taxed. The SECURE Act continues the same principle by forcing certain inherited IRAs to be distributed within a ten year period. At a bare minimum, this reinforces the principle that individuals should not be able to easily transfer assets to the next generation and that existing capital pools are fair game for taxation.

Prior To The SECURE Act Certain Inherited IRAs Could Grow For The Life Of The Beneficiary

In an earlier post (with the help of Chris Stooksbury) I had described the tremendous growth and capital preserving opportunity in certain inherited ROTH IRAs.

No more!

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Naomi Osaka does NOT automatically relinquish US citizenship by choosing Japanese citizenship

Citizenship is becoming more and more interesting. In my last post I wrote about Canada’s Conservative leader Andrew Scheer’s U.S. citizenship. Theoretically, on October 21, 2019, Canada could have it’s first U.S. citizen Prime Minister. (Think of the extra pressure that the United States could bring to bear on Canada.)

The newsworthiness of U.S. citizenship continues. There has been much discussion of citizenship as a prerequisite to compete for countries in the Olympic games. This week, it is being reported that tennis star Naomi Osaka , a dual Japan/U.S. citizen is complying with a Japanese law that requires her to choose either U.S. or Japanese citizenship. A number of media outlets are reporting that Ms. Osaka is relinquishing U.S. citizenship. Is this really true? Interestingly the Toronto Globe and Mail initially reported that:

The Globe later (presumably realizing their error) changed the title of the article to:

“Naomi Osaka set to represent Japan at Tokyo Olympics”

Note that there is no U.S. law that requires her to choose one citizenship over the other. Ms. Osaka is apparently linking her “choosing Japanese citizenship” to a desire to represent Japan in the upcoming Olympics. A number of media sources are reporting that by choosing Japanese Nationality (under Japanese law) that Ms. Osaka is relinquishing/renouncing U.S. citizenship under U.S. law. This is probably incorrect. The act of “choosing Japanese nationality” under Japanese law does NOT automatically mean that Ms. Osaka has relinquished U.S. citizenship under U.S. law. As a matter of U.S. law:

Unless Ms. Osaka’s “choosing Japanese Nationality” meets the the test of voluntarily and intentionally relinquishing U.S. citizenship under Section 349(a) of the U.S. Immigration and Nationality Act, then “choosing Japanese Nationality” will NOT result in the relinquishment of Ms. Osaka’s U.S. citizenship. The act of “choosing Japanese citizenship” under Japanese law does NOT automatically result in the loss of her U.S. citizenship.

Every country is free to decide who it’s citizens are or are not.

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Part 31 – "Double Taxation Disguised as Tax Reform": Jackie Bugnion comments in @TaxNotes on @USTransitionTax and #GILTI

https://twitter.com/worldnewsreader/status/1132961693598986241

This is Part 31 of my series of blog posts about the Sec. 965 transition tax. It is a “guest post” by Jackie Bugnion who is the former tax direction of ACA. The article explores the impacts of the Section 965 transition tax and GILTI on the lives of Americans abroad. Ms. Bugnion places the transition tax and GILTI in the context of the U.S. system of citizenship-based taxation.

This article is reproduced with thanks to the author Jackie Bugnion and the publisher Tax Analysts.

Bugnion (4-29)

Bugnion (4-29)

Bugnion-4-29

Green Card holders who have moved from the United States without properly severing US tax residency

Here is the scenario that this post is addressing:
An individual becomes a permanent resident of the United States (meaning that he has a Green Card). He lives in the United States for any number of years. He then moves away from the United States and returns to live in his home country. He is NOT aware that he must complete any specific steps (from either an immigration or tax perspective) to sever his ties with the United States.
He simply moves from the United States with the intention of no longer living permanently in the United States and:
1. Stops filing U.S. tax returns;
2. Fails to notify the State Department that he is abandoning his U.S. permanent residence.
While a resident of the United States he acquired significant pensions and IRAs.
Years later he reads an article in a newspaper that suggests that the United States still considers him to be subject to the full force of U.S. tax laws. Accessing the pensions will force him to file U.S. tax returns. He (as might be expected) is panic stricken and wonders what to do.
This is a very common scenario – what should he do?
The short answer is: it is completely dependent on the facts. This is one of the most difficult areas to advise in. The problem is that the person is likely to continue to be a tax resident of the United States and subject to all of the requirements of the Internal Revenue Code. The most appropriate response to this will depend on the interaction of a number of factors specific to the individual.
If you are in this situation, I suggest that you seek competent assistance sooner rather than later.
John Richardson – Follow me on Twitter @ExpatriationLaw

How Americans moving to Canada can maximize the use of their existing Roth IRA

I have previously explained how the Canada U.S. Tax Treaty allows a U.S. citizen to move to Canada and continue the deferral of taxation (in both Canada and the United States) on his existing Roth.The treaty allows for deferral with respect to the existing balance in the Roth. It does NOT allow for deferral with respect to contributions made after the person becomes a tax resident of Canada.

That post concluded with:

Conclusions:

1. The owner of a ROTH who moves to Canada can will continue to not pay tax on the income earned by the ROTH and will not pay tax on distributions from the ROTH. We will see that this can prevent a tremendous investing opportunity; and

2. Contributions made to the ROTH after moving to Canada will cease to be “pensions” within the meaning of of Article XVIII of the Treaty! This means that post “resident in Canada” contributions will NOT be subject tax “tax deferral” (as per paragraph 7) and will be subject to taxation (as per paragraph 1).

Possible Additional Conclusion:

3. Because a Canadian TFSA is the same kind of retirement vehicle as a U.S. ROTH IRA, and the ROTH IRA is treated as a “pension” under Article XVIII of the treaty:

A TFSA should be treated as a pension under Article XVIII of the Canada U.S. Tax Treaty.

But, moving back to the U.S. citizen who moves to Canada with a Roth IRA.

How a U.S. citizen who moves to Canada can maximize use of the Roth and the Canada U.S. Tax Treaty

Q. How does this work? A. It takes advantage of the “stretch” principle
The general “stretch” principle is described at Phil Hogan as follows:

How US plans can “stretch” to Future Generations

Chris discusses the often overlooked benefits of US plans for Canadian residents. Under US tax laws IRA (and sometimes 401k) plans can be “stretched” or transferred to future generations tax free. Pursuant to Canada-US treaty provisions the same treatment can be had for Canadian tax purposes.

Unlike RRSP accounts, US IRA accounts can be transferred to a second generation (non-spouse) tax free under the Canada-US tax treaty. The impact of the tax free transfer and compounding investment over the lifetime of the beneficiary can be significant. This is outlined in detail in Chris’ new white paper report Roth IRAs in Canada – The gift that keeps on giving. How $250,000 can turn into $35 million TAX FREE to an heir.

Here is the full video …

And the written explanation …

See the link in the above tweet here …

roth_IRA_in_Canada_compliance_approved-1 (1)

Bottom line:

The features of a Roth IRA coupled with certain provisions of the Canada U.S. tax treaty may provide for better financial planning options for U.S. citizens who move to Canada than are available to Canadian residents who have not lived in the United States.

John Richardson Follow me on Twitter @ExpatriationLaw

Considering renouncing US citizenship? #citizide – There are times when US citizenship can save you from foreign taxes!

Should other nations be permitted to impose taxation on U.S. citizens or corporations?
At first blush, the question sounds absurd. Is there something about being a U.S. citizen that should exempt individuals from taxation in or by a another country? Some time ago, this question was explored in a discussion on a Facebook group. Interestingly, most participants thought the discussion was absurd and did not take it seriously. But truth can be stranger than fiction. When it comes to taxation there can be some benefits to being a U.S. citizen. In fact, in certain cases, U.S. citizenship can act as a “cloaking device” – a device that shields you from taxation in another country.

The two certainties are “death and taxes” …

It’s in the area of “death” where U.S. citizenship can be helpful. Sometimes it can be to your benefit to die as a U.S. citizen. Sometimes U.S. citizenship can be helpful when somebody dies leaving you part of their estate.
What follows are some categories where U.S. citizenship can protect you from taxation. These possibilities should be considered prior to renouncing U.S. citizenship.
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Part 21 – @ACAVoice makes presentation at October 22/18 IRS @USTransitionTax hearing – argues both that Regulatory Flexibility Act should apply and/or that de minimis rule be created

Introduction


This is Part 21 of my series of posts about the Section 965 transition tax.
The Section 965 “Transition Tax” saga continues. Americans abroad may have political differences. They may have philosophical differences. They may live in different countries with different tax treaties. But, opposition to the Section 965 Transition Tax and GILTI appear to have unified all Americans abroad.


To put it simply: The application of the Section 965 transition tax to the small businesses operated by Americans Abroad is the most unjust, most punitive, most egregious and most unjustified piece of legislation over to come from the Homeland (assuming – which I doubt – that it was every intended to apply to Americans abroad in the first place). Significantly, the transition tax is a benefit to Homeland Americans but can confiscate the retirement plans of Americans abroad. In other words, the transition tax is one more punishment that America is meting out to its citizens who dare to leave the United States.
Boldly Go, where no fictitious tax event has gone before …
The transition tax is also a direct attack on the tax base of the countries where Americans abroad live. To put it simply: the transition tax is a fictional tax event, that allows the United States to take a preemptive tax strike against the tax base of other countries. By so doing, the transition tax allows the United States to siphon tax revenue from other countries, that it could never siphon before. (Well, the S. 877A Exit Tax rules also create a fictitious tax event that allows the United States to siphon capital from other countries.) The impact of the transition tax on Canadian residents (who are also U.S. citizens) has been explored in CBC reporter Elizabeth Thompson’s series of posts about the transition tax.
The Transition Tax when applied to Americans abroad is:

The retroactive taxation of undistributed earnings of a non-US corporation, based on NO event that generates taxable income, which almost certainly subjects Americans abroad to double taxation.

The parts I have bolded provide arguments for why the “transition tax” violates numerous tax treaties.
In Part 20 I explored the arguments for why/how the Treasury Regulations are not compatible with the Regulatory Flexibility Act. Part 20 included a discussion of the arguments made by ACA for why the Regulatory Flexibility Act should apply to the regulations.
In Part 21 (this post), I am highlighting the submission of American Citizens Abroad (ACA), who argues IN ADDITION (this is a no brainer) that there should be a threshold level of undistributed earnings before the Section 965 confiscation can apply – period.
Thanks to ACA (“American Citizens Abroad”) for taking the time to organize these arguments and present them at the October 22, 2018 IRS hearing on the “transition tax”.
What follows is the email I received from ACA – I strongly suggest that you follow the links. ACA has done a superb job of demonstrating how the Treasury can exempt Americans abroad from this particularly draconian and confiscatory piece of legislation.
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