Biden 2023 Green Book: Six Ways The Proposals Would Affect Americans Abroad

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Update April 13, 2022 …

Here is yet a seventh way – the treatment of gifts as capital gains – that the Biden Green book would impact Americans Abroad

Introduction

As long as the United States employs citizenship taxation any proposed changes to the US tax system will have an impact (some intended and some unintended) on Americans abroad.

The Biden Green Book for fiscal year 2023, released on March 28, 2022, contains a number of proposals to both increase tax rates and increase the tax base by increasing the number of activities that are taxable events. Generally the proposals include a number of provisions to create and enhance taxation on both income from capital and capital itself. These provisions continue to generate discussion in the mainstream media including: The New York Times, Washington Post and Wall Street Journal. This is certain to generate much discussion in the tax compliance community.

The 2023 Green Book is available here.

Much will be written about how the proposals would affect resident Americans. Far less will be written about how the proposals would affect Americans abroad. The US rules of citizenship taxation steal from Americans abroad (and the countries where they reside) in hundreds of ways. Some are intended and foreseeable. Others are the unintended consequences that result from tax changes that apply to people who are not considered in the political process.

Significantly the Green Book does not suggest a move away from US citizenship taxation toward resident taxation as embraced by the rest of the world. In their totality, the proposals (particularly those that create income realization events when a gift is made) suggest a worsening of the situation for Americans abroad. That said, one proposal “might” (depending on Treasury) allow for the relaxation for the 877A Exit Tax rules, for a narrow group of Americans abroad under certain circumstances.

The purpose of this post is to identify six ways (and I assure you that there are more) that the Green Book would impact Americans abroad. The “Group Of Six” includes:

1. Raising The Corporate Tax Rate To 28 percent – Creating Subpart F Income and Making More Americans Abroad GILTI – Page 2

Verdict: This will have the effect of increasing the number of Americans abroad subject to taxation on income earned by their small corporations but not received by them personally.

2. An increase in the Corporate rate would increase the GILTI rate (suggesting to 20 percent) – Page 2

Verdict: More Americans abroad will be GILTI and will possibly (depending on a combination of country specific factors and their specific circumstances) be subject to GILTI taxes at a higher rate).

3. Reducing Phantom Gains And Losses: Simplify Foreign Exchange Rate And Loss Rules For Individuals And Exchange Rate Rules For Individuals – Page 90

Verdict: This in interesting. While reinforcing that Americans abroad are tethered to the US dollar it does suggest a recognition of the unfairness of how the phantom gain rules harm the purchase and sale of residential real estate outside the USA). Imagine how this would interact with the proposed rules converting gifts to taxable capital gains?

4. Strengthening FATCA: Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For the Exchange Of information – Page 97

Verdict: This is an attempt to reinforce the core principles of FATCA which are about the identification of US citizens outside the United States.

5. Expatriation – The Stick: Extend The Statute Of Limitations For Auditing Expatriates To Three Years From The Date From Which 8854 Should Have Been Filed (Possibly Forever) – Page 87

Verdict: This is theoretically very bad. It means that those who renounce without filing Form 8854 would be subject to a lifetime of risk. Practically speaking these provisions are not understood on the retail level. Hence, I doubt this will influence many people.

6. Expatriation – The Carrot: Exempting Certain Dual Citizen Expatriates From The Exit Tax – Page 87

Verdict: This is good news for the narrow group of people impacted by this – mainly “Accidental Americans”. It is bad news for the rest because the existing rules will continue to apply to those “who are left behind”.

I assure you that the Green Book contains a large number of ways that Americans abroad will be impacted. I will leave it to others to add to this list.

The principle is:

Citizenship taxation can steal from Americans abroad at least a thousand ways. If you can understand even one hundred of them you are doing well!

Summary: Once again this shows how all proposed changes to US tax law impact Americans abroad in a world of citizenship taxation. There is nothing in this that suggests a move toward residence taxation. There are few crumbs which might make citizenship taxation easier to live with (example relaxing phantom gains). But, on balance these provisions are a “doubling down” on the problems of citizenship taxation. The provision to allow easier expatriation for “Accidental Americans” does nothing to make life easier for the rest.

If you have seen enough you can stop here. For those who want more of the details and explanation, continue on …

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1. Raising The Corporate Tax Rate To 28 percent – Creating Subpart F Income and Making More Americans Abroad GILTI- Page 2

This may affect Americans abroad with corporations. The reason is that under the CFC rules found in 951 to 965 of the Internal Revenue Code, certain income does not qualify as “Subpart F” income (and taxable to the individual shareholder) if it is taxed at a rate of at least 90% of the US corporate tax rate. At the current 21% rate, income taxed at 18.9% or more is excluded from US taxation. At a corporate rate of 28% the foreign tax rate would need to be as high as 25.2% to qualify for the exclusion.

Conclusion: This is potentially very very bad news for entrepreneurs abroad.

2. An increase in the Corporate rate would increase the GILTI rate (they are claiming to 20 percent) – Page 2

Need I say more. Suffice it to say that any increase in US corporate tax rates will have a “trickle down” effect to individuals. The Green Book explanation is interesting and includes:

Reasons for Change

Raising the corporate income tax rate is an administratively simple way to raise revenue to pay for the Administration’s infrastructure proposals and other longstanding fiscal priorities. A corporate tax rate increase can expand the progressivity of the tax system and help reduce income inequality. Additionally, a significant share of the effects of the corporate tax increase would be borne by foreign investors. Therefore, some of the revenue raised by this proposal would result in no additional Federal income tax burden on U.S. persons. Also, the majority of income from capital investments in domestic C corporations is untaxed by the U.S. government at the shareholder level, so the corporate tax is a primary mechanism for taxing such capital income.

Furthermore, many multinational corporations pay effective tax rates that are far below the statutory rate, due in part to low-taxed foreign income. The proposal would keep the global intangible low-taxed income (GILTI) deduction constant, raising the GILTI rate in proportion to the increase in the corporate rate. This avoids increasing the incentive to shift profits and activity offshore as the domestic rate is increased

Bottom Line: More Americans Abroad Will Be GILTI!

3. Reducing Phantom Gains And Losses: Simplify Foreign Exchange Rate And Loss Rules For Individuals And Exchange Rate Rules For Individuals – Page 90

All American citizens are tethered to the US dollar as their functional currency. Yet they live their lives in the currency of the country where they reside. Every taxable transaction that takes place in that foreign currency must be converted to the US dollar to determine its US tax impact. Many Americans abroad have experienced the pain of having to pay tax on phantom capital gains. To add insult to injury, with respect to personal use real estate, the gains are taxable but the losses are not deductible. This peculiar form of the American nightmare is found in Internal Revenue Code 988.

That said, the Green Book is proposing limited relief as follows:

Proposal

The proposal would allow individuals living and working abroad to use an average rate for the year to calculate qualified compensation received in foreign currency, as well as for other items of income or expense of such individuals (including retired individuals) as specified in regulations.

The proposal would increase the personal exemption amount for foreign currency gain from $200 to $500, to reflect inflation since 1986, and would index this threshold to inflation on an annual basis.

The proposal would also allow individuals to deduct foreign currency losses realized with respect to mortgage debt secured by a personal residence to the extent of any gain taken into income on the sale of the residence as a result of foreign currency fluctuations. Since an individual may own a personal residence outside the United States that is secured by a foreign currency-denominated mortgage whether or not the individual lives abroad, this proposal would
not be limited to individuals who live and work abroad.

The proposal would be effective for taxable years beginning after December 31, 2022.

4. Strengthening FATCA: Provide For Information Reporting by Certain Financial Institutions and Digital Asset Brokers For the Exchange Of information – Page 97

This is interesting. The Green Book recognizes:

1. The importance of information exchange; and

2. The fact that the US is not meeting its exchange obligations under the FATCA IGAs.

This proposal is an attempt to strengthen FATCA (which is why it is of interest to individuals) by requiring the US to meet its obligations under the FATCA IGAs. The Green Book states:

Reasons for Change

The United States has established a broad network of information exchange relationships with other jurisdictions based on established international standards. The information obtained through those information exchange relationships has been central to recent successful IRS enforcement efforts against offshore tax evasion. The strength of those information exchange relationships depends, however, on cooperation and reciprocity. Further, as the IRS has gained more experience with exchange of tax information on an automatic basis with appropriate partner jurisdictions, it has become clear that a jurisdiction’s willingness to share information on an automatic basis with the United States often depends on the United States’ willingness and ability to reciprocate by exchanging comparable information.

The ability to exchange information reciprocally is particularly important in connection with the implementation of FATCA. In many cases, foreign law would prevent foreign financial institutions from complying with the FATCA reporting provisions. Such legal impediments are addressed through intergovernmental agreements under which the foreign government (instead of the financial institutions) agrees to provide the information required by FATCA to the IRS.

Under many of these agreements, the United States provides some information on residents of the foreign country that hold accounts at a U.S. financial institution. However, the United States provides less information on foreign accounts at a U.S. financial institution than it receives on U.S. accounts at a foreign financial institution.

The intergovernmental agreements include political commitments by the U.S. government to advocate and support relevant legislation to achieve equivalent levels of reciprocal information exchange. In order to fulfill this commitment, legislation is needed to require U.S. financial institutions to report to the IRS certain additional information on foreign account holders.

Requiring financial institutions in the United States to report to the IRS the comprehensive information required under FATCA would enable the IRS to provide equivalent levels of information to cooperative foreign governments in appropriate circumstances to support their efforts to address tax evasion by their residents.

5. Expatriation – The Stick: Extend The Statute Of Limitations For Auditing Expatriates To Three Years From The Date From Which 8854 Should Have Been Filed (Possibly Forever) – Page 87

Apparently there are “expatriates” who fail to file Form 8854. This change would allow for IRS audits of expatriates who fail to file Form 8854 for up to three years from the date Form 8854 is filed. It would be interesting to know whether this proposal is intended to be retrospective. I suspect that this would definitely encourage more people to avail themselves of the provisions in the 2019 “Relief Procedures For Former Citizens“.

To quote from the Green Book:

Proposal

First, the proposal would provide that, in the case where a taxpayer is required to provide IRS Form 8854 with his or her tax return, the time for assessment of tax will not expire until three years after the date on which Form 8854 is filed with the IRS. This will create parity with the current statute of limitation rules for tax returns when other information returns relating to various international transactions or assets are required to be filed with the return. The proposal
will reduce abuse and noncompliance with respect to high net wealth expatriates.

6. Expatriation – The Carrot: Exempting Certain Dual Citizen Expatriates From The Exit Tax – Page 87

“Expatriation” is defined as either “relinquishing US citizenship” or “Ceasing To Be A Permanent Resident”. The Internal Revenue Code defines the tax consequences of “expatriation” in 877A (which for the definitions of “covered expatriate” and “long term resident” reference 877(a)(2) and 877(e)(2) respectively). The 877A Exit Tax rules are harsh and extremely punitive as applied to US citizens living outside the United States who have little connection to the United States.

The consequences of expatriation are described in the Green Book as follows – Page 87:

The Internal Revenue Code (Code) imposes special rules on certain individuals who relinquish their U.S. citizenship or cease to be lawful permanent residents of the United States (expatriates). Expatriates who are “covered expatriates” generally are required to pay a mark-to-market exit tax on a deemed disposition of their worldwide assets as of the day before their expatriation date.

An expatriate is a covered expatriate if he or she meets at least one of the following three tests: (a) has an average annual net income tax liability for the five taxable years preceding the year of expatriation that exceeds a specified amount that is adjusted for inflation (the tax liability test); (b) has a net worth of $2 million or more as of the expatriation date (the net worth test); or (c) fails to certify, under penalty of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date (the certification test).

But, the exception to the 877A Expatriation Tax for “dual citizens” at birth is noted:

The definition of covered expatriate includes a special rule for an expatriate who became at birth a citizen of both the United States and another country and, as of the expatriation date, continues to be a citizen of, and taxed as a resident of, such other country. Such an expatriate will be treated as not meeting the tax liability or net worth tests if he or she has been a resident of the United States for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation occurs. However, such an expatriate remains subject to the certification test.

The Green Book notes with respect to the difficulty of compliance (whether dual citizen or not) that:

Lower-income individuals who have spent most of their lives abroad may find complying with these rules difficult when attempting to expatriate. A dual citizen who has spent most of his or her life outside the United States will be considered a covered expatriate despite having relatively low income and assets if the individual does not certify to the IRS compliance with all U.S. Federal tax obligations for the five preceding taxable years. Some dual citizens who have spent most of their lives outside the United States may not have previously filed a U.S. tax return or obtained a TIN. Foreign financial institutions in some countries have threatened to close bank accounts of U.S. citizens who do not provide a TIN. U.S. citizens who are citizens and residents of foreign countries and have limited contacts with the United States may wish to expatriate, but in order to avoid being considered covered expatriates such individuals need to be able to certify that they are compliant with all U.S. Federal tax obligations for the five preceding taxable years.

For taxpayers with modest incomes who have not been filing U.S. tax returns but have been filing tax returns and paying tax in their countries of residence, the cost and practical difficulties of certifying compliance with their U.S. Federal tax obligations may impede their ability to satisfy the requirements for expatriation. For example, it may be difficult to find a U.S. tax advisor to prepare a U.S. tax return in the taxpayer’s country of residence, and the cost of doing
so may be significant for a lower-income taxpayer. If the taxpayer would not owe any U.S. tax, the benefit to the IRS of the filing of such tax returns is limited.

No kidding! Actually the idea of the United States imposing worldwide taxation on individuals with no residential connection to the United States is absurd. Many of them don’t know they are considered to be US citizens. Others learn they are US citizens because they are identified by a bank pursuant to the FATCA IGAs. A significant percentage don’t speak English. It is entirely reasonable that these individuals should NOT be subjected to any aspect of US worldwide taxation, including the 877A Exit Tax. Furthermore, the Green Book frankly admits that there is significant noncompliance with filing Form 8854. Therefore, in a remarkable and unusual instance of common sense, the Green Book proposes an exemption from the Exit Tax rules for certain “dual citizens” (whether dual citizens at birth or not) …

Second, the proposal will grant the Secretary and her delegates authority to provide relief from the rules for covered expatriates for a narrow class of lower-income dual citizens with limited U.S. ties. This relief would apply only to taxpayers that have a tax home outside the United States and satisfy other conditions that ensure that their contacts with the United States are limited, and whose income and assets are below a specified threshold. Evidence of limited contacts with the United States may include a demonstration that the taxpayer’s primary residence has been outside the United States for an extended period. Evidence of the taxpayer’s income and assets may include a foreign tax return, information about the value of property owned by the taxpayer and the taxpayer’s sources of income, or information demonstrating that a certain amount of income earned from working outside the United States is excludable from U.S. tax. No inference would be intended that the evidence acceptable to the Secretary under this provision constitutes the filing of a U.S. tax return.

The proposal would be effective for taxable years beginning after December 31, 2022.

(Interestingly in 2015 the Obama administration proposed a provision that was similar in spirit.)

Query: Is this an admission from the Biden administration that for the purposes of US taxation there really is a difference between US citizens who live within the United States and those who live without the United States? Could this possibly be treated as a “crack in the wall” – of that most American tradition – the notion that it should impose worldwide taxation on individuals with no residential connection to the United States?

Conclusion: If I am reading this correctly this proposal would grant Treasury the authority (whether by formal regulation or informal notice) to exempt certain dual citizens from the 877A Exit Tax rules. In other words, they can renounce and simply be done with the USA once and for all. This proposal is clearly in the interest of the United States of America (it is generating a lot of bad will over this issue), the IRS (clearly the biggest victim of US citizenship-based taxation) and the individuals impacted (who are being taxed on non-US income while they are tax residents of another country). What’s not to like?

The real problem is the continued existence of US citizenship-based taxation. The time has come to “Stop Extraterritorial American Taxation“.

That said, this proposal would provide relief for the individuals who are most unjustly treated under an extremely unjust tax system. If adopted, this would become one more example of what I (along with Dr. Karen Alpert and Dr. Laura Snyder) have previously proposed as “A Simple Regulatory Fix For Citizenship-based Taxation“.

John Richardson – Follow me on Twitter @Expatriationlaw

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Appendix – Excerpt From 2023 Green Book – Page 87

ADDRESS COMPLIANCE IN CONNECTION WITH TAX RESPONSIBILITIES OF EXPATRIATES

Current Law

An individual may become a U.S. citizen at birth either by being born in the United States (or in
certain U.S. territories) or by having a parent who is a U.S. citizen. All U.S. citizens generally
are subject to U.S. income taxation on their worldwide income, even if they reside abroad.
U.S. citizens that reside abroad also may be subject to tax in their country of residence. Potential
double taxation is generally relieved in two ways. First, U.S. citizens can credit foreign taxes
paid against their U.S. taxes due, with certain limitations. Second, U.S. individuals may exclude
from their U.S. taxable income a certain amount of income earned from working outside the
United States. U.S. citizens living abroad are also eligible for the same exclusions from gross
income and deductions as other U.S. taxpayers, and therefore may have taxable income that is
low enough that no income tax is due.

The Internal Revenue Code (Code) imposes special rules on certain individuals who relinquish
their U.S. citizenship or cease to be lawful permanent residents of the United States (expatriates).
Expatriates who are “covered expatriates” generally are required to pay a mark-to-market exit
tax on a deemed disposition of their worldwide assets as of the day before their expatriation date.
An expatriate is a covered expatriate if he or she meets at least one of the following three tests:
(a) has an average annual net income tax liability for the five taxable years preceding the year of
expatriation that exceeds a specified amount that is adjusted for inflation (the tax liability test);
(b) has a net worth of $2 million or more as of the expatriation date (the net worth test); or (c)
fails to certify, under penalty of perjury, compliance with all U.S. Federal tax obligations for the
five taxable years preceding the taxable year that includes the expatriation date (the certification
test).

The definition of covered expatriate includes a special rule for an expatriate who became at birth
a citizen of both the United States and another country and, as of the expatriation date, continues
to be a citizen of, and taxed as a resident of, such other country. Such an expatriate will be
treated as not meeting the tax liability or net worth tests if he or she has been a resident of the
United States for not more than 10 taxable years during the 15-taxable year period ending with
the taxable year during which the expatriation occurs. However, such an expatriate remains
subject to the certification test.

If a taxpayer renounces U.S. citizenship or abandons lawful permanent resident status, that
taxpayer must file Form 8854, Initial and Annual Expatriation Statement, with their U.S. tax
return to make the certification described in the preceding paragraph and provide information to
determine whether the individual is subject to the exit tax (and to compute such tax, if
applicable).

Generally, the IRS has three years from the date a return is filed to assess the tax. However,
existing law extends the assessment statute of limitations in certain cases, such as when a
taxpayer fails to furnish required information returns relating to various international transactions
or assets. In these cases, the statute of limitations does not expire until three years after the
information required to be reported is provided. Existing law does not include Form 8854 as one
of the information returns that would trigger an extended statute of limitations.

Under the Foreign Account Tax Compliance Act (FATCA) provisions of the Code, a foreign
financial institution is required to collect certain information about U.S. persons who hold an
account with the institution, including the person’s U.S. taxpayer identification number (TIN). A
foreign financial institution that fails to comply with these rules may be subject to U.S.
withholding tax on certain U.S. source payments. Foreign financial institutions consequently
routinely require an account holder who is a U.S. citizen to provide a TIN.

Reasons for Change

Form 8854 is critical to the IRS’s ability to identify expatriating taxpayers. If a person
expatriates but fails to include the form with his or her tax return, it is difficult for the IRS to
identify such a failure, and consequently the IRS may not be aware that the person has
expatriated. Although the IRS receives information on expatriating individuals from the
Department of State or from the United States Citizenship and Immigration Service, the
information is received after the expatriating act and does not include TINs, which means that it
is more difficult and time-consuming for the IRS to match this information with taxpayer
records. In the case of long-term permanent residents, many are not aware of the requirement to
file Form 8854 when they surrender their green cards, and the IRS has no established
methodology of identifying such cases. Because of these difficulties, the IRS may not discover
that an individual has expatriated and failed to file Form 8854 until more than three years after
the individual files his or her tax return for the year of expatriation. In these circumstances,
unless the IRS proves fraud, the IRS may be barred from making any expatriation related tax
assessments because the assessment statute of limitation on the taxpayer’s tax return may have
already expired. These cases can involve substantial amounts of foregone exit tax and related
taxes, and high net wealth taxpayers can exploit the tax system by simply failing to file Form
8854 with their tax return.

Lower-income individuals who have spent most of their lives abroad may find complying with
these rules difficult when attempting to expatriate. A dual citizen who has spent most of his or
her life outside the United States will be considered a covered expatriate despite having
relatively low income and assets if the individual does not certify to the IRS compliance with all
U.S. Federal tax obligations for the five preceding taxable years. Some dual citizens who have
spent most of their lives outside the United States may not have previously filed a U.S. tax return
or obtained a TIN. Foreign financial institutions in some countries have threatened to close bank
accounts of U.S. citizens who do not provide a TIN. U.S. citizens who are citizens and residents
of foreign countries and have limited contacts with the United States may wish to expatriate, but
in order to avoid being considered covered expatriates such individuals need to be able to certify
that they are compliant with all U.S. Federal tax obligations for the five preceding taxable years.
For taxpayers with modest incomes who have not been filing U.S. tax returns but have been
filing tax returns and paying tax in their countries of residence, the cost and practical difficulties
of certifying compliance with their U.S. Federal tax obligations may impede their ability to
satisfy the requirements for expatriation. For example, it may be difficult to find a U.S. tax
advisor to prepare a U.S. tax return in the taxpayer’s country of residence, and the cost of doing
so may be significant for a lower-income taxpayer. If the taxpayer would not owe any U.S. tax,
the benefit to the IRS of the filing of such tax returns is limited.

Proposal

First, the proposal would provide that, in the case where a taxpayer is required to provide IRS
Form 8854 with his or her tax return, the time for assessment of tax will not expire until three
years after the date on which Form 8854 is filed with the IRS. This will create parity with the
current statute of limitation rules for tax returns when other information returns relating to
various international transactions or assets are required to be filed with the return. The proposal
will reduce abuse and noncompliance with respect to high net wealth expatriates.

Second, the proposal will grant the Secretary and her delegates authority to provide relief from
the rules for covered expatriates for a narrow class of lower-income dual citizens with limited
U.S. ties. This relief would apply only to taxpayers that have a tax home outside the United
States and satisfy other conditions that ensure that their contacts with the United States are
limited, and whose income and assets are below a specified threshold. Evidence of limited
contacts with the United States may include a demonstration that the taxpayer’s primary
residence has been outside the United States for an extended period. Evidence of the taxpayer’s
income and assets may include a foreign tax return, information about the value of property
owned by the taxpayer and the taxpayer’s sources of income, or information demonstrating that a
certain amount of income earned from working outside the United States is excludable from U.S.
tax. No inference would be intended that the evidence acceptable to the Secretary under this
provision constitutes the filing of a U.S. tax return.

The proposal would be effective for taxable years beginning after December 31, 2022.

https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf

For the 2022 Green Book (which does not have the above provision):

General-Explanations-FY2022

For the 2023 Green Book:

General-Explanations-FY2023

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