Tag Archives: territorial taxation

How U.S. Citizenship Tax, The Treaty “Saving Clause” and FATCA Create A Fiscal Prison For Dual Tax Residents

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Introduction – The Problem Of Dual Tax Residency For U.S. Citizens

A “Hell greater than the sum of the parts”

There are people in the world who really don’t understand (or say they don’t) what exactly is the problem with U.S. citizenship based taxation. They claim to not understand why defining “tax residency” based on the “circumstances of birth” rather than the “circumstances of life” is a problem. They fail to consider how taxation based on “circumstances of birth”, interacts with U.S. tax treaties and FATCA to create a “hell that is greater than the sum of the parts”.

This is the third post in a series designed to explore and facilitate the understanding of the U.S. “citizenship based” extra-territorial tax regime. The first post explored the practical meaning of U.S. citizenship-based taxation (it’s primary effects are on people who live outside the U.S.). The second post explored the fact that tax residency based on “citizenship” is tax residency based on the “circumstances of one’s birth” rather than the “circumstances of one’s life” (its effects are primarily based on the circumstance of birth in the U.S.). The conclusion drawn from these first two posts was that the U.S. citizenship based extra-territorial tax regime is one in which:

The circumstance of a U.S. birthplace is used as a justification to regulate the lives of people with no connection to the United States and impose U.S. taxation on income that has no connection to the United States and is received by someone who does not live in the United States.

Citizenship taxation has practical and contextual meaning only its application to tax residents of non-US countries. The U.S. uses the circumstance of a “U.S. birthplace” to reach out and “claim” the tax residents of other countries as U.S. “tax residents”.

The purpose of this post is to explain how the interaction of U.S. citizenship taxation (claiming those with a U.S. birth place as U.S. tax residents when they are tax residents of other countries), the “saving clause” (not allowing U.S. citizens with dual tax residency to assign tax residency to the country where they actually live) and FATCA (the tool to hunt, find and enforce the extraterritorial U.S. tax and regulatory regime on the residents of other countries) creates a whole hell greater than the sum of the parts.

Many people understand the three components of “citizenship taxation”, the “saving clause” and “FATCA” as separate entities. Few appear to understand how those three components interact together to destroy the lives of U.S. citizens with dual tax residency. The U.S. has created a “fiscal prison” for its citizens. Seven video accounts of the impact of the U.S. citizenship tax regime are available here.

This problem can be solved ONLY by the United States redefining its rules for “tax residency” so that “citizenship” (the circumstances of one’s birth”) is not relevant to “tax residency” (the circumstances of one’s life).

This post is to identify the component “Part”(s) of the problem. It is organized in “Sections” and “Parts” as follows:

Section I – How The Problem Was Created

Part A – Tax, Residency and Tax Residency
Part B – The general problem of dual tax residency
Part C – Introducing the treaty tie break and how it can be used to end “dual tax residency” under a relevant Canadian tax treaty”
Part D – The general principles of the U.S. Canada “tax treaty tie break – How “circumstances of life” are used to assign tax residency
Part E – Food for thought – Citizenship the least important factor for the treaty tie break
Part F – Two possible examples of assigning residence to one country by using the “treaty tie break” – Green Card Edition
Part G – U.S. Citizens CANNOT Benefit From The “Tax Treaty Tie Break” – Hello “Saving Clause”
Part H – The “Saving Clause” And The Inability For U.S. Citizens To Use The “Treaty Tie Break” Is How The United States Captures The Residents Of The Treaty Partner Country And Claims Them As U.S. Tax Residents
Part I – The Tax Treaty Tie Break And Implications For U.S. Tax Compliance And For FATCA And The CRS Reporting

Section II – How Dual Tax Residents Experience The Extraterritorial Tax Regime

Part J – The U.S. exports a more punitive from of taxation to tax residents of other countries
Part K – The Problem Of Investing, Retirement planning and Retirement Planning – The Punitive Taxation And Reporting Requirements of PFICs and Foreign Trusts
Part L – The Problem Of Non-U.S. Pensions – How Are They Treated Under The Internal Revenue Code? – Different Rules For Different Countries
Part M – Discouraging U.S. Small Business Abroad – The Treatment Of Small Business Corporations Generally And On A Country By Country Basis
Part N – The “FBAR Marriage”: How Marriage To An Alien Results In Higher Taxation, More Reporting, Difficulties With Asset Transfers, Higher Divorce Costs And Possibly A Requirement To File A Tax Return With As Little As $5 Of Income

Section III – How The U.S. Extraterritorial Tax Regime Attacks The Sovereignty Of Other Countries

Part O – The U.S. taxation of residents of other countries attacks and erodes the tax base of those other countries

Section IV – Solving The Problem: Regulatory And Legislative Solutions

Part P – Regulatory Solution: “A Regulatory Fix For Citizenship Taxation
Part Q – Regulatory Solution: Amending The “Saving Clause” In U.S. Tax Treaties
Part R – Territorial Taxation For U.S. Citizen Individuals
Part S – Redefining U.S. Tax Residency To Move To Residence-based Taxation”

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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

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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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Even corporations are renouncing U.S. citizenship

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Introduction – International business in the modern world


It’s tough to be a U.S. Corporation and compete with non-U.S. companies


This is the question posed by Robert Wood in his recent post about the rise in U.S. companies wanting to NOT have a U.S. domicile. The attempts on the part of the United States to control and tax the activities of “U.S. persons” is resulting in renunciations of U.S. citizenship. People (of the flesh and blood type) are renouncing. Corporations are merging with “foreign” companies in a way that ensures that they cease to be “U.S. persons” for tax purposes.
As you know, the United States laws subject people and companies to U.S. taxes on income earned anywhere in the world. U.S. citizens abroad live with this reality every day of the week.
In fact, U.S. citizens abroad are required to pay tax on their foreign source income at the point it is received – before it is brought back to the United States.
U.S. corporations have a better deal than U.S. citizens (of the DNA people) type. In the case of corporations:
1. Although they are subject to U.S. taxation on business activities/profits outside the U.S.;
2. They are NOT required to pay the U.S. tax until the profits are brought back to the U.S.
This is why U.S. corporations often do NOT bring their profits back (repatriate profits) to the U.S. They will be hit with a massive tax at the point of reentry. (Obviously not a good thing for America, but …) For example, in the Senator Carl Levin inquisition of Apple, Apple CEO Tim Cook made it clear that Apple had no intention of bringing it’s “offshore profits” back to the U.S.
Of course, these rules apply only to corporations that are “U.S. persons”. If a corporation is NOT a U.S. person then the corporation would pay tax only profits earned in the United States.
Mr. Wood explains the process as follows:
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