When: Tuesday January 15, 2019 – 12:30 EST/17:30 GMT (Toronto, Canada) time (one hour)
Where: http://www.uberconference.com/orgop2 or by calling: 503 – 773 – 9640
Pre-Registration: Required – please visit http://www.facebook.com/RepublicansOverseas for instructions (or leave a comment at the bottom of this post which includes your name, email and country of residence).
Introduction – A background review
This is the language that I have been using to describe the objective. There are FEW INDIVIDUALS and NO advocacy group that would disagree with this.
This language focuses on where U.S. tax laws are applied. I believe that this is better language than “Stop Citizenship-based taxation” (which focuses on WHO is subject to U.S. taxation, confuses citizenship and residency and is more emotionally laden). This language also allows for more flexibility in terms of how this goal is to be achieved.
Defining tax residency – A primer
Tax residency is a term that defines WHO is subject to worldwide taxation by a country. Many countries define tax residency in a way that may be different from actual residency/physical presence. Most countries have tax systems that are based on “residence based taxation” (although countries may define “tax residence” in different ways).
Although tax residency tells you WHO is subject to a country’s tax system, it does NOT tell WHAT income is subject to taxation by that country. Most countries impose worldwide taxation on their tax residents.
Residence-based taxation: Under a system of “residence based taxation” people are tax residents (usually subject to a country’s worldwide tax system) if they have a sufficient physical connection to the country. Non-residents (those without a sufficient physical connection) would NOT be subject to worldwide taxation by that country.
Citizenship-based taxation: Under the citizenship-based taxation system the United States deems “citizens” to be tax residents of the United States wherever they live. Because U.S. citizens can also be tax residents of other countries, the United States imposes worldwide taxation on people who are tax residents of other countries.
(Domicile-based taxation: Although not directly relevant to the purpose of this post, some countries and states use domicile as the basis for tax residency. Different jurisdictions define domicile differently. Interestingly the new China tax laws make domicile in China the primary test for tax residency. An interesting discussion of the State of Maryland attempting to impose tax residency on an American living abroad is here.)
But, on to the problem of U.S. extra-territorial taxation.
How to end the U.S. imposition of worldwide taxation on the tax residents of other countries
The mission of some groups and individuals (which is expressed in the Holding bill) includes: How to stop the United States from imposing worldwide taxation on people who are tax residents of other countries.
The following two solutions come to mind:
1. Transition to a system of residence based taxation (Americans abroad cease to be subject to U.S. tax jurisdiction at all.) NOTE THAT NOT A SINGLE ADVOCACY GROUP HAS PROPOSED THIS SOLUTION.
2. Retain citizenship-based taxation (Homeland Americans are still subject to taxation on non-U.S. income), but allow Americans abroad to exclude foreign source income from their U.S. taxable income. NOTE THAT EVERY EVERY ADVOCACY GROUP HAS ASSUMED THE RETENTION OF CITIZENSHIP-BASED TAXATION.
How the Holding bill ends the U.S. practice of imposing worldwide taxation on the tax residents of other countries
On December 21, 2018 Congressman George Holding introduced the “Tax Fairness For Americans Abroad Act of 2018” hereafter referred to as the Holding bill.
A direct link to the Holding bill is here.
The Holding bill (which is generally supported by BOTH parties, ACA, AARO, Democrats Abroad, Republicans Overseas and number of individuals) is NOT an end to citizenship-based taxation. It retains citizenship-based taxation (tax jurisdiction over Americans abroad) but simply says that Americans abroad will no longer be required to pay U.S. tax on income that is not sourced in the United States. By adding the new Sec. 911A to the Internal Revenue Code, the Holding bill in effect creates TTFI (territorial taxation) for non-U.S. source income. For Americans abroad, the new Sec. 911A becomes an “island of territorial taxation in an a sea of worldwide taxation”.
To put it another way: The Holding bill says: (1) As U.S. citizens we retain the right to tax you on your worldwide income, but (2) we will allow you to exclude your non-U.S. income from taxation.
Therefore (and this is important to understand) the Holding bill has a narrow purpose. The narrow (but incredibly important purpose) is to define WHAT INCOME received by Americans abroad is subject to U.S. taxation. The bill does NOT redefine “who is a U.S. tax resident” and it does NOT deal with FATCA issues.
The Holding bill achieves the core objective which is consistent with:
While the Holding bill does NOT end “citizenship-based taxation”, it (in effect) makes “citizenship-based taxation” operate as though it were “residence based taxation”! To put it simply: Americans abroad will be required to pay tax in the country where the income is sourced.
Criticism of the Holding bill from individuals
Most of the criticism has been that the Holding bill does not solve the problems of “accidental Americans”. I agree that the U.S. treatment of accidental Americans is indescribably unjust. Of all the groups of Americans abroad there is no group that is treated more unfairly than accidental Americans. The situation of accidental Americans results from the fact that:
The United States is the ONLY country that BOTH confers citizenship based on birth in the country AND imposes worldwide taxation based on citizenship.
This criticism takes many forms which include:
- it doesn’t solve the FATCA banking problem. True, but it was not intended to solve that problem (see the discussion above)
- why should accidental Americans have to do a three year compliance exercise to qualify for the new system? THE HOLDING BILL DOES NOT CHANGE THE DEFINITION OF WHO IS A U.S. TAX RESIDENT. CITIZENS REMAIN U.S. TAX RESIDENTS. Most accidental Americans have not entered the U.S. tax system anyway. The reality is that those who see the Holding bill as a benefit will enter the U.S. tax system. Those who don’t see it as a benefit won’t enter the U.S. tax system. This is not rocket science.
- One shouldn’t claim that the Holding bill helps ALL 9 million Americans abroad. The Holding bill is designed so that Americans abroad can exclude non-U.S. income and still be compliant with U.S. tax laws. This is a clear benefit to all 9 million Americans abroad who wishe to be in compliance with U.S. tax laws. (The Holding bill is NOT intended to solve all the problems.)
- The Holding bill doesn’t address the reporting requirements and other requirements in the Internal Revenue Code. That’s right it doesn’t. It is expected that those issues will continue to evolve. But, those issues will evolve in the context of a system where Americans abroad do not pay tax on non-U.S income. Why should people be required to report on income that is not subject to taxation? THIS BILL IS INTENDED TO BE A GOOD START IN SOLVING THESE PROBLEMS.
Criticism of the Holding Bill from the tax compliance community
Oh my God! What would you expect from these people?
The responses from the tax compliance community have ranged from absolutely offensive, to mild claims that they don’t think tax reform can happen, to neutrality.
What is clear is the tax compliance community is of ZERO help to you. Their primary function (so far) has been to tell you that tax reform just can’t happen. This has the effect of undermining your hopes, destroying your enthusiasm and undermining your commitment to actively support change. YOUR SUPPORT IS ABSOLUTELY NEEDED!
To put it simply: The tax compliance industry has NOT (there are a few exceptions) been part of the process of lobbying and negotiating for change. They don’t know anything about this.There is NOTHING TO BE GAINED BY LISTENING TO THEIR CHATTER. Their business is tax compliance and not legislative change.
Bringing me to my final and most important point – Individuals should support this bill
At the end of the day this uphill battle will be won because of the vocal, organized, consistent and steadfast support from the community of individual Americans abroad. This is a moment for unity! It is not a moment for negativity.
This is a moment to embrace and support a goal that is more important than the interests of any one individual. This is a moment to embrace legislation that has clear benefits for many and sets the stage for more positive changes to come.
This bill should be supported by all individuals. If you identify as a a true American abroad living abroad you do NOT want your children burdened with the toxicity of U.S. tax laws. If you are an “accidental American” who does not identify as being an American abroad you surely do want U.S. extra-territorial tax laws in your country!
Whether you are a believer in citizenship-based taxation, residence-based taxation, Republican, Democrat, male, female, accidental or Homelander abroad (or anything else) surely you would all agree that:
On hope and persistence
The naysayers want to undermine your hope and discourage your persistence. They would have you believe that change is simply not possible. Their claims are ridiculous. Five years ago, it was inconceivable that the Holding bill would have been introduced. The Holding bill is the result of the hard work, persistence and patience – and HOPES – of a small and dedicated group of people.
Hope and persistence remain the most important ingredients to any form of change. Your support is critical.