— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) August 23, 2022
Americans Abroad are crumbling under the weight of the application of US citizenship taxation to their “every day lives”. Pursuant to America’s “citizenship taxation regime”, the United States is actually imposing a more punitive and more penalty laden reporting regime on US citizens who do NOT live in the United States than on those who do live in the USA.
Think of it:
For every other country in the world, if one ceases to be a resident of the country and establishes residence in another country, one ceases to be taxed by the first country. US citizens who move from the United States: (1) not only continue to be subject to US taxation, but (2) are “subject(s)” to a more punitive taxation than if they remained in the United States!
In 2010 President Obama signed FATCA into law. The effect of FATCA was to (1) institute a “world wide search” for US citizens living outside the United States and (2) to create significant public awareness of US citizenship taxation. I have previously argued that the effect of FATCA was to expand the US tax base into other countries.
FATCA applies to Americans abroad because and only because of US citizenship taxation (the rule that says that Americans abroad are treated as US tax residents even if they don’t live in the United States). Because FATCA created awareness of US citizenship taxation many people have trouble understanding the difference between US citizenship taxation and FATCA. It is understandable that many believe that FATCA and citizenship taxation are the same.
How to understand how/why citizenship taxation is different from FATCA:
1. US citizenship taxation is the rule that says that all US citizens regardless of where they live are subject to all the provisions of the US Internal Revenue Code. These provisions include taxation, reporting penalties and of course full US taxation on all income earned earned while they are living outside the United States. Many US residents do NOT end actually owing any US tax. Similarly, many US citizens living outside the United States do NOT end up owing any US tax.
2. FATCA is part of the Internal Revenue Code. Because the Internal Revenue Code applies to all US citizens, FATCA (as part of the Internal Revenue Code) applies to all US citizens (including US citizens living outside the United States). Generally FATCA is a provision to require non-US financial institutions to identify their US citizen customers and report their identity to the Internal Revenue Service. FATCA also imposes additional “reporting requirements” on US citizens (including those who live outside the United States) who have non-US bank and financial accounts.
Ending FATCA Would NOT End Citizenship Taxation, But Ending Citizenship Taxation Would Likely End The Application Of FATCA To Americans Abroad
The US Internal Revenue Code applies to ALL US citizens. FATCA is just one part of the Internal Revenue Code. Even if FATCA were repealed the Internal Revenue Code would continue to apply to all US citizens AND its discriminatory impact on Americans abroad would continue.
But, if the United States ended citizenship taxation by severing citizenship from US tax residency (people can no longer be taxed by the United States just because they are a US citizen) the application of FATCA to US citizens abroad would likely end.
Here is why – some technical “mumbo jumbo” for those interested
1. IRC 1471 (the operative FATCA section) refers to IRC 1473 for the definition of “Specified United States Person” which is defined partly in terms of “United States Person”. The point is that by ceasing to be a “United States Person”, one ceases to be a “Specified United States Person” for FATCA purposes.
2. As part of ending citizenship taxation IRC 7701(a)(30) would be amended to exclude “citizen” from the definition of “United States Person”:
(30)United States person
The term “United States person” means—
citizen orresident of the United States,
(B)a domestic partnership,
(C)a domestic corporation,
(D)any estate (other than a foreign estate, within the meaning of paragraph (31)), and
(E)any trust if—
(i)a court within the United States is able to exercise primary supervision over the administration of the trust, and
(ii)one or more United States persons have the authority to control all substantial decisions of the trust.
Ending “citizenship taxation” AKA “severing US citizenship from US tax residency” should solve the FATCA problem for Americans abroad. Ending FATCA would leave the citizenship taxation problem intact!
Ending FATCA would solve “a problem” for Americans abroad. Ending “citizenship taxation” would solve “the problem” for Americans abroad!
Appendix – How Severing Citizenship From Tax Residency Would Impact The FATCA IGAs
The definitions section of the Canada US FATCA IGA (see page 7) includes:
ee) The term “U.S. Person” means
(1) a U.S. citizen or resident individual,
(2) a partnership or corporation organized in the United States or under the laws of the United States or any State thereof,
(3) a trust if
(A) a court within the United States would have authority under applicable law to render orders or judgments concerning
substantially all issues regarding administration of the trust, and
(B) one or more U.S. persons have the authority to control all substantial decisions of the trust, or
(4) an estate of a decedent that is a citizen or resident of the United States.
This subparagraph 1(ee) shall be interpreted in accordance with the U.S. Internal Revenue Code.
For the full text of the US Canada FATCA IGA see:
Assuming citizenship were severed from US tax residency, either:
1. The definition of “U.S. Person” would require amendment to exclude “U.S. citizen” in (1); and/or
2. The FATCA IGA would simply be interpreted to exclude “U.S. citizen” from the definition of U.S. tax residency.
In other words, the IGAs might require amendment to ensure that its provisions are not triggered by and only by a finding of U.S. citizenship.
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) July 25, 2022
For those more interested in logic than in FATCA, you will find a discussion of the logical fallacy here.
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:
The Readers Digest Version
Yes, this post is a bit long. If you don’t want to read it, here is the “Readers Digest” version in the form of a tweet:
H.R. 5800 (establishment of a commission to study the issues of Americans does NOT prioritize (or even recognize) US @citizenshiptax as the problem. This problem can be solved ONLY with a broad aggressive push to sever US citizenship from @taxresidency. https://t.co/Hw8NNJeIpz pic.twitter.com/UwN4j64LqW
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) June 28, 2022
Now, on to the explanation …
Part I of this blog post discussed President Biden’s Green Book proposal that would change the tax rules for unrealized capital gains when assets are gifted or passed at death. To recap, the major thrust of the Green Book proposal (starting at page 30) is to treat gifts and bequests as “deemed sales at fair market value” triggering a capital gains tax which would be payable with respect to the year of the transfer. The net investment income tax / 3.8% surcharge looks as if it can certainly apply in addition to the capital gains tax (full detail on the 3.8% surcharge is here). The Green Book contains no proposals to eliminate or change the current Estate and Gift Tax rules and we believe that taxing gifts and bequests from an income tax perspective while keeping the Estate and Gift Tax regime in place is only a recipe for tax disaster.
Today’s post, Part II, looks at how the proposal will particularly impact the American abroad, its exemptions and carve-outs and how it complicates tax planning for individuals wishing to give up their US citizenship or green card.
Update April 13, 2022 …
Here is yet a seventh way – the treatment of gifts as capital gains – that the Biden Green book would impact Americans Abroad
It’s The System Not The Parties!
As long as the United States employs @citizenshiptax and #FATCA, changes in US tax laws will continue to have dramatic (intended and unintended) effects on #Americansabroad – regardless of which political party is in power. https://t.co/t6N4zyLIBQ
— Care about #Americansabroad? Join @USVotersAbroad! (@USVotersAbroad) March 11, 2022
As long as the United States employs citizenship taxation any proposed changes to the US tax system will have an impact (some intended and some unintended) on Americans abroad.
The Biden Green Book for fiscal year 2023, released on March 28, 2022, contains a number of proposals to both increase tax rates and increase the tax base by increasing the number of activities that are taxable events. Generally the proposals include a number of provisions to create and enhance taxation on both income from capital and capital itself. These provisions continue to generate discussion in the mainstream media including: The New York Times, Washington Post and Wall Street Journal. This is certain to generate much discussion in the tax compliance community.
The 2023 Green Book is available here.
Much will be written about how the proposals would affect resident Americans. Far less will be written about how the proposals would affect Americans abroad. The US rules of citizenship taxation steal from Americans abroad (and the countries where they reside) in hundreds of ways. Some are intended and foreseeable. Others are the unintended consequences that result from tax changes that apply to people who are not considered in the political process.
Significantly the Green Book does not suggest a move away from US citizenship taxation toward resident taxation as embraced by the rest of the world. In their totality, the proposals (particularly those that create income realization events when a gift is made) suggest a worsening of the situation for Americans abroad. That said, one proposal “might” (depending on Treasury) allow for the relaxation for the 877A Exit Tax rules, for a narrow group of Americans abroad under certain circumstances.
The purpose of this post is to identify six ways (and I assure you that there are more) that the Green Book would impact Americans abroad. The “Group Of Six” includes:
1. Raising The Corporate Tax Rate To 28 percent – Creating Subpart F Income and Making More Americans Abroad GILTI – Page 2
Verdict: This will have the effect of increasing the number of Americans abroad subject to taxation on income earned by their small corporations but not received by them personally.
2. An increase in the Corporate rate would increase the GILTI rate (suggesting to 20 percent) – Page 2
Verdict: More Americans abroad will be GILTI and will possibly (depending on a combination of country specific factors and their specific circumstances) be subject to GILTI taxes at a higher rate).
3. Reducing Phantom Gains And Losses: Simplify Foreign Exchange Rate And Loss Rules For Individuals And Exchange Rate Rules For Individuals – Page 90
Verdict: This in interesting. While reinforcing that Americans abroad are tethered to the US dollar it does suggest a recognition of the unfairness of how the phantom gain rules harm the purchase and sale of residential real estate outside the USA). Imagine how this would interact with the proposed rules converting gifts to taxable capital gains?
4. Strengthening FATCA: Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For the Exchange Of information – Page 97
Verdict: This is an attempt to reinforce the core principles of FATCA which are about the identification of US citizens outside the United States.
5. Expatriation – The Stick: Extend The Statute Of Limitations For Auditing Expatriates To Three Years From The Date From Which 8854 Should Have Been Filed (Possibly Forever) – Page 87
Verdict: This is theoretically very bad. It means that those who renounce without filing Form 8854 would be subject to a lifetime of risk. Practically speaking these provisions are not understood on the retail level. Hence, I doubt this will influence many people.
6. Expatriation – The Carrot: Exempting Certain Dual Citizen Expatriates From The Exit Tax – Page 87
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 29, 2022
Verdict: This is good news for the narrow group of people impacted by this – mainly “Accidental Americans”. It is bad news for the rest because the existing rules will continue to apply to those “who are left behind”.
I assure you that the Green Book contains a large number of ways that Americans abroad will be impacted. I will leave it to others to add to this list.
The principle is:
Citizenship taxation can steal from Americans abroad at least a thousand ways. If you can understand even one hundred of them you are doing well!
Summary: Once again this shows how all proposed changes to US tax law impact Americans abroad in a world of citizenship taxation. There is nothing in this that suggests a move toward residence taxation. There are few crumbs which might make citizenship taxation easier to live with (example relaxing phantom gains). But, on balance these provisions are a “doubling down” on the problems of citizenship taxation. The provision to allow easier expatriation for “Accidental Americans” does nothing to make life easier for the rest.
If you have seen enough you can stop here. For those who want more of the details and explanation, continue on …
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 31, 2022
Few US residents are aware of US citizenship-based taxation and FATCA. Legislative change will be aided by educating US residents and politicians about US citizenship-based taxation, FATCA and how they interact.
Citizenship-based taxation is a form of taxation where the USA imposes direct taxation on income earned outside the United States by individuals who do not live in the United States. FATCA is the law that is the enforcement tool for citizenship-based taxation.
It's difficult to explain the problems of @citizenshiptax and #FATCA. I have compiled a "one stop resource" where you can easily refer people. Please share widely! It includes the massive efforts and advocacy for the last decade. https://t.co/rP9MSxrlOK
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 27, 2022
In order to provide a summary of resources which can be used to better explain US citizenship-based taxation and FATCA, I have compiled the following resources.
Please circulate this link widely!
It's 2022 and time to revisit the issue the US taxation of the #TFSA: "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" https://t.co/1qVKlrz0Po via @expatriationlaw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 10, 2022
In 2018 I wrote a post arguing that it is reasonable to conclude that the text of the Canada US Tax Treaty should be interpreted to mean that a Canadian TFSA is – like a US ROTH IRA – a pension within the meaning of the Canada US Tax Treaty. The 2018 post was arguing for equal treatment without the intervention of the respective Canadian and American Competent Authorities.
The Punitive Taxation Of US Citizens Living Outside The United States Continues
I have previously and repeatedly made the point that:
Life is full of rude awakenings. More and more people are experiencing their OMG moment …
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 20, 2022
This is Part 2 of the series. In Part 1, I identified that it is essential that individuals (and governments) unite to bring an end to the US tradition of “citizenship taxation”. “Citizenship taxation” – what a phrase. The words are not descriptive of anything. It clearly has something to do with some form of taxation. The inclusion of the word “citizenship” makes it sound almost patriotic. But maybe, not. Maybe it’s just part of what means to be a citizen. Since only the United States has citizenship taxation, perhaps taxation is what it means to be a US citizen. If so, then perhaps US citizenship should be called “taxation based citizenship”. The concept of citizenship means different things in different countries. Is this a statement that the essence and the meaning of US citizenship is taxation and only taxation?
Citizenship Taxation – Theory vs. Reality
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.
I guarantee you that there is not a single supporter of US citizenship taxation who actually understands it!
Toward An Understanding: Citizenship Taxation And The Seven Deadly Sins
Introduction – The First Of A Series Of Short Posts
My name is John Richardson. I am a Toronto, Canada based lawyer. I am also a founding member of “SEAT” (“Stop Extraterritorial American Taxation”). I am an advocate for reforming the US laws which apply to US citizens who live outside the United States as permanent residents of other countries. The problems experienced by Americans abroad are at the “boiling point” and something must be done. This post is motivated by the following twitter thread which reveals the pain, desperation, anger and divisiveness experienced by Americans abroad:
FOR IMMEDIATE RELEASE – Taxation Task Force submission to @WaysMeansCmte Oversight Subcommittee in advance of hearing with the @YourVoiceAtIRS on Challenges facing taxpayers https://t.co/RY7M37kfCB #Taxation #IRS
— Rebecca Abroad (@AbroadRebecca) February 7, 2022
This is the first of a series of short posts in which I will share my thoughts and suggestions for how to proceed. I welcome your comments both here and on twitter where I am @Expatriationlaw.
Blind Partisanship Is Not Productive
I want to state at the outset that I am an independent and am not a member of any political party. I have been and continue to be supportive of independent candidates in Canada (and anywhere else). I state this because during this series of posts, I will express sentiments that are critical of political parties. When I criticize the Democrats it’s not because I am a Republican. It’s because the Democrats are deserving of criticism (or vice-versa). Healthy democracies are dependent on accurate observations and objective analysis. Excessive partisanship is simply an excuse for reasoned analysis.
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 19, 2022
The Difficulty Of Living As A US Citizen Outside The United States
First, if you are a “retiree living abroad” where all of your income is US sourced this post is NOT for you. You are filing the same US tax return while “retiring abroad” that you would if you were living in the USA. You are probably filing tax returns ONLY in the USA. Therefore, the US citizenship tax regime does not impact you in the same way. This post is for those who live permanently outside the United States and your income sources, assets and retirement planning are associated with the tax systems of other countries (foreign to the United States).
Second, As permanent residents of other countries, US citizens are treated as BOTH tax residents of the United States and tax residents of the countries where they live. In other words, they are subject to the full force of two (often incompatible) tax systems. Think of it. US citizens living outside the United States are subject to the tax systems of two countries at the same time. Leaving aside the anxiety this induces, the time that it takes to comply, the heightened threats of penalties and the outrageous costs of compliance (think tax accountants and lawyers), this puts Americans abroad in a position where:
3. The US tax rules prevent them from engaging in the normal financial planning and retirement opportunities (Canadian TFSA and UK ISAs are not tax free for US citizens)
4. In many countries, because and only because of their US citizenship they are prevented from maintaining the normal financial accounts they need to live in a normal way (this is the direct result of the 2010 Obama FATCA law)
The cumulative weight of these problems is that US citizens living outside the United States are being constructively forced to renounce their US citizenship in order to survive. But, it gets worse. Since June 16, 2008 certain Americans abroad who renounce US citizenship (“covered expatriates“) are forced to pay a special expatriation tax on their non-US assets to achieve this goal. (You can find a video of my discussing US citizenship renunciation here.)
Americans abroad are NOT renouncing because they don’t want to be Americans. They are renouncing because the US tax and regulatory regime is forcing them out of their US citizenship!
It’s The System Not The Parties
Regardless of which political party is in power, tax laws will continue to change.
As long as the United States employs citizenship-based taxation, changes in US tax laws will continue to have dramatic (sometimes intended and sometimes unintended) effects on Americans abroad. These negative effects and outcomes will continue regardless of which political party is in power.
Another example of the evil of @citizenshiptax imposed on #Americansabroad. The 3.8% NIIT cannot be offset by foreign tax credits which guarantees the double tax of #expats. Shouldn’t @AbroadRebecca be complaining? @Taxresidency cannot be based on citizenship period. https://t.co/4dbIPy38KT
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 13, 2022
The 2017 TCJA became law under the Republicans. The effects on Americans abroad were horrible. (Examples include: Transition Tax, GILTI, those using the “Married Filing Separately” category were required to file with zero income)
The 2010 FATCA law was enacted under the Democrats. The effects on Americans abroad were horrible. (Examples include: Form 8938, FATCA bank account closures, etc.)
Therefore, it is a mistake to bicker over which political party has done more or less damage to Americans abroad. As long as citizenship-based taxation continues and tax laws continue to evolve, whatever political party is in power will – by changing tax laws – continue to damage the lives and finances of Americans abroad.
Individual American Abroad Must Unite To Get This System Of Law Changed
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) February 19, 2022
Conclusion for today: The problem is the system! It’s not the political parties.
To be continued …