How U.S. Citizenship Tax, The Treaty “Saving Clause” and FATCA Create A Fiscal Prison For Dual Tax Residents

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Introduction – The Problem Of Dual Tax Residency For U.S. Citizens

A “Hell greater than the sum of the parts”

There are people in the world who really don’t understand (or say they don’t) what exactly is the problem with U.S. citizenship based taxation. They claim to not understand why defining “tax residency” based on the “circumstances of birth” rather than the “circumstances of life” is a problem. They fail to consider how taxation based on “circumstances of birth”, interacts with U.S. tax treaties and FATCA to create a “hell that is greater than the sum of the parts”.

This is the third post in a series designed to explore and facilitate the understanding of the U.S. “citizenship based” extra-territorial tax regime. The first post explored the practical meaning of U.S. citizenship-based taxation (it’s primary effects are on people who live outside the U.S.). The second post explored the fact that tax residency based on “citizenship” is tax residency based on the “circumstances of one’s birth” rather than the “circumstances of one’s life” (its effects are primarily based on the circumstance of birth in the U.S.). The conclusion drawn from these first two posts was that the U.S. citizenship based extra-territorial tax regime is one in which:

The circumstance of a U.S. birthplace is used as a justification to regulate the lives of people with no connection to the United States and impose U.S. taxation on income that has no connection to the United States and is received by someone who does not live in the United States.

Citizenship taxation has practical and contextual meaning only its application to tax residents of non-US countries. The U.S. uses the circumstance of a “U.S. birthplace” to reach out and “claim” the tax residents of other countries as U.S. “tax residents”.

The purpose of this post is to explain how the interaction of U.S. citizenship taxation (claiming those with a U.S. birth place as U.S. tax residents when they are tax residents of other countries), the “saving clause” (not allowing U.S. citizens with dual tax residency to assign tax residency to the country where they actually live) and FATCA (the tool to hunt, find and enforce the extraterritorial U.S. tax and regulatory regime on the residents of other countries) creates a whole hell greater than the sum of the parts.

Many people understand the three components of “citizenship taxation”, the “saving clause” and “FATCA” as separate entities. Few appear to understand how those three components interact together to destroy the lives of U.S. citizens with dual tax residency. The U.S. has created a “fiscal prison” for its citizens. Seven video accounts of the impact of the U.S. citizenship tax regime are available here.

This problem can be solved ONLY by the United States redefining its rules for “tax residency” so that “citizenship” (the circumstances of one’s birth”) is not relevant to “tax residency” (the circumstances of one’s life).

This post is to identify the component “Part”(s) of the problem. It is organized in “Sections” and “Parts” as follows:

Section I – How The Problem Was Created

Part A – Tax, Residency and Tax Residency
Part B – The general problem of dual tax residency
Part C – Introducing the treaty tie break and how it can be used to end “dual tax residency” under a relevant Canadian tax treaty”
Part D – The general principles of the U.S. Canada “tax treaty tie break – How “circumstances of life” are used to assign tax residency
Part E – Food for thought – Citizenship the least important factor for the treaty tie break
Part F – Two possible examples of assigning residence to one country by using the “treaty tie break” – Green Card Edition
Part G – U.S. Citizens CANNOT Benefit From The “Tax Treaty Tie Break” – Hello “Saving Clause”
Part H – The “Saving Clause” And The Inability For U.S. Citizens To Use The “Treaty Tie Break” Is How The United States Captures The Residents Of The Treaty Partner Country And Claims Them As U.S. Tax Residents
Part I – The Tax Treaty Tie Break And Implications For U.S. Tax Compliance And For FATCA And The CRS Reporting

Section II – How Dual Tax Residents Experience The Extraterritorial Tax Regime

Part J – The U.S. exports a more punitive from of taxation to tax residents of other countries
Part K – The Problem Of Investing, Retirement planning and Retirement Planning – The Punitive Taxation And Reporting Requirements of PFICs and Foreign Trusts
Part L – The Problem Of Non-U.S. Pensions – How Are They Treated Under The Internal Revenue Code? – Different Rules For Different Countries
Part M – Discouraging U.S. Small Business Abroad – The Treatment Of Small Business Corporations Generally And On A Country By Country Basis
Part N – The “FBAR Marriage”: How Marriage To An Alien Results In Higher Taxation, More Reporting, Difficulties With Asset Transfers, Higher Divorce Costs And Possibly A Requirement To File A Tax Return With As Little As $5 Of Income

Section III – How The U.S. Extraterritorial Tax Regime Attacks The Sovereignty Of Other Countries

Part O – The U.S. taxation of residents of other countries attacks and erodes the tax base of those other countries

Section IV – Solving The Problem: Regulatory And Legislative Solutions

Part P – Regulatory Solution: “A Regulatory Fix For Citizenship Taxation
Part Q – Regulatory Solution: Amending The “Saving Clause” In U.S. Tax Treaties
Part R – Territorial Taxation For U.S. Citizen Individuals
Part S – Redefining U.S. Tax Residency To Move To Residence-based Taxation”

Section I – How The Problem Was Created

Part A – Tax, Residency and Tax Residency

In the 21st Century, the most interesting thing about a person is their “tax residency“. If one is a tax resident of a country, that individual is subject to the full force/scope of taxation by that country. The term “tax resident” refers to the individual who is “subject” (no pun intended) the full force of the country’s tax rules. The OECD has provided a chart of the rules governing tax residence for each country that has agreed to the Common Reporting Standard (“CRS”). The information includes:

Tax residence is determined under the domestic tax laws of each jurisdiction. There might be situations where a person qualifies as a tax resident under the tax residence rules of more than one jurisdiction, and therefore is a tax resident in more than one jurisdiction. For the purposes of the CRS, Financial Institutions must ensure that Account Holders (or Controlling Persons) disclose all tax residences in the required self-certification.

The United States

The OECD commentary about tax residency describes the rules for United States tax residency as including:

As a general matter, under the U.S. Internal Revenue Code (Code), all U.S. citizens and U.S. residents are treated as U.S. tax residents. …

https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/United-States-Tax-Residency.pdf

Canada

The OECD commentary about tax residency describes the rules for Canadian tax residency as follows:

In Canada, an individual’s residency status for income tax purposes is determined on a case by case basis. An individual who is resident in Canada can be characterized as ordinarily resident (also known as factual resident) or deemed resident. An individual’s whole situation and all the relevant facts must be considered with reference to Canada’s tax laws and views of the Courts.

An individual who is ordinarily resident in Canada includes an individual who regularly, normally or customarily lives in the usual mode of life in Canada. As a result, residential ties with Canada such as a home in Canada, social and economic interests in Canada, and other connections to Canada are important considerations. It is also important to consider whether any “deeming provision” in Canada’s tax laws apply to cause an individual to be a resident of Canada for income tax purposes. (These “deeming provisions” impact certain individuals not otherwise resident in Canada with connections to Canada, such as individuals who spend a total of 183 days or more in a year in Canada or who are employed by the Government of Canada or a Canadian province.)

An individual may take into account their residency status under a relevant Canadian tax treaty when determining whether they are a resident in Canada.

https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/tax-residency/Canada-Residency-EN.pdf

Part B – The general problem of dual tax residency

It is clearly possible that an individual could be a “tax resident” of both Canada and the United States. For example, either a Green Card holder or U.S. citizen could live in and be a “tax resident” of Canada. These unfortunate individuals, because they are tax residents of both Canada and the United States, are subject to worldwide taxation by each country. This is true of the thousands of individuals who file both Canadian personal tax returns (T1 as a tax resident of Canada) and a U.S.tax return (1040 as a tax resident of the United States). Double taxation is relieved (often not eliminated) through the allowance of “foreign tax credits” found in the domestic tax legislation of each of Canada and the United States. In addition, parts of Article XXIV of the Canada/U.S. Tax Treaty will relieve double taxation in some cases where domestic tax credit rules fall short. Such is the plight of the dual tax resident. The greater cost of U.S./Canada dual tax residency is the opportunity cost associated with U.S. taxation of Canadian retirement planning vehicles.

Those who find it difficult to comply with the tax system of either the U.S. or Canada should imagine what it is like to be required to comply with both tax systems. Much of retirement planning is facilitated by the tax system (401K, RRSP, ROTH IRA, TFSA, etc.). Often what one tax system “giveth”, the other tax system “taketh”. (For example it is not always clear to what extent the U.S. tax rules impose U.S. taxation on the Canadian TFSA.)

Part C – Introducing the treaty tie break and how it can be used to end “dual tax residency” under a relevant Canadian tax treaty”

Generally, the international community supports a policy that individuals should be treated as a tax resident of only one country at a time. This policy is expressed in tax treaties which often have a “treaty tie break” clause. The purpose of the “treaty tie break” clause is to assign tax residency to the country that is most aligned with the “circumstances of the individual’s life”.

In simple terms, the language “residency status under a relevant Canadian tax treaty” means that the residency tie break provisions of a tax treaty may allow an individual who is a “resident” in Canada under domestic law AND who is resident of another country under the domestic laws of that country to be treated as a resident of only one country or the other. For example an individual could be resident of Canada under Canada’s rules and a resident of the U.S. because he has a Green Card (or other form of tax residence). In these circumstances that person “may” (depending on the factual circumstances) may be treated as a tax resident of either Canada or the United States (or sometimes both)..

Generally, the treaty tie break provision may be used in the case of “dual residence” to assign residence to one of the two countries for (1) the purposes of taxation and (2) for the purposes of reporting by the banks under the Common Reporting Standard (“CRS”) or Foreign Account Tax Compliance Act (“FATCA”). (The Canada Revenue Agency has advised U.S. “Green Card holders” who are Canadian residents that they should indicate they are NOT U.S. residents for the purposes of “tax residence” inquiries under FATCA.) This is a clear example of how treaty tie break provisions can affect the application of both FATCA and the CRS.

For example the Canada Germany tax treaty includes in Article IV:

Article 4

Resident

1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, his status shall be determined as follows:

a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);
b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;
d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

In the case of “dual tax residency”, Article 4 contains a “treaty tie break” which assigns residency to one country or the other. This has implications for both tax (where is the person a tax resident) and CRS reporting (is the person a nonresident for CRS reporting?).

The Canada U.S. tax treaty differs from the Canada Germany tax treaty in that U.S. citizens are excluded from the group of individuals who are permitted to use a treaty tie break to end dual tax residency!

Part D – The general principles of the U.S. Canada “tax treaty tie break – How “circumstances of life” are used to assign tax residency

Paragraph 2 of Article IV of the Canada/US Tax Treaty: The Treaty Residence Tie Breaker

Paragraph 2 of Article IV of the Canada U.S. tax treaty states:

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

(a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both States or in neither State, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests cannot be determined, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither State, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and
(d) if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

A reading of the the “treaty tie break” reveals a process of assigning tax residency which focuses on the circumstances of the individual’s life that are most important in determining the connection to the country. Notice that it begins with where the individual has a “permanent home”, moving to his “centre of vital interest”, moving to where he has an “habitual abode” and finally (if it still cannot be determined”, his “citizenship”).

Part E – Food for thought – Citizenship the least important factor for the treaty tie break

Interestinly, “citizenship” (the least important criterion for assigning residence under the “treaty tie break”) is used by the United States as the the most important criterion for U.S. tax residency!!

The United States uses “circumstances of birth” as a determinant of tax residency, while the rest of the world (as reflected in the “treaty tie break” uses “circumstances of life!

Part F – Two possible examples of assigning residence to one country by using the “treaty tie break” – Green Card Edition

The treaty tie break is available ONLY if the individual is a “tax resident” under the domestic laws of BOTH Canada and the United States. The United States defines “residence” primarily in terms of citizenship or immigration status (“Green Card”). Canada defines “residence” generally in terms of the overall connection to Canada. These two examples assume dual tax residency because the individual is a U.S. Green Card holder and that the individual meets the test of “ordinary residence” for Canada.

Example 1 – A Canadian resident using the treaty to be treated as a resident of the United States

If (the Canadian resident is also a “resident” of the United States AND he has a “permanent home available to him” in ONLY the United States) then (he will be treated as a resident of the United States and NOT a resident of Canada).

The individual will be treated as a U.S. tax resident and will be taxed by Canada as a “nonresident”. In addition, for the purposes of FATCA reporting he will be considered by Canadian banks to be a “U.S. tax resident.

Example 2 – A Canadian resident using the treaty to be treated as a resident of Canada

If (the Canadian resident is also a “resident” of the United States AND he has a “permanent home available to him” ONLY in Canada) then (he will be treated as a resident of Canada and NOT the United States).

The individual will be treated as a Canadian tax resident and will be taxed by the United States as a “nonresident alien”. In addition, for the purposes of FATCA reporting he will be considered by Canadian banks to NOT be a “U.S. tax resident.

The tax residency tie break rules have implications for both taxation AND for FATCA reporting.

Notice that the above perspectives are relevant when the individual is a “resident” BUT NOT A CITIZEN of the United States. They do NOT allow a U.S. “citizen” to use the tie break provisions to be treated as a ONLY a tax resident of Canada. This is because another provision of the treaty called the “saving clause” which is the primary focus of this post.

Part G – U.S. Citizens CANNOT Benefit From The “Tax Treaty Tie Break” – Hello “Saving Clause”

Q. What is the impact of the “saving clause” on the taxation of U.S. citizens who are residents of other countries?

A. U.S. citizens cannot use the tax treaty tie break to cease to be U.S. tax residents. As a result they are ALWAYS U.S. tax residents wherever they live in the world.

A consolidated version of the Canada US Tax Treaty is available here:
https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997-2007.html

Understanding The “Saving Clause” – Article XXIX Of The Canada U.S. Tax treaty

Article XXIX

Miscellaneous Rules

1. The provisions of this Convention shall not restrict in any manner any exclusion, exemption, deduction, credit or other allowances now or hereafter accorded by the laws of a Contracting State in the determination of the tax imposed by that State.

JR Commentary: Okay, but we haven’t yet reached the “saving clause”. It’s in paragraph 2.

2.(a) Except to the extent provided in paragraph 3, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens and companies electing to be treated as domestic corporations.

JR Commentary: Paragraph 2. (a) is best understood by breaking it into two separate sentences:

2.(a) Except to the extent provided in paragraph 3, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article IV (Residence))

(Residents may use the Article IV Residency Tie Break to become nonresidents of the United States under the treaty. In addition, generally “tax residency” can be determined by the treaty.)

2.(a) Except to the extent provided in paragraph 3, this Convention shall not affect the taxation by a Contracting State of in the case of the United States, its citizens and companies electing to be treated as domestic corporations.

(i) This clearly states that the tax treaty is presumed to not affect U.S. taxation of U.S. citizens wherever they live in the world (including in Canada). By agreeing to the “saving clause”, Canada is agreeing that the treaty is presumed to NOT affect U.S. taxation of Canadian residents who qualify as U.S. citizens. In effect, Canada is agreeing (subject to any exceptions in paragraph 3) that the treaty cannot be used to block the U.S. from imposing U.S. taxation on Canadian residents.

(ii) Notably U.S. citizens – unless allowed by paragraph 3 – are NOT permitted to use the Article IV Residency Tie Break to become nonresidents of the United States under the treaty.

(b) Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of the United States, may, for the period of ten years following the loss of such status, be taxed in accordance with the laws of the United States with respect to income from sources within the United States (including income deemed under the domestic law of the United States to arise from such sources).

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), 7, 8, 10 and 13 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 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.

JR Commentary: Note that Paragraph 3 does NOT exempt the Article IV residency provisions from the paragraph 2. (a) “saving clause”. In other words: Green Card holders are permitted (but it may be unwise) to become nonresidents under the treaty. U.S. citizens are NEVER permitted to become nonresidents under the treaty! To put it simply: The “saving clause” of the treaty ensures that U.S. citizens will always be treated as tax residents of the United States by BOTH the United States AND the treaty partner country. Their treaty benefits are restricted to the exceptions of the “saving clause”.

Part H – The “Saving Clause” And The Inability For U.S. Citizens To Use The “Treaty Tie Break” Is How The United States Captures The Residents Of The Treaty Partner Country And Claims Them As U.S. Tax Residents

The combined effects of (1) U.S. domestic law which defines “tax residency” in terms of “citizenship” conferred by the circumstances of birth and (2) the “saving clause” found in most U.S. tax treaties allows the United States (with the agreement of the treaty partner country) to “capture” the residents of other countries as U.S. tax residents. This allows the United States (with enforcement help from the FATCA IGAs) to effectively extend its domestic tax base into other countries.

Part I – The Tax Treaty Tie Break And Implications For U.S. Tax Compliance And For FATCA And The CRS Reporting

FATCA Reporting

U.S. citizens residents in Canada (unlike Green Card holders resident in Canada) are precluded by the “saving clause” from using a treaty tie break provision to avoid being treated as U.S. tax residents. The inability to use the tax treaty tie break means that they are ALWAYS subject in their country of residence to FATCA identification and reporting under both domestic U.S. FATCA legislation AND the FATCA IGAs. Significantly under the FATCA reporting regime this means that account information is being sent from a country where the individual lives (Canada) to a country where the individual does not live (United States). This is in direct contrast to the CRS where information flows from a country where the person is NOT a tax resident (example Canada) to a country where the individual IS a tax resident (example France). This is another reason why FATCA and the CRS are not equivalent kinds of information exchange.

As a result, the FATCA IGAs require the reporting of account information from a country where the individual DOES live (Canada) to a country where does not live (United States). In contrast, the CRS requires reporting of account information from a country where the individual does NOT live to a country where he DOES live.

Another important difference between FATCA and the CRS

The available of treaty tie breaks is another major and significant difference between FATCA and the CRS!

U.S. Tax Compliance: Extending and exporting U.S. taxation to other countries

Since July 1, 2014 (the advent of the FATCA IGAs) I have observed how:

First, the in compliance with the FATCA rules identify their U.S. citizen customers; and

Second, that identification incentivizes those U.S. citizens living outside the U.S. to enter the U.S. tax system.

Although compliance means compliance with reporting requirements, there is no doubt that those reporting requirements and had the effect of extending the U.S. tax system into the populations and tax base of other countries. This has caused hardship to both the individual residents of those other countries and the sovereignty of other countries.

Section II – How Dual Tax Residents Experience The Extraterritorial Tax Regime

Part J – The U.S. exports a more punitive from of taxation to tax residents of other countries

It is unconscionable that the United States exports its citizenship taxation system, reinforced by the “saving clause” and facilitated by FATCA to claim the residents of other countries as U.S. tax residents. But, it gets worse!

The U.S. tax system is particularly hostile – imposing punitive taxation and reporting requirements – to anything that is “foreign” to the United States. U.S. citizens living outside the United States as tax residents of other countries have an economic life that is foreign to the United States. The following post contains a number of ways that the U.S. tax system imposes a more punitive form of taxation on the tax residents of other countries.

Part K – The Problem Of Investing, Retirement planning and Retirement Planning – The Punitive Taxation And Reporting Requirements of PFICs and Foreign Trusts

Part L – The Problem Of Non-U.S. Pensions – How Are They Treated Under The Internal Revenue Code? – Different Rules For Different Countries

Part M – Discouraging U.S. Small Business Abroad – The Treatment Of Small Business Corporations Generally And On A Country By Country Basis

Part N – The “FBAR Marriage”: How Marriage To An Alien Results In Higher Taxation, More Reporting, Difficulties With Asset Transfers, Higher Divorce Costs And Possibly A Requirement To File A Tax Return With As Little As $5 Of Income

Section III – How The U.S. Extraterritorial Tax Regime Attacks The Sovereignty Of Other Countries

Part O – The U.S. taxation of residents of other countries attacks and erodes the tax base of those other countries

Here are the ways that claiming the “tax residents” of other countries as U.S. “tax residents” erodes the tax base of other countries.

1. The claim that the IRC 911 Foreign Earned Income Exclusion, the IRS 901 Foreign Tax Credit rules and the tax treaty prevent double taxation is incorrect. In other words double taxation exists.

2. The U.S. tax system imposes taxation on things that are not necessarily taxable in the other country. Common examples include:

– the taxation of the capital gain on the sale of a principal residence

– U.S. taxation of tax favored savings plans in other countries

3. The creation of income for U.S. tax purposes where there is no “realization event” (no actual income received). Examples include:

– the IRC 877A Expatriation tax
– the IRC 965 Transition Tax
– Subpart F income in general
– the IRC 951A GILTI tax
– phantom capital gains

Each of these are examples where productive capital is – via U.S. taxation – removed from the other country to the United States. The U.S. tax system erodes the tax base of the other nation and burdens the fiscal sovereignty of that other nation.

Section IV – Solving The Problem: Regulatory And Legislative Solutions

The only real and permanent solution to ending the nightmare is for the United States to amend the Internal Revenue Code to remove “citizenship” as a criterion for tax residency and legislate “residence” (however it is defined) as the condition for tax residency. Nevertheless, there are solutions that could mitigate the effects of citizenship taxation. Some of the solutions are regulatory and some are legislative.

Part P – Regulatory Solution: “A Regulatory Fix For Citizenship Taxation

Dr. Karen Alpert, Dr. Laura Snyder published an article “A Regulatory Fix For Citizenship Taxation“. This article detailed: (1) how, where and why Treasury has the authority to make the regulatory changes that would mitigate the worst effects of the U.S. extraterritorial tax regime.

Part Q – Regulatory Solution: Amending The “Saving Clause” In U.S. Tax Treaties

It is clear that the “saving clause” by retaining the right of the U.S. to impose taxation on U.S. citizens is a big part of the problem. Amending the “saving clause” to allow U.S. citizens to benefit from the tax treaty tie break rules would mitigate the problems.

Part R – Territorial Taxation For U.S. Citizen Individuals

There is a difference between the questions of:

“Who is a tax resident?” and therefore subject to the full force of a country’s taxation (residence based taxation or citizenship taxation); and

What income is subject to taxation? Only domestic income (territorial taxation” and all income wherever earned (worldwide taxation).

As various groups and individuals note:

If the United States were to move to as system of “territorial taxation” for individuals this would means that U.S. citizens (who is taxed) would NOT be taxable on income that was “foreign” to the United States. Note that under the “territorial taxation” proposal, U.S. citizens WOULD remain “tax residents” of the United States. They would (as “tax residents” simply NOT be taxed on their “foreign source” income.

Notably both the Holding bill in 2018 and the Beyer bill in 2021 were attempts to tweak the IRC “Foreign Earned Income Exclusion” to exclude foreign earned income from U.S. taxation. Because each of these bills was premised on U.S. citizens continuing to be U.S. “tax residents” neither of these proposals could/should be understood to be an end to citizenship taxation and an adoption of residence taxation. Rather, each bill continued citizenship taxation, but excluded foreign source income from the tax base for citizens!

To be clear, under each of Holding and Beyer bills, U.S. citizenship continued to be a sufficient condition for U.S. tax residency!

Part S – Redefining U.S. Tax Residency To Move To Residence-based Taxation”

Many people consider “citizenship taxation”, the treaty “saving clause” and “FATCA”:

1. As separate entities; and

2. Through the lens of they how they impact a U.S. citizens who is a “tax resident” of ONLY the United States.

This myopic view completely obscures the reality of what they mean when:

1. The effects of “citizenship taxation”, the treaty “saving clause” and “FATCA” are combined; and

2. Applied to people who at dual tax residents!!

It is absolutely essential that the United States stop defining “tax residency” in terms of citizenship (“the circumstances of birth”) and start defining tax residency in terms of residence (“the circumstances of one’s life”).

John Richardson – Follow me on Twitter @Expatriationlaw

One thought on “How U.S. Citizenship Tax, The Treaty “Saving Clause” and FATCA Create A Fiscal Prison For Dual Tax Residents”

  1. Heather Lindsey

    “Abandon hope, all ye who enter in”, or so one may feel having read the above. And yet a few brave souls battle against this astonishing abuse of common sense and due process. Many thanks and God speed to you all in your continuing battle.

    Reply ↓

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