Prologue – The Circumstances Of Your Birth Should Not Determine The Outcome Of Your Life …
Kids stuck with $2000 bill each for KiwiSaver https://t.co/gLb5TlCv1z
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) October 24, 2022
The above tweet references a “human interest” story where US citizen children are denied benefits in their country of residence that are available to all people who are NOT US citizens.
The description includes:
New Zealand children born to parents’ who are citizens of the United States face a difficult KiwiSaver choice: Give up your US citizenship, or face a KiwiSaver tax compliance bill of $750 or more a year courtesy of the US taxman.
A petition has been started at Parliament asking MPs to change the KiwiSaver Act to allow people with KiwiSaver accounts facing the unreasonable demands from US tax authorities to close their KiwiSaver accounts.
The issue surfaced as a result of the plight of Auckland dual national Kira Bacal and her four New Zealand-born children, Harper, 13, Rowan, 10 and twins Malachi and Elias, 8.
It appears that the poor (New Zealand born) Bacal children are finding that the US (or at least US tax preparers in New Zealand) consider their KiwiSaver to be a possible vehicle for US tax evasion! Not only is the KiwiSaver a “trust”, but it’s a “foreign trust” which comes with all kinds of penalty laden reporting obligations and no tax advantages. An excellent analysis of the US tax implications of the New Zealand KiwiSaver is here. The story is somewhat comical in that one gets the feeling that the blame should be placed on New Zealand (and not the United States) for New Zealand’s failure to legislate special exceptions for US citizens living in New Zealand.
So what! They’re Americans and therefore they deserve it (you say)!
A previous post explained that for Americans abroad, changes in the laws of their country of residence can change their tax relationship with the United States. The purpose of this post is to expand on that theme by demonstrating that:
US tax treaties presumptively prevent the treaty partner country from establishing tax advantaged retirement programs which will benefit ALL of their residents (US citizens are always left out).
(Note that “tax advantaged retirement programs available to ALL residents are different from “pensions” (which are established through employment). My next post will discuss the issue of “pensions” and US citizens.)
US citizens are disabled from full participation in retirement planning schemes that a country creates for its residents. Examples include but are NOT limited to the: the Australian Superannuation, the New Zealand KiwiSaver, and the Canadian TFSA. There are certainly other countries that have created similar programs (example UK ISA). These programs are all based on the principle that money is contributed to one of these plans. The income earned in the plan is always treated tax favourably under the law of the country that created the plan. Either the income earned inside the plan is not taxed at all (TFSA or ISA) or is taxed at a preferential rate (Australian Superannuation or New Zealand KiwiSaver). Because US citizens are subject to US tax laws they do NOT generally (subject to treaty exceptions) receive the tax benefits available to other residents of their country. (I acknowledge that a variant of the Australian Superannuation is treated as 402(b) plan under the US Internal Revenue Code).
Q. How can such a perverse state of affairs exist?
A. The injustice is created by US tax treaties!
It’s because of the “saving clause” that is included in all US tax treaties
The use of the "savings clause" to invade other nations. It's the weaponization of citizenship! pic.twitter.com/wacQ0zZwLI
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) May 26, 2016
All US tax treaties contain a “saving clause” pursuant to which the treaty partner agrees that:
(1) US citizens do NOT presumptively receive benefits from the tax treaty; and
(2) the treaty partner agrees that the US may tax its own citizens according to US tax law.
This has unforeseeable effects. One of the effects is that when a country creates a new tax incentivized plan to encourage its residents to save for retirement, some of its residents are NOT permitted – because of the disability of US citizenship – to take advantage of that plan!!!
This is the result of a combination of US tax laws (which recognize ONLY US retirement plans), US citizenship-based taxation (US citizens are subject to US tax laws regardless of where they live), the “saving clause” found in all US tax treaties (their country of residence agrees that the US may tax US citizens according to US tax laws) and a failure to anticipate the possibility of developing new retirement planning programs when negotiating tax treaties with the United States (the Australian Superannuation, New Zealand Kiwisaver and Canadian TFSA were all created AFTER the most recent tax treaties).
To put it simply:
By entering into tax treaties with the United States, countries are impeding their ability to develop tax advantaged retirement/savings plans for their residents!!!!!! The USA will generally NOT allow US citizens to benefit from these plans!
The crippling of part of the population of (at least) three countries ….
Australia – US/Australia tax treaty entered into in 1982 – Australian Superannuation created in 1992*
New Zealand – US/New Zealand tax treaty entered into in 1982 – Kiwisaver created in 2007**
Canada – Canada/US tax treaty last updated in 2008 – TFSA created in 2009***
JR Note:In previous posts I have argued that the Canada/US Tax Treaty should be interpreted to preserve that tax advantaged status for US citizens living in Canada.
A suggestion for how to end the injustice of the “saving clause”
I have previously written a suggestion that the “saving clause” should NOT apply to US citizens who are both “tax residents” of the countries where they reside AND bona fide residents of those other countries under the provisions of US Internal Revenue Code Section 911.
The “saving clause” should be neither interpreted nor used to allow the United States to impose worldwide taxation on individuals who are tax residents of other countries!
The “saving clause” found in US tax treaties means that the treaty partner country agrees that the US may capture some of the “tax residents” of the treaty partner country as US tax residents. The effect of this capture is that when the country (Australia, New Zealand or Canada) creates new retirement planning programs, those captured residents (US citizens) will generally NOT be able to participate.
John Richardson – Follow me on Twitter @Expatriationlaw
*Appendix A – The “Saving Clause” and the US Australia Tax Treaty
Australia Tax Treaty: The “saving clause” and exclusions from the “saving clause” are found in paragraphs 3 and 4 of Article 1 of the US Australia Tax Treaty as follows:
(3) Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals electing under its domestic law to be taxed as residents of that state, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term “citizen” shall, with respect to United States source income according to United States law relating to United States tax, include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance
of tax, but only for a period of 10 years following such loss.
(4) The provisions of paragraph (3) shall not affect:
(a) the benefits conferred by a Contracting State under paragraph (2) of Article 9 (Associated Enterprises), paragraph (2) or (6) of Article 18 (Pensions, Annuities, Alimony and Child Support), Article 22 (Relief from Double Taxation), 23 (Non-Discrimination), 24 (Mutual Agreement Procedure) or paragraph (1) of Article 27 (Miscellaneous); or
(b) the benefits conferred by a Contracting State under Article 19 (Governmental Remuneration), 20 (Students) or 26 (Diplomatic and Consular Privileges) upon individuals who are neither citizens of, nor have immigrant status in, that State (in the case of benefits conferred by the United States), or who are not ordinarily resident in that State (in the case of benefits conferred by Australia).
**Appendix B – The “Saving Clause” and the US New Zealand Tax Treaty
New Zealand Tax Treaty: The “saving clause” and exclusions from the “saving clause” are found in paragraphs 3 and 4 of Article 1 of the US New Zealand Tax Treaty as follows:
3. Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and the United States may tax its citizens and United States companies, as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.
4. The provisions of paragraph 3 shall not affect:
(a) the benefits conferred in a Contracting State under the Convention in accordance with paragraph 2 of Article 9 (Associated Enterprises), paragraph 1(b) of Article 18 (Pensions and Annuities), and Articles 22 (Relief From Double Taxation), 23
(Non-discrimination), and 24 (Mutual Agreement Procedure); and
(b) the benefits conferred in a Contracting State under the Convention in accordance with Articles 19 (Government Service), 20 (Students), and 26 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor have
immigrant status in, that State.
***Appendix C – The “Saving Clause” and the US Canada Tax Treaty
Canada Tax Treaty: The “saving clause” and exclusions from the “saving clause” are found in paragraphs 2 and 3 of Article XXIX of the US Canada Tax Treaty as follows:
2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.
3. The provisions of paragraph 2 shall not affect the obligations undertaken by a Contracting State:
(a) under paragraphs 3 and 4 of Article IX (Related Persons), paragraphs 6 and 7 of Article XIII (Gains), paragraphs 1, 3, 4, 5, 6(b) and 7 of Article XVIII (Pensions and Annuities), paragraph 5 of Article XXIX (Miscellaneous Rules), paragraphs 1, 5 and 6 of Article XXIX B (Taxes Imposed by Reason of Death), paragraphs 2, 3, 4 and 7 of Article XXIX B (Taxes Imposed by Reason of Death) as applied to the estates of persons other than former citizens referred to in paragraph 2 of this Article, paragraphs 3 and 5 of Article XXX (Entry into Force), and Articles XIX (Government Service), XXI (Exempt Organizations), XXIV (Elimination of Double Taxation), XXV (Non-Discrimination) and XXVI (Mutual Agreement Procedure);
(b) under Article XX (Students), toward individuals who are neither citizens of, nor have immigrant status in, that State.
A year ago the Australian Treasury announced a review of the Tax Treaty Network. One focus is the establishment of 10 new tax treaties. Public submissions were requested including on any matters regarding the Tax Treaty Network.
https://treasury.gov.au/consultation/c2021-208427>. The submissions are listed. Karen Alpert’s is #1 on the list.
Of the 35 public submissions (excluding 6 non-public submissions), 22 or 63% regarded the Australian-U.S. Tax Treaty. With nearly 2/3 of the submissions on the AU-U.S. Tax Treaty that should be received as strong indication that The Treaty needs attention and fixing.
I am in there under ANON (2).
I believe I provide some very good suggestions of short-term measures the Australian Government may take to help reduce where the treaty may guarantee double taxation.