Introduction:

Thinking about @doubletaxation – New post featuring the thoughts of @sdetreville. This is a great way of explaining what it is, how to think about it and why @citizenshiptax is wrong! https://t.co/r0xHAtXQFd

— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) January 8, 2025

I received the following message from:

Dr. Suzanne de Treville
Swiss Finance Institute Professor of Operations Management, Emeritus
University of Lausanne
Faculty of Business and Economics
1015 Lausanne-Dorigny
Switzerland

A very interesting analysis of double taxation indeed. I am reproducing this as a blog post with her kind permission.

Suzanne has kindly agreed to participate in an upcoming “Spaces Discussion” as part of our “Understanding Double Taxation” series. Stay tuned!

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John,

This message is in response to your request for proposals for how to define double taxation..

My field is operations and supply-chain management. I recently retired as a professor of operations and supply-chain management at the University of Lausanne, and served as co-EIC of the Journal of Operations Management (a Financial Times 50 journal) from 2018 to 2023. I began applying operations logic to the taxation process a couple of years ago because of the usual expat problems—and the incredible difficulty of finding anyone who actually understands how this reporting should work. Democrats Abroad provided helpful material, I got to know Rebecca Lammers, and have been helping out on the analysis and drafting side of the Taxation Task Force for a couple of years.

I propose to define taxation as an operation, such that double taxation is a second pass of a taxation operation to revenue or assets.

An analogy is a harvester going over a field. We the taxpayers are the field. I am a tax resident of Switzerland, so the Swiss tax authorities make a first pass over my income and wealth. Because I am a US citizen, the IRS then makes a second pass over what has already been processed by the Swiss authorities.

A harvester making a second pass over a field collects a small fraction of what was harvested the first time. This is why 54% of 2021 returns from outside the US had no tax liability at all, compared to 19% for US tax returns as a whole. The fact that I receive a credit for the Swiss taxes paid means that my tax liability to the US is minimal. Whether or not I also pay taxes to the US does not change the fact that my income and assets have been doubly “processed”, first by Switzerland, and then by the US. And, the main costs of the second pass through the taxation process concern the cost and complexity of compliance.

Taking a harvester that is costly to run and deploying its capacity to cover fields that have already been harvested once is typically not cost effective. The IRS is short of capacity, so would do financially better to avoid using capacity in ways that bring little or no revenue. Also, collecting taxes from and managing the taxation process for those living abroad is more expensive than for domestic taxpayers. Again considering the 2021 data, we see that the tax revenue from returns with an AGI of less than $100,000 was only $708 million, and for those with an AGI of less than $200,000 it was $1.56 billion—again a relatively small number.

The complexity of reporting for expats comes not only from the need to prepare full reports to two jurisdictions, but to a large extent from the difficulty of reconciling the two operations that apply different principles. Let’s compare this to a Finnish citizen who moves to Switzerland and becomes Swiss. Each chunk of income is allocated via the tax treaty to one or the other country to be taxed. Pension income from work done in Finland before the move to Switzerland is taxed by Finland as source income if the person is a Finnish but not Swiss citizen. If the person becomes a Swiss citizen, they notify the Finnish authorities and the taxation shifts to Switzerland. There is very little in terms of duplication in reporting.

Many of the taxation problems that emerge for expats come from this second pass of a taxation operation. Although the second pass tends to produce little, it can unfairly increase the tax liability for income that is not taxed by the country of residence (e.g., disability payments). This provides little for the IRS, yet creates a crushing burden for the taxpayer. Defining taxation as a process/operation/“machine”—with double taxation being a second pass of that machine over the same revenue or assets—should make it easier to explain these problems. And, it makes crystal clear the deceptive nature of the savings clause.

Imagine that the US would eliminate this second pass over income (assets) that are taxed by the country in which the taxpayer is a tax resident. This could be combined with prioritizing US taxation of US-sourced income. I am, for example, first taxed by Switzerland on investment income from the US, then get a tax credit for those taxes to offset US taxes. The US could consider negotiating with Switzerland that US-sourced investment income would be first taxed in the US. Someone like Heitor David Pinto would be positioned to do a simulation of how an increase in US taxation of US-sourced income would compare to the loss of revenue from eliminating the second pass of the taxation machine.

One final point: International Information Returns and FATCA do not fit the definition of double—or even single—taxation. They are not that kind of machine! Their purpose combines control and penalty generation. This penalty-as-a-revenue model is beginning to be understood, and needs to be addressed, but it is not (double) taxation.

I hope that these thoughts are useful to you. Thank you for the leadership that you are showing at this critical time.

All the best,

Suzanne

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This slide presentation from Suzanne further explains the issue of double taxation.

John Richardson – Follow me on X.com/ExpatriationLaw