Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:
"What Is The Future Of Citizenship-Based Taxation?" Prof. William Byrnes (Texas A&M Law), Prof. Edward Zelinsky (Cardozo Law), John Richardson (Canadian attorney who represents US-Canada dual nationals), Kat Jennings (CEO Tax Connections) https://t.co/LP63MHEFYS
— William Byrnes (Tax Monk) (@williambyrnes) May 5, 2019
You are invited to submit your questions in advance. In fact, PLEASE submit questions. This is an opportunity to engage with Homelanders in general and the U.S. tax compliance community in particular.
Thanks to Professor Zelinsky for his willingness to engage in this discussion. Thanks to Kat Jennings of Tax Connections for hosting this discussion. Thanks to Professor William Byrnes for his willingness to moderate this discussion.
Tax Connections has published a large number of posts that I have written over the years (yes, hard to believe it has been years). As you may know I oppose FATCA, U.S. citizenship-based taxation and the use of FATCA to impose U.S. taxation on tax residents of other countries.
Tax Connections has also published a number of posts written by Professor Zelinsky (who apparently takes a contrary view).
This is the second of a series of four posts that reflect views and experiences of Americans abroad who are experiencing the reality of actually living as an American abroad in an FBAR and FATCA world. (The first post is here.) I think it’s important to hear from people who are actually impacted by this and who have the courage to speak out. The “reality on the ground” is quite different from the theory.
I hope that this series of posts will give you ideas for questions and concerns that you would like to have addressed in the May 17, 2019 Tax Connections – Citizenship Taxation discussion.
I am grateful to Laura Snyder for contributing her thoughts, writing and research to the discussion.
Now over to Ms. Snyder …
In run-up 2 @TaxConnections discussion w/ @ExpatriationLaw +Edward Zelinsky 17 May-Post 2 of 4 – "It Hurts My Heart:" Historical background of US taxation of non-residents https://t.co/LPWZuFiSZY #FATCA #CBT #TCJA pic.twitter.com/VOS07bxgBx
— Laura Snyder (@TAPInternation) May 5, 2019
“It Hurts My Heart:”
The Case for Fairer Taxation of Non-Resident US Citizens
by Laura Snyder*
Post 2 of 4
The number of US citizens living outside the United States is estimated to be anywhere from 5.5 to 9 million. Of that number, roughly 200,000 (or 2.2 to 3.6%) are active-duty military personnel. The remaining 97% or so come from all different walks of life: children and students, actively employed or self-employed, unemployed, homemakers, retirees. Some were born in the United States but left at a very early age (still in diapers), some left as children or teenagers, and some left as adults, including some as retirees. And many have never lived in the United States: they were born overseas to at least one US-citizen parent.
What all these persons have in common is that, even though they live outside the United States, they are subject to United States tax and banking regulations in the same manner as persons who live in the United States. This is the case regardless both of the country in which these US citizens live and of the fact that they are also subject to the tax and banking regulations of the countries in which they live, in the same manner as the other residents of those countries.
This situation is little understood. This is true with respect to the US citizens (and green card holders) living overseas themselves: while some are acutely aware of the situation, others are only vaguely aware, and some manage to live in blissful ignorance (or denial). This is also true with respect to homeland Americans: there is little awareness of the situation and, among those who have some awareness, there are many unfortunate prejudices, misconceptions and misunderstandings which serve both to perpetuate and to aggravate the very serious consequences that the situation presents for their fellow Americans who live overseas.
This is the second of a series of four posts to make the case for fairer taxation of non-resident US citizens and green card holders. The first post was a Case Study in the Marginalization of Americans Living Overseas. This second post recounts the origins of this situation, unique to the United States. The third post will describe the destabilizing effects of recent US banking regulations and explain how the 2017 Tax Cuts and Jobs Act turned an already difficult situation for entrepreneurs and small business owners into an impossible one. The fourth post will expose continuing prejudices, misconceptions and misunderstandings and how they serve to perpetuate and aggravate the situation for so many US citizens who seek simply to lead normal lives in the places where they live.
The United States Is One of Just Two Countries that Taxes Its Non-Resident Citizens on their Foreign-Sourced Income
All US citizens, including those who live outside the United States, are subject to US taxation on the basis of their worldwide income. While many countries tax their residents (citizens or not) on the basis of their worldwide income, the United States is just one of two countries in the world that taxes the foreign (non-US) income of their non-resident citizens (and green card holders). The United States is the only country in the world to subject its non-resident citizens to worldwide taxation under the same rules as those applied to the country’s residents, rules that treat the local financial dealings of those non-resident citizens as “foreign” cross-border transactions and penalize them as such.
Taxing Non-Resident Citizens Is Based Upon Century-Old Prejudice
The first policy taxing non-resident citizens was adopted during the Civil War in order to punish draft dodgers as well as other US citizens residing overseas: they were seen as shirking their duties to the country, whether it be with respect to military service or to making a financial contribution to the war effort, or both. In 1862, Senator Jacob Collamer of Vermont explained: “If a man draws his income from our public debt, or from property here, and resides in Paris, skulking away from contributing his personal support to the Government in this day of its extremity, he ought to pay a higher income tax.” A few decades later, in 1894, Senator George Hoar of Massachusetts argued his support of non-resident taxation in this manner:
[The point of non-resident taxation is so that] if an American citizen went abroad and carried the protection of his country, of his citizenship with him, he did not escape its burdens… There are a great many people, I am sorry to say, who go abroad for that very purpose, and some of them went abroad during the late [Civil W]ar. They lived in luxury, at the same time at less cost, in a foreign capital; they had none of the voluntary obligations which rest upon citizens, of charity, or contributions, or supporting churches, or anything of that sort, and they escaped taxation.
These statements demonstrate that from the very first incarnations of non-resident taxation, American homelanders typecast US citizens living outside the United States as wealthy and indolent and living in exotic locales. They were characterized as having left the country for the principal purpose of avoiding their obligations, financial and otherwise, to the United States and therefore they deserved to be punished by means of taxation.
At the time of the Civil War as well as during a century afterwards dual citizenship was rare and US citizens living outside the United States were unlikely to also be citizens of their host countries. This was in large part because naturalizing in another country was an expatriating act, as were other activities, such as voting in a foreign election or, in the case of women, marrying a non-citizen. However, in 1967 the US Supreme Court held in Afroyim v. Rusk that the commission of a relinquishing act cannot lead to the loss of US citizenship unless the individual performed the act with the intention of losing US citizenship. One result of this decision has been an explosion in the number of US citizens living outside the United States and, more than that, in the number of dual citizens living overseas. For example, Australian census data shows that 54% of US-born Australian residents are Australian citizens. The high prevalence of dual citizenship belies the stereotype of US citizens living overseas—are they “skulking” as self-exiles from US taxation, all the while “drawing” their income from US sources, or are they integrated members of society in their new home countries, “drawing” their income from sources outside the United States?
Compliance Levels Are Low
The legal obligation to declare and pay taxes on the basis of worldwide income has been difficult to enforce. United States tax authorities have had limited access to information about the income and assets of US citizens living overseas and limited means of compelling them to declare their income and pay the applicable taxes. Further, given how aberrational the practice of non-resident taxation is, it never occurred to many US citizens living overseas that they could be subject to such an obligation.
This is particularly the case with respect to US citizens who have never lived in the United States or who have lived there only for a very short time when they were (very small) children (these persons are often referred to as “Accidental Americans”). Not only were many such persons not even aware of the fact that they are considered to be US citizens but, even if they were aware, the suggestion that they were supposed to file US tax returns and pay US income tax would, on its face, be met with dumbstruck incredulity. On what legitimate basis, they would ask, could this possibly be the case? And who would be foolish enough to comply with what could only be a scam?
And even for US citizens who had previously studied, worked or lived in the United States and had previously declared and paid US taxes—for them, too, the fact that they remained subject to US income taxation even though they no longer either lived in the United States or drew an income from the country was, for many, difficult to come to terms with. While this difficulty was due to a variety of reasons, it was especially because remaining in compliance with US tax obligations while residing outside the United States is highly problematic, especially for those residing outside the US on a long-term basis. The reasons for that include:
1. They already pay taxes in the places where they live, in many cases at much higher rates,
2. It is impossible to reconcile the US tax system with the system of their country of residence, with the result that many investment and retirement vehicles favored under the system of their country of residence are harshly penalized by the US system. This has a number of consequences not the least of which is significant difficulties in planning and saving for retirement, and
3. The tax reporting obligations for US citizens living overseas are so complex and lengthy that it is impossible for most US citizens to comply with them without spending several hundreds if not several thousands of dollars for professional assistance. This is the case even when the US citizen’s income is very low (as low as $5) and the US tax ultimately owed is $0.
Given the above, it is hardly a surprise that from the very inception of non-resident taxation over 150 years ago the level of compliance (that is, the number of non-resident US citizens filing US tax returns) has been limited. At the same time, the efforts as well as the ability of US tax authorities to enforce compliance were also limited.
The next and third of this series of four posts will describe the destabilizing effects of recent US banking regulations and explain how the 2017 Tax Cuts and Jobs Act turned an already difficult situation for entrepreneurs and small business owners into an impossible one.
* Laura Snyder was raised in the United States and has lived in Europe (mostly in France) since 1995. She holds a JD from the University of Illinois, a DEA in droit privé from the University of Paris 1 (Panthéon-Sorbonne) and she completed the TRIUM Executive MBA program (an alliance of New York University, London School of Economics and HEC School of Management). She is a doctoral candidate at the University of Westminster. She is the author of the books Democratizing Legal Services: Obstacles and Opportunities and Modernizing Legal Services in Common Law Countries: Will the US Be Left Behind? She is a member of the bars of New, York, Illinois and Paris.
Note: The original version of Ms. Snyders post contains a number of footnotes that provide a rich source of further research and discussion. She has graciously allowed me to include the following pdf of this post that contains those footnotes. Here it is: