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.
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:
In January 2015 the US Senate Finance Committee (SFC) launched five working groups to study and propose reforms to the United States Tax Code, including one devoted to individual taxation and another to international taxation. In March the SFC called for public submissions to the five working groups. On April 29 those submitted documents became publicly available on the SFC website.
Of the 347 submissions to the International Taxation working group, 245 (71%) were about issues of concern to US persons living outside the USA, the rest being about corporate taxes. Of the 448 submissions to the Individual Taxation working group, 215 (48%) focussed on taxation of persons outside the USA.
In July 2015 the International Taxation working group released its official report. Almost the entirety of its 82 pages is devoted to corporate taxes, with a mere three sentences tucked into its very last pages, acknowledging the existence of flesh and blood individuals, but offering no recommendations.
Hundreds of letters from Americans abroad, including many brave enough to incriminate themselves for the sake of amending unjust laws, but also scores of extensively – researched proposals for international tax reform, as well as documents from respected organizations, including the American Chamber of Commerce, Republicans Overseas, and Democrats Abroad, were all summarily ignored.
Changing the language of the discourse …
Clearly the effectiveness of “repeal citizenship-based advocacy” will depend on how “citizenship-based taxation is described”. All submissions (of which I am aware) describe the intolerable impact of “citizenship-based taxation” on AMERICAN CITIZENS abroad (they are discriminated against in many aspects of life). It is not unusual for Americans abroad to pay higher U.S. taxes than a comparably situated Homeland American. As noted recently by Representative Holding, U.S. “citizenship-based taxation” impacts U.S. employers (it’s simply too expensive to incur the additional U.S. tax cost of hiring Americans).
Examples of this “U.S. centric” perspective are represented by the able submissions of Jackie Bugnion, ACA (American Citizens Abroad) and Democrats Abroad (all of which argue strongly and effectively that the United States should stop imposing taxation on U.S. citizens who live in and pay taxes to other countries). Although these are all excellent submissions, none of them highlights the fact that U.S. “citizenship-based taxation” has a very large impact on the citizens and residents of other nations. Given the large number of “accidental Americans” and other kinds of “dual citizens”, this is no small matter. (I note also that the largest number and percentage of submissions regarding U.S. tax reform (in general) comes from those impacted by U.S. extra-territorial taxation and FATCA.)
I suggest that the phenomenon of “citizenship-based taxation” NOT be described exclusively from the perspective of U.S. citizens and U.S. interests. Furthermore, I suggest that the descriptive label of “Citizenship-based taxation” be avoided and a label that conveys the idea of “Taxing the citizens and residents of other countries” be adopted.
What is an appropriate way of “labeling” (and thinking about) the uniquely American phenomenon of defining “tax residency” in terms of citizenship (and thereby imposing U.S. taxation in an extra-territorial manner)?
Because taxing the residents of other countries results in infringing the sovereignty of other countries and in the syphoning of capital from those countries to the USA, perhaps an appropriate label would be:
“U.S. Tax Colonization” – (One person at a time)
Adopting a “new label” may change the terms of the discussion.
Descriptive label 1 – “Citizenship-based taxation”: Some (the overwhelming majority) describe this phenomenon (which is unique to the United States) as “citizenship-based taxation”. Although true, this descriptive label is a very “U.S. centric” description. It accurately describes what takes place, but it ignores the practical reality of who it actually impacts and how it impacts those persons. It’s as though, a U.S. citizen is also a U.S. resident. It also ignores the fact that U.S. citizens who are resident/citizens of other countries pay taxes to those countries. (What? It is sometimes a surprise to “Homeland Americans” that U.S. citizens who live in other countries are required to pay taxes to those other countries.)
(See the first video in Appendix A to see Representative Holding identify how U.S. “citizenship-based taxation” is harming the lives of those Americans who leave the United States.)
Descriptive label 2 – “U.S. Tax Colonization”: This label accurately describes the actual impact of “citizenship-based taxation”. It accurately reflects the reality that those U.S. citizens who do NOT live in the United States pay taxes to the countries where they live. The reality of defining “tax residency” in terms of “citizenship”, is that it forces the citizen/residents of other countries to comply with the full terms of the Internal Revenue code. (A Canadian resident must pay taxes to the United States in addition to paying taxes to Canada.)
The use of citizenship as a sufficient condition for taxation is NOT a theoretical issue. It is a “real” problem with “real” consequences inflicted on those who are the citizens and residents of other countries. If you have read this far, you might stop and consider what it would be like to be simultaneously subject to the tax laws of two jurisdictions.
(See the second video in Appendix A to see McGill Professor Allision Christians describe how the U.S. taxation of Canadian citizens, resident in Canada is destroying the lives of those affected.)
Independence Day – July 4, 2017
On July 4, 2017, Americans living inside the USA celebrated the “4th of July” holiday – a day that Americans celebrate their independence and freedom.
On that same day, I had meetings with SEVEN American dual citizens, living outside the United States. This “Group of Seven” were in various stages of RENOUCING their U.S. citizenship. Each of them was also a citizen and tax paying resident of another country. They varied widely in wealth, age, occupation, religion, and political orientation. Some of them have difficulty in affording the $2350 USD “renunciation fee” imposed by the U.S. Government. Some of the SEVEN identify as being American and some did NOT identify as being American. But each of them had one thing in common. They were renouncing their U.S. citizenship in order to gain the freedom that Americans have been taught to believe is their “birth right”.
As I write the post, I note with interest a “renunciation discussion” taking place on Facebook in real time – demonstrating the “reality on the ground”:
A “follow up” discussion (post renunciation) takes place here:
I live in Toronto, Canada. I assist those who are American citizens living outside the United States to respond to the “layers upon layers” of rules coming from the Internal Revenue Code (and other pieces of extra-territorial legislation) that affect and attempt to control EVERY aspect of their lives. Although these people are usually citizens and residents of other countries, the United States claims the right to control almost all aspects of their lives BECAUSE IT CONSIDERS THEM TO BE U.S. CITIZENS. (It is significant that many of those who the U.S. considers to be its citizens do NOT consider themselves to be U.S. citizens.) In many cases, the best response is to renounce U.S. citizenship AKA commit “citizide” (the formal process of terminating U.S. citizenship).
The U.S. extraterritorial application of its “Tax, Form and Penalty” edicts, impacts most aspects of their lives, including either tax consequences and/or “reporting requirements coupled with penalties”. The Internal Revenue Code triggers either U.S. tax or U.S. reporting requirements (or both) on (without limitation): they way they carry on business, who they marry, the cost of divorce, the extent to which they are allowed to have pension plans, their opportunities for retirement and financial planning, how they plan for their death and more. YET, THESE PEOPLE ARE THE CITIZENS AND TAX PAYING RESIDENTS OF OTHER NATIONS!
The difficulty (or near impossibility) of being a “tax resident” of both the United States and another country is demonstrated in Ms. Bugnion’s comprehensive submission and one of my previous posts “How To Live Outside in an FBAR and FATCA World” found here.
Those who contemplate compliance with these “citizenship-based rules” learn that they must choose between compliance with the U.S. laws governing Americans abroad or the opportunity to engage in normal retirement planning. As any “expatriation lawyer” will confirm, they cannot have both.
I have authored numerous submissions which detail the “technicalities” for how the Internal Revenue Code, the Bank Secrecy Act and other U.S. laws restrict the life opportunities of Americans who live in other countries. The “technicalities” are less relevant. What is relevant is WHAT THE TECHNICALITIES mean in the lives of those they affect. Rather then repeat the “technicalities” (described in previous submissions) let me just say that:
The “tradition” (seriously the attempts to justify “citizenship-based taxation” as “sound tax policy” are laughable) of imposing EVERY section of the Internal Revenue Code on any “U.S. citizen” who lives outside the United States has resulted in a situation where:
– the United States is inflicting the Internal Revenue Code on people who are TAX PAYING RESIDENTS OF OTHER NATIONS and who are ALMOST ALWAYS CITIZENS of those other nations
Thoughts on U.S. tax policy and the “moral capital” of America
What the USA calls “citizenship-based taxation” (the U.S. tradition of requiring U.S. citizens who do NOT live in the United States to pay U.S. tax on their income earned outside the United States) is in effect a set of rules that require the resident/citizens of other nations to abide by the rules of the Internal Revenue Code.
The sheer number of submissions, from Americans abroad (to the House Ways and Means Committee and Senate Finance Committee in 2013 and 2015) indicates that U.S. tax policies are creating severe hostility toward the United States. The United States simply cannot impose taxation on the citizens and residents of other nations (in effect syphoning capital from those nations) without creating ill will.
Renunciations of U.S. citizenship are “forced” and “increasing”
U.S. “citizenship-based taxation” has and will continue to drive (I believe “force”) renunciations of U.S. citizenship
From a U.S. perspective this may not matter. That said, forcing people to renounce U.S. citizenship (at tremendous financial cost to themselves – including the possibility of the S. 877A Exit Tax) is one more circumstance fueling “anti-Americanism”. (The “Exit Tax” rules are so punitive that (when applicable) they will impose full U.S. taxation on the “present value” of Canadian pensions earned while the person was a resident of Canada!)
There is NOT a single circumstance where “anti-Americanism” can be good for the United States.
Those who fail to learn from history are doomed to repeat it
History (particularly American history) suggests that in the long run the citizens of other countries will NOT tolerate taxation from the United States. Americans are taught that the American Revolution was based largely on unjust taxation from England.
History (particularly American history) demonstrates the problems of imposing one country’s citizenship on the citizens of other countries. Americans are taught that the War of 1812 was partially the result of the British claiming that U.S. citizens were really British citizens.
History (as described by tax historian Charles W. Adams) demonstrates that the “rise and fall of civilizations” is impacted by tax policy.
Recommendation for U.S. tax reform 2017
The United should not impose U.S. taxation on individuals who do not reside in the United States (unless the income has a U.S. source). The Internal Revenue Code should be amended to define “tax residency” in terms of “residence” (as does the rest of the world) and NOT citizenship.
Appendix – It’s a matter of perspective – Here are at least 3 perspectives
A. Label 1: The “Citizenship-based taxation” perspective – how it unfairly affects and destroys opportunities for “U.S. citizens” living outside the United States
Remarkable @RepHolding understands how U.S. "citizenship-based taxation" of individuals disadvantages America! https://t.co/Bw8beebRhW
— Citizenship Lawyer (@ExpatriationLaw) July 17, 2017
An interesting facebook discussion about this Representative Holding’s questions is here.
B. Label 2: “Imposing U.S. taxation on the citizens and residents of other nations” perspective – How the United States is destroying the lives of Canadian citizens resident in Canada
It's a #FATCA: USA taxation on Canadian source income earned by Canadian citizens resident in Canada https://t.co/sQm408IiAr – It's true!
— Citizenship Lawyer (@ExpatriationLaw) July 24, 2017
C. Label ?: And what if you don’t know that you might be considered by the USA to be American? What then?
And what if you didn't even now that you might be considered to be a "U.S. Person" AKA American! Should you check? https://t.co/smEH5PAZI4
— Citizenship Lawyer (@ExpatriationLaw) July 25, 2017
Excellent submission, John. It’s so much more appropriate to focus on this problem from a perspective outside of the USA’s boundaries. Boundaries that the USA is constantly overstepping, in more ways than taxing extraterritorially.