Category Archives: Americans abroad

Eroding the tax base of other countries by imposing direct US taxation on the residents of those countries

This is the fourth of a series of posts about international tax reform generally and how FATCA, CRS, citizenship-based taxation, GILTI, etc. work together.

The first three posts were:

US Tax Treaties Should Reflect The 21st Century And Not The World Of 100 Years Ago

The Pandora Papers, FATCA, CRS And How They Have Combined To Create Tax Haven USA

How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries

This fourth post continues where the third post – How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries – left off. That post described in a general way that FATCA facilitated the US taxation of residents of other countries. The purpose of this post is to give a small number of important examples. To repeat:

The imposition of FATCA on other countries means that …

The United States has effectively expanded its tax base into other countries by claiming residents of other countries as US tax residents. This is a direct attack on and the erosion of the tax base of those other countries.

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How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries

This purpose of this post is to continue the general theme of focusing on the difference between what a law says and what the law means in application and effect. Yesterday’s post (The Pandora Papers, FATCA, CRS And How They Have Combined To Create Tax Haven USA) focussed on the role that the 2010 US FACTCA law played in in facilitating the rise of Tax Haven USA. (To be clear, I am not saying that FATCA was the sole cause.) That said, the unwillingness of the USA to sign the CRS (“Common Reporting Standard”) has also played a role in the growth of the US as a tax haven.

Many believe that FATCA is just the US version of the CRS. Because of this belief the US has received little or no resistance to its refusal to join the CRS. This belief that FATCA and the CRS are fundamentally the same is wrong. They are very different.

The purpose of this post is two-fold.

First, to explain how/why FATCA is very different from the CRS.

Second, to explain how FATCA is used to export the “original sin” of US citizenship-based taxation into other countries. To put it simply FATCA assists the United States in capturing the tax residents of other countries and subjecting them to direct US taxation.

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The Pandora Papers, FATCA, CRS And How They Have Combined To Create Tax Haven USA

Introduction

While millions of people are obsessed with taxation there are apparently people who may (but who knows) wish to simply opt out of the discussion.

I am becoming less and less interested in the intricacies of taxation. At its core the principles of tax are really pretty simple. Tax laws exist for two purposes: (1) To redistribute assets from one person to another person (with the government taking an administrative cut along the way) and (2) to punish (sin taxes) or reward (buying a fuel efficient car) certain kinds of behaviour. Certain cultures are more tax obsessed than others. When it comes to obsession over taxation the USA is certainly a world leader. In fact, what started out as US “citizenship-based taxation” more than one hundred years ago, has created a culture of “Taxation-based citizenship” (Yes, they are different concepts).

The focus on the “intricacies” (and complexities) of how the redistribution of assets works (the text of modern tax codes) often obscures what the overall effect of the tax laws are. For example, in a recent post I suggested that the real impact of the passport revocation laws (found in the Internal Revenue Code) was a recognition that there is no Constitutional right to leave the United States. But, most people don’t care. They pay their taxes. Why should they be concerned that somebody who doesn’t pay their taxes should be prohibited from leaving the country? (It doesn’t occur to them that there may be a broader principle at stake.)

The focus on what tax laws say obscures the broader question of what tax laws mean. The recent “Pandora Papers” revelation (the media is in overdrive trying to demonize people) provides yet another example of how a focus on what a tax law says, obscures the broader effect of what the law really means. There are many examples. The unwillingness of the US to join the CRS (“Common Reporting Standard”) is an interesting example. (The fact that the US has FATCA is part of the reason.) The relationship between FATCA and the CRS has fuelled the rise of Tax Haven USA.

FATCA, The CRS and the differences between them

Forget the technicalities

1. The CRS (“Common Reporting Standard”) is an agreement signed by hundreds of countries, to automatically report to other countries, financial accounts in their country, which are owned by “tax residents” of the other country. For example: if a tax resident of France has a financial account in Canada, the Canada Revenue Agency would report the existence of that account to France. This makes it hard for residents of CRS countries to hide accounts outside that country. The key is that the CRS mandates the automatic exchange of information. All members automatically share with each other. The CRS makes it more difficult (but never impossible) for CRS countries to be used to hide assets. Examples of the general angst associated with the “roll out” of the CRS in Canada are here and here. It’s important to remember that the CRS is based on the principle of exchange of information.

2. FATCA (“Foreign Account Tax Compliance Act”) is a US law (1471 – 1474 of the Internal Revenue Code and the associated FATCA IGAs. FATCA does NOT operate on the principle of “exchange of information”. Pursuant to FATCA the United States demands information from other countries (about US citizens) under the threat of a 30% sanction. In other words, under FATCA the US receives information from other countries but does not provide any information in return. FATCA and the CRS are contextually related only because FATCA preceded the CRS. Because the CRS was created after FATCA and the US already had FATCA, the US had no need to join the CRS. Of course (at least in theory) the US could abolish FATCA and join the CRS. But, the US is unlikely to do this.

Notice the following aspects of FATCA:

1. FATCA is NOT a multilateral agreement. Rather FATCA is a US unilateral assault on the sovereignty of other countries;

2. The US is not required to exchange information under FATCA; and

3. Because it (presumably) receives the information it wants, there is no incentive for the US to join the CRS.

The US is not party to any international agreement pursuant to which it automatically discloses the existence of US accounts held by nonresident aliens!! To put it another way: The US is one of the few countries in the world where nonresident aliens can effectively hide money and other assets (trusts anyone?). Think of the possibilities (that may or may not be related to tax issues …)

This reality was explained by Oliver Bullough in a brilliant 2019 article that appeared in The Guardian.

The article (which includes a fascinating discussion of the history of trusts) summarizes the interaction of FATCA and the CRS with:

That calculation changed in 2010, in the aftermath of the great financial crisis. Many American voters blamed bankers for costing so many people their jobs and homes. When a whistleblower exposed how his Swiss employer, the banking giant UBS, had hidden billions of dollars for its wealthy clients, the conclusion was explosive: banks were not just exploiting poor people, they were helping rich people dodge taxes, too.

Congress responded with the Foreign Account Tax Compliance Act (Fatca), forcing foreign financial institutions to tell the US government about any American-owned assets on their books. Department of Justice investigations were savage: UBS paid a $780m fine, and its rival Credit Suisse paid $2.6bn, while Wegelin, Switzerland’s oldest bank, collapsed altogether under the strain. The amount of US-owned money in the country plunged, with Credit Suisse losing 85% of its American customers.

The rest of the world, inspired by this example, created a global agreement called the Common Reporting Standard (CRS). Under CRS, countries agreed to exchange information on the assets of each other’s citizens kept in each other’s banks. The tax-evading appeal of places like Jersey, the Bahamas and Liechtenstein evaporated almost immediately, since you could no longer hide your wealth there.

How was a rich person to protect his wealth from the government in this scary new transparent world? Fortunately, there was a loophole. CRS had been created by lots of countries together, and they all committed to telling each other their financial secrets. But the US was not part of CRS, and its own system – Fatca – only gathers information from foreign countries; it does not send information back to them. This loophole was unintentional, but vast: keep your money in Switzerland, and the world knows about it; put it in the US and, if you were clever about it, no one need ever find out. The US was on its way to becoming a truly world-class tax haven.

So, one might reasonably ask the question:

Was FATCA a law that contributed to discouraging tax evasion or was FATCA a law that contributed to encouraging tax evasion?

(The answer is that it possibly discouraged tax evasion on the part of US citizens, but clearly played a role in encouraging tax evasion for nonresident aliens.)

FATCA has had a devastating effect on the lives of Americans abroad.

October 2021 – The Pandora Papers

A consortium of investigative journalists has revealed the names of large numbers of people with financial accounts, corporations, trusts and other entities outside their country of tax residence. It’s impossible to know how much of this is related to tax evasion. There are many reasons to have financial accounts outside your country of residence.

The Pandora Papers seemed to focus more on WHO the individuals were than on WHERE the accounts were located.

The Pandora Papers suggested that few Americans were using offshore accounts. But, the same Pandora Papers suggested that US jurisdictions (South Dakota as an example) were becoming the “jurisdictions of choice” for hiding assets. Although this was the subject of media comment, what was NOT the subject of comment was how the US has become a tax haven for a large part of the world.

At a time when Secretary Yellen has gone to the OECD and asked that the world impose higher taxes (to protect the USA from tax competition) the US is playing an evolving role in becoming a tax haven for those who not US tax residents. The media (including the Washington Post) is either unaware of this or refusing to acknowledge it.

Secrecy aside – there are many good reasons for nonresident aliens to invest in the USA

I discussed this in a recent podcast …

John Richardson – Follow me on Twitter @Expatriationlaw

Take 1: Digging The Foundation To Build The House Of US Residency-based Taxation

Prologue

This is the fifth of a series of posts focussing on the need to end US citizenship-based taxation (practised only by the USA) and move to a form of pure residence-based taxation (practised by the rest of the world). The first post was titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“. The second post was titled “Toward A Movement For Residence-based Taxation For Americans Abroad“. The third post was “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation“. The fourth post explains why some Americans Abroad actually OPPOSE changes to citizenship-based taxation. This fifth post in the series is to begin a discussion of what would be the basic changes (to the existing Internal Revenue Code) that would move the United States toward the world standard of pure residency-based taxation.

It’s about “pure residency-based taxation” and not citizenship-based taxation with a “carve out”

I have previously advocated that the United States should move to to a system of pure residence-based taxation. A system of pure residency-based taxation, means that:

Citizenship is NOT a sufficient condition for tax residency. If citizenship is not a sufficient condition for tax residency, income sourced outside the United States, which is received by people who are not residents of the United States, should not be taxable by the United States.

Note that pure residency-based taxation is NOT citizenship-based taxation with a “carve out” for US citizens living abroad. To put it another way: US citizens, simply because they are US citizens, would NOT be defined as US tax residents and subject to US worldwide taxation. This is different from US citizens being defined as US tax residents, but allowing (like the FEIE) for their foreign income to be excluded from US taxation. Note also that this is a legislative proposal. It is therefore different from our earlier proposal for “A Regulatory Fix To Citizenship Taxation“.

It is my opinion and the opinion of the members of SEAT, that only a system of pure residency-based taxation will solve the many problems of Americans abroad!

How is residency to be determined?

Residency is commonly determined in various ways. For example, Canada determines residency based on an objective deeming provision (number of days spent in Canada and through a “facts and circumstances” test described as ordinary residence). Generally, citizenship (if it is a factor at all) is not a significant issue in determining ordinary residence. The Canadian experience is proof that it is possible to have very sticky tax residency without citizenship being an issue.

Purpose of this post:

The purpose of this post is to propose some simple amendments to the Internal Revenue Code which would provide a foundation for the United States to transition from citizenship-based taxation to pure residence-based taxation. The goal is modest. The post is not intended to (I will write a separate post) deal with those who are CURRENTLY US citizens living outside the United States. It is NOT to address all the issues. That said, most of the Internal Revenue Code focuses on the taxation of those who are US tax residents. Little in the Code focuses on the actual definition of US tax residency.

The purpose of this post is begin with the fundamentals and ask:

How could the existing Internal Revenue Code be modified to provide a framework for residency-based taxation? Of course, readers will be left with many questions. But, the proposed foundation would allow for:

1. US citizens to move from the United States and sever tax residency with the United States.

2. US citizens to move from the United States and continue to be treated as tax residents of the United States.

Under either scenario, US citizens would remain US citizens. They would NOT be required to relinquish US citizenship in order to sever tax residency.

Obviously there will be many complications. But, every journey begins with a modest beginning. This is intended to be only a modest beginning. It is to begin digging the foundation to build the house of “residency-based taxation”.

The post is composed of the following parts:

Part A – Residents Are Subject To Worldwide Taxation

Part B – Nonresidents Are Not Subject To Worldwide Taxation

Part C – Definition Of Resident and Nonresident- 7701(b)

Part D – Definitions That Require Change “US Person”, “Relinquishment Of Residency”, etc.

Part E – Relinquishment Of Residence

Part F – Living abroad without relinquishing US residence

Generally, I believe that amendments to a small number of sections of the Internal Revenue Code provide the foundation from which to grow. Note that this proposal solves the problems of the “Retirees Abroad” (they don’t give notice under the new 877(a)(g)) and the problems of accidentals (they were never tax residents in the first place). There would be regulations (like the Canada Revenue Agency folio) for what constitutes residence. In Canada tax residency is defined largely by “ordinary residence” – a concept that is very sticky).

I am identifying the building blocks that could define tax residency under a US system of residency-based taxation, with few modifications to the Internal Revenue Code. (These building blocks are generally compatible with the existing Internal Revenue Code.) Once the foundation has been built we would then build our way out. This initial foundation solves the PFIC problem, the CFC problems and most problems related to foreign source income. The FinCEN 114 (FBAR) rules currently reference Internal Revenue Code 7701(b). Therefore, the proposals in this post would solve the FBAR problem.

I will discuss other issues impacting Americans abroad in subsequent posts.

I have included only the sections of the Internal Revenue Code that I consider the foundation of US tax residency. When a word is IN CAPS that means that there has been a change to facilitate a change to pure residence-based taxation.

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Toward An Explanation For Why Some Americans Abroad Oppose Changes To Citizenship Taxation

Prologue

This is the fourth of a series of posts focussing on the need to end US citizenship-based taxation (practised only by the USA) and move to a form of pure residence-based taxation (practised by the rest of the world). The first post was titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“. The second post was titled “Toward A Movement For Residence-based Taxation For Americans Abroad“. The third post was “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation“. This fourth post explains why some Americans Abroad actually OPPOSE changes to citizenship-based taxation.

My last post discussed those who were complacent about citizenship-based taxation. In other words people who are actually indifferent. Their indifference contributes to the difficulty in cultivating a strong movement in support of pure residence-based taxation.

The purpose of this post is to discuss those who actually support the current system of citizenship-based taxation because they fear any change will harm them. They are NOT indifferent. They support the current system fo citizenship-based taxation.
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Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation

Prologue

This is the third of a series of posts focussing on the need to end US citizenship-based taxation (practised only by the USA) and move to a form of pure residence-based taxation (practised by the rest of the world). The first post was titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“. The second post was titled “Toward A Movement For Residence-based Taxation For Americans Abroad“. This third post is “Toward An Explanation For Why Some Americans Abroad Are Complacent About Citizenship Taxation“.

Why are some Americans Abroad not concerned about citizenship-based taxation? Why will many Americans Abroad continue to vote for the same political party that continues to damage them? What does this imply for unifying Americans Abroad in support of a movement toward residency-based taxation? This post will explore these issues.

In The Life Of Many Americans Abroad: Citizenship-based taxation is not a problem until it is!!

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Toward a definition of residence-based taxation for Americans abroad

Introduction

The discussion of tax reform for Americans abroad is increasing in intensity. Whether through amendments to the Internal Revenue Code or a “Regulatory Fix To Citizenship-based Taxation“, Americans abroad are in desperate need of change. The US tax system as it impacts Americans abroad is forcing renunciations of US citizenship.

The language in the discussion for change reflects a desire (on the part of individuals and organizations) to move from the US system of “citizenship-based taxation” to a system of “residence-based taxation”. Various individuals and groups describe the goal using the language of “residence-based taxation” AKA RBT. It would be a mistake to assume that RBT means the same thing to different people. The purpose of this post is to describe definitions of RBT and and how those definitions may be defined for different individuals or groups.

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Comments from Americans abroad about the effects of #FATCA and @CitizenshipTax

Those contributing to conversations on Social media about FATCA and US citizenship-based taxation would find the following to be of great value.

Those who are trying to provide education on this topic should use this book.

Those who are trying to learn about this topic should use this book.

Submission_SFC

Also, see the following video accounts here:

http://www.vimeo.com/citizenshiptaxation

John Richardson – Follow me on Twitter @Expatriationlaw

To punish 100 #GILTI Corporations is to punish millions more individuals

Introduction: As Goes Tax Reform For US Multinationals, So Escalates The Harm To Individual Americans Abroad

The Problem: The proposed changes in International Tax (mostly in relation to corporations) will affect numerically more individuals than corporations. The effects on Americans abroad, who run small businesses outside the United States, will be absolutely devastating.

Two Solutions: Suggestions for how to protect individuals (including Americans abroad) would be to make changes to the Subpart F regime – GILTI, etc. There are at least two ways this change can be achieved:

1. To NOT apply Subpart F to INDIVIDUALS who are shareholders of CFCs.

2. If Subpart F is to apply to individual shareholders of CFCs, it should NOT apply to those individual Americans abroad who meet the residence requirements to use the S. 911 Foreign Earned Income Exclusion. (I.e. people who are almost certainly tax residents of other countries.)

March 25, 2021 – The Senate Finance Committee Held A Hearing Described As:

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US Senate Finance Hearing Affects Americans Abroad AKA Mini-Multinationals – Action Needed!

Introduction

The background: The US Senate Finance Committee has begun hearings for the purpose of discussing further reform of the rules of International Tax. These reforms would appear to include raising the GILTI tax and raising US corporate tax rates in general. Each of these would have a massive negative effect on Americans abroad. The reasons are detailed in the rest of this post.

Bottom line: Americans abroad need to send their views (presumably objections) to the Committee. The rest of this post provides the background, SEAT’s understanding of the issue and templates individuals can use to email Senate Finance.

Please forward this post to anybody who you believe would be affected by this (anybody who runs a small business through a corporation.)

Okay ….

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