Summary and purpose:
This post is a continuation of my posts about the “saving clause” in U.S. tax treaties. For an introduction to the “saving clause” see:
Croatia Agrees To Allow The US To Impose Tax, Forms And Penalties On Its US Citizen Residents
This post will also identify how the 2003 Protocol to the U.S. Mexico tax treaty makes expatriation with an “intention to avoid taxation”, relevant from BOTH a tax and immigration perspective.
Part A – Taxation: The tax treaty saving clause and expatriation with an intention to avoid U.S. taxation
The 1992 U.S. Mexico tax treaty “saving clause”
A basic “saving clause” appeared in the 1992 U.S. Mexico tax treaty. It gave either the country the right to tax its citizens as though the treaty did not exist. See Appendix A for the full text and Appendix B for the technical interpretation
The 1992 “saving clause” stated that:
“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.”
The 1992 “saving clause” made no mention of “Green Card” holder or of the specific principles to be used to determine whether the expatriation “had as one of its principal purposes the avoidance of tax:,
The 2003 U.S. Mexico tax treaty protocol
The 2003 protocol to the U.S. Mexico tax treaty included a “saving clause” that is unlike any I have seen elsewhere. The Mexico “saving clause” has four unusual features:
1. While continuing the principle that the United States always has the right to tax its citizens (the purpose of any “saving clause”) it defines “citizen” to include BOTH citizen or long term resident who expatriated for the purpose of avoiding U.S. taxation (Paragraph 6. a));
2. It defines the meaning of “long term resident” (Paragraph 6.b) – notably this follows the definitions in the U.S. Internal Revenue Code 877(e)(2) as it was in 2003 and continues to be);
3. It provides specific criteria (reiterated in the technical interpretation) to be used as factors to determine whether a citizen expatriated for the purpose of avoiding U.S. taxation (Paragraph 7). See Appendix C of this post.
Paragraph 7
7. In the case of an individual who is a former citizen of a Contracting State, the following factors shall be considered favorably in determining whether or not one of the principal purposes of that individual’s loss of citizenship of that Contracting State was the avoidance of tax:
a) at the time of the individual ceasing to be a citizen of that Contracting State or within a reasonable period thereafter, the individual is or becomes a resident fully liable to income tax in the other Contracting State, and
b) i) the individual was a citizen of both Contracting States at birth and has remained a citizen of the other Contracting State;
ii) at the time of the loss of such citizenship (or within a reasonable period thereafter), the individual was or became a citizen of the other Contracting State, and that other Contracting State was that individual’s country of birth, or the country of birth of that individual’s spouse or of either of that individual’s parents;
iii) in the 10 years preceding the loss of such citizenship, the individual was present in that Contracting State for no more than 30 days in each taxable year or year of assessment; or
iv) the loss of citizenship occurred before the individual attained the age of 18 and one half years.
Notice that “dual citizenship” from birth is identified as being a factor negating expatriation with the intention of avoiding U.S. taxation. This continues the U.S. obsession with both “citizenship taxation” and “citizenship non-taxation”!
Because “Accidental Americans” are more likely to have dual citizenship from birth it is unlikely that the treaty would be interpreted to allow them to be taxed by the USA after expatriation!!
4. It provides specific criteria in Paragraph 8 (reiterated in the technical interpretation) to be used as factors to determine whether a Green Card holder expatriated for the purposes of avoiding U.S. taxation. See Appendix D of this post.
Paragraph 8
In the case of an individual who is a former long-term resident of a Contracting State, a number of factors may be considered by that Contracting State in determining whether or not one of the principal purposes of that individual’s loss of long-term resident status (“expatriation”) was the avoidance of tax. Paragraph 8 sets forth the following factors which will be considered favorably for purposes of determining whether a former long-term resident had a tax avoidance purpose for expatriating: (1) at the time of the individual’s expatriation (or within a reasonable time thereafter) the individual is or becomes a resident fully liable to tax in the other Contracting State and that other Contracting State is the individual’s country of birth, the country of birth of that individual’s spouse, or the country of birth of either of that individual’s parents; (2) in the 10 years prior to expatriation, the individual was present in the Contracting State from which he expatriated for no more than 30 days in each taxable year or year of assessment; or (3) the individual expatriated before he reached the age of 18 ½ years. This provision is consistent with U.S. law.
Notice that moving back to the “country of birth” is identified as a factor to negate any presumption of tax avoidance. In addition, becoming a “tax resident” in the new country of residence is relevant.
The 2003 protocol to the U.S. Mexico tax treaty is consistent with the principle that the “saving clause” mirrors the expatriation provisions of the time of negotiating the tax treaty.
Part B – Immigration: The tax treaty saving clause, expatriation with an intention to avoid U.S. taxation and how the tax treaty may bear on the application of the Reed amendment
Expatriation with an intention to avoid U.S. taxation is theoretically relevant for immigration purposes. This is the provision of U.S. immigration law that makes individuals who renounced for tax reasons inadmissible to the United States. This is commonly known as the “Reed Amendment”.
INA 212(d)(10)(E) reads:
“Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.”
An excellent discussion and history of the Reed amendment is here. A 2020 podcast with U.S. tax lawyer Virginia La Torre Jeker discussing the Reed Amendment is here.
The U.S. Mexico tax treaty as an aid to interpreting the “Reed Amendment”
Assuming that the criteria for “expatriation to avoid U.S. taxation” can be used to interpret the Reed amendment (found in the Immigration and Nationality Act) it is clear that
– dual citizens from birth (most Accidental Americans are dual citizens from birth) are unlikely to be deemed “excludable aliens” within the meaning of the Reed amendment.
– long term Americans abroad (because they are less likely to be dual citizens from birth) do NOT enjoy the benefits of dual citizens from birth. (Nevertheless, I have no reason to believe that their renunciations would be deemed to be for the purposes of avoiding U.S. taxation.)
In other words, the Reed amendment is almost certainly inapplicable to “Accidental Americans”. It is not likely to be applicable to the circumstances generally of Americans abroad who are renouncing U.S. citizenship.
The 2003 protocol to the U.S. Mexico tax treaty is consistent with the principle that the “saving clause” mirrors the expatriation provisions of the time of negotiating the tax treaty.
Conclusion
Dual citizenship from birth continues to matter!
John Richardson – Follow me on X.com/Expatriationlaw
Appendix A
The U.S. Mexico 1992 Tax Treaty – Article I
ARTICLE 1
General Scope
1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.
2. The Convention shall not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded:
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States.
3. Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, 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 by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), under paragraphs 1(b) and 3 of Article 19 (Pensions, Annuities, Alimony, and Child Support), and under Articles 22 (Exempt Organizations), 24 (Relief from Double Taxation), 25 (Non-Discrimination), and 26 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under Articles 20 (Government Service), 21 (Students), and 28 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor lawful permanent residents in, that State.
https://www.irs.gov/pub/irs-trty/mexico.pdf
Appendix B
Technical Interpretation To The 1992 Treaty
Paragraph 3 contains the traditional “saving” clause, which provides that each country may tax in accordance with its domestic law, without regard to the Convention, its residents, citizens, and former citizens whose loss of citizenship had tax avoidance as one of its principal purposes. Although the paragraph is drafted reciprocally, Mexico does not now tax the income on the basis of citizenship. The taxation of former citizens is limited to a period of ten years, as provided in section 877 of the Code. “Residence”, for the purpose of the saving clause, is determined under Article 4 (Residence). Thus, for example, if an individual who is not a U.S. citizen is a resident of the United States under the Code, e.g., a “green card” holder, and is also a resident of Mexico under Mexican law, and the tie-breaker rules of paragraph 2 of Article 4 determine that he is a resident of Mexico, he will be entitled to U.S. benefits under the Convention.
As a consequence of the saving clause, each Article should be read as not providing benefits with respect to the U.S. taxation of U.S. citizens (wherever resident) or residents or with respect to Mexico’s taxation of Mexican citizens or residents. However, paragraph 4 provides certain exceptions to the saving clause. Under subparagraph (a), for example, U.S. residents and citizens are entitled to certain U.S. benefits provided under the Convention. Those benefits are:
the correlative adjustments authorized by paragraph 2 of Article 9; the exemption of social security benefits paid by the other State and of child support and alimony paid by residents of the other State, that are provided in paragraphs 1(b) and 3 of Article 19; the deductibility of certain contributions to Mexican charities and the relief from expenditure responsibilities provided in Article 22; the guarantee of a foreign tax credit provided in Article 24; the non-discrimination protection of Article 25; and the competent authority procedures of Article 26. Mexican residents are entitled to the benefits provided by Mexico under the same Articles (and Mexican citizens or former citizens would be entitled to the same benefits, if relevant).
Under subparagraph (b) certain additional benefits are available to U.S. residents who are neither U.S. citizens nor “green card” holders; these are the U.S. benefits extended to employees of the Mexican Government under Article 20, to visiting students, under Article 21, and to members of diplomatic and consular missions under Article 28. This subparagraph also applies reciprocally.
https://www.irs.gov/pub/irs-trty/mexicotech.pdf
Appendix C
2003 Protocol to the U.S. Mexico Tax Treaty
ARTICLE I
Article 1 of the Convention is deleted and the following Article is substituted:
“ARTICLE 1
General Scope
1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.
2. This Convention shall not restrict in any manner any exclusion, exemption, deduction, credit or other allowance now or hereafter accorded:
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States.
3. Notwithstanding the provisions of subparagraph b) of paragraph 2:
a) any question arising as to the interpretation or application of this Convention and, in particular, whether a taxation measure is within the scope of this Convention, shall be determined exclusively in accordance with the provisions of Article 26 (Mutual Agreement Procedure) of this Convention; and
b) the provisions of any other agreement shall not apply to a taxation measure unless the competent authorities agree that the measure is not within the scope of Article 25 (Non-Discrimination) of this Convention.
For the purposes of this paragraph, a “measure” is a law, regulation, rule, procedure, decision, administrative action, or any similar provision or action.
4. Notwithstanding any provision of this Convention except paragraph 5, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect.
5. The provisions of paragraph 4 shall not affect:
a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), under subparagraph b) of paragraph 1 and paragraph 3 of Article 19 (Pensions, Annuities, Alimony, and Child Support), and under Articles 22 (Exempt Organizations), 24 (Relief from Double Taxation), 25 (Non-Discrimination), and 26 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under Articles 20 (Government Service), 21 (Students), and 28 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of, nor lawful permanent residents in, that State.
6. a) A former citizen or long-term resident whose loss of citizenship or long-term resident status had as one of its principal purposes the avoidance of tax (as defined under the laws of the Contracting State of which the person was a citizen or long-term resident) shall be treated for purposes of paragraph 4 of this Article as a citizen of that Contracting State, but only for a period of 10 years following the loss of such status. This paragraph shall apply only in respect of income from sources within that Contracting State (including income deemed under the domestic law of that State to arise from such sources).
b) The term “long-term resident” shall mean any individual who is a lawful permanent resident of a Contracting State in 8 or more taxable years during the preceding 15 taxable years. In determining whether the threshold in the preceding sentence is met, there shall not count any year in which the individual is treated as a resident of the other Contracting State under this Convention, or as a resident of any country other than the first-mentioned Contracting State under the provisions of any other tax treaty of that Contracting State, and, in either case, the individual does not waive the benefits of such treaty applicable to residents of the other country.
7. In the case of an individual who is a former citizen of a Contracting State, the following factors shall be considered favorably in determining whether or not one of the principal purposes of that individual’s loss of citizenship of that Contracting State was the avoidance of tax:
a) at the time of the individual ceasing to be a citizen of that Contracting State or within a reasonable period thereafter, the individual is or becomes a resident fully liable to income tax in the other Contracting State, and
b) i) the individual was a citizen of both Contracting States at birth and has remained a citizen of the other Contracting State;
ii) at the time of the loss of such citizenship (or within a reasonable period thereafter), the individual was or became a citizen of the other Contracting State, and that other Contracting State was that individual’s country of birth, or the country of birth of that individual’s spouse or of either of that individual’s parents;
iii) in the 10 years preceding the loss of such citizenship, the individual was present in that Contracting State for no more than 30 days in each taxable year or year of assessment; or
iv) the loss of citizenship occurred before the individual attained the age of 18 and one half years.
8. In the case of an individual who is a former long-term resident of a Contracting State, the following factors shall be considered favorably in determining whether or not one of the principal purposes of that individual’s ceasing to be a long-term resident of that Contracting State was the avoidance of tax:
a) at the time of the individual ceasing to be a long-term resident of that Contracting State or within a reasonable period thereafter, the individual is or becomes a resident fully liable to income tax in the other Contracting State, and that other Contracting State is:
i) the country in which the individual was born;
ii) the country in which the individual’s spouse was born; or
iii) the country where either of the individual’s parents was born;
b) in the 10 years preceding the individual’s ceasing to be a long-term resident of that Contracting State, the individual was present in that Contracting State for no more than 30 days in each taxable year or year of assessment; or
c) the individual ceases to be a long-term resident of that Contracting State before reaching the age of 18 and one half years.”
https://home.treasury.gov/system/files/131/Treaty-Mexico-Pr2-10-26-2002.pdf
Appendix D
Technical Interpretation To The 2003 Protocol
Paragraph 4
Paragraph 4 contains the traditional saving clause found in U.S. tax treaties. The Contracting States reserve their rights, except as provided in paragraph 5, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the Convention to the contrary. For example, if a resident of Mexico performs professional services in the United States and the income from the services is not attributable to a permanent establishment in the United States, Article 7 (Business Profits) would by its terms prevent the United States from
taxing the income. If, however, the resident of Mexico is also a citizen of the United States, the saving clause permits the United States to include the remuneration in the worldwide income of the citizen and subject it to tax under the normal Code rules (i.e., without regard to Code section 894(a)). However, subparagraph 5(a) of this Article preserves the benefits of special foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident in Mexico. See paragraph 4 of Article 24 (Relief from Double Taxation).
For purposes of the saving clause, “residence” is determined under Article 4 (Residence). Thus, an individual who is a U.S. resident under the Internal Revenue Code but who is deemed to be a resident of Mexico under the tie-breaker rules of Article 4 would be subject to U.S. tax only to the extent permitted by the Convention. For example, if an individual who is not a U.S. citizen is a resident of the United States under the Code, and is also a resident of Mexico under its law, and that individual has a permanent home available to him in Mexico and not in the United States, he would be treated as a resident of Mexico under Article 4 and for purposes of the saving clause. The United States would not be permitted to apply its statutory rules to that person if they are inconsistent with the treaty.
However, the person would be treated as a U.S. resident for U.S. tax purposes other than determining the individual’s U.S. tax liability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares in that corporation held by the individual would be considered to be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart F income recognized by the corporation. See
Treas. Reg. section 301.7701(b)-7(a)(3). The application of the saving clause to former citizens and long-term residents is not addressed in paragraph 4, but in paragraphs 6, 7, and 8.
Paragraph 5
Some provisions are intended to provide benefits to citizens and residents even if such benefits do not exist under internal law. Paragraph 5 sets forth certain exceptions to the saving clause that preserve these benefits for citizens and residents of the Contracting States.
Subparagraph (a) lists certain provisions of the Convention that are applicable to all citizens and residents of a Contracting State, despite the general saving clause rule of paragraph 4:
(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative adjustment with respect to income tax due on profits reallocated under Article 9.
(2) Subparagraph 1(b) and paragraph 3 of Article 19 (Pensions, Annuities, Alimony, and Child Support) provide exemptions from source or residence State taxation for certain pension distributions, social security payments and child support.
(3) Article 22 (Exempt Organizations) provides for reciprocal recognition of tax-exempt, charitable organizations resident in a Contracting State and qualifying for benefits of the Convention under paragraph 1(e) or 2 of Article 17 (Limitation on Benefits).
(4) Article 24 (Relief from Double Taxation) confirms the benefit of a credit to citizensand residents of one Contracting State for income taxes paid to the other, even if such a credit may not be available under the Code.
(5) Article 25 (Non-Discrimination) requires one Contracting State to grant national treatment to nationals of the other Contracting State in certain circumstances. Excepting this Article from the saving clause requires, for example, that the United States give such benefits to a national of Mexico even if that person is a citizen of the United States.
(6) Article 26 (Mutual Agreement Procedure) may confer benefits on residents or nationals of the Contracting States. For example, the statute of limitations may be waived for refunds and the competent authorities are permitted to use a definition of a term that differs from the internal law definition. As with the foreign tax credit, these benefits are intended to be granted by a Contracting State to its citizens and residents.
Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving clause. The benefits referred to are all intended to be granted to temporary residents of a Contracting State (for example, in the case of the United States, holders of non- immigrant visas), but not to citizens or to persons who have acquired permanent residence in that State. If beneficiaries of these provisions travel from one of the Contracting States to the other, and
remain in the other long enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in the U.S. context, they do not become “green card” holders) and are not citizens of that State, the host State will continue to grant these benefits even if they conflict with statutory rules. The benefits preserved by this paragraph are the host country exemptions for the following items: government service salaries and pensions under Article 20 (Government Service); certain income of visiting students or business apprentices under Article 21 (Students); and the income of diplomatic agents and consular officers under Article 28 (Diplomatic Agents and Consular Officers).
Paragraph 6
Under subparagraph (a) of paragraph 6, each Contracting State reserves for a period of ten years its right to tax former citizens and long-term residents whose loss of citizenship or long-term resident status had as one of its principal purposes the avoidance of tax. Thus, the saving clause in paragraph 4 applies to such persons for a period of ten years. In the case of the United States, section 877 of the Code applies to former citizens and long-term residents of the United States whose loss of citizenship or long-term resident status had as one of its principal purposes the avoidance of tax. Under section 877, the United States generally treats an individual as having a principal purpose to avoid tax if either of the following criteria exceed established thresholds: (a) the average annual net income tax of such individual for the period of 5 taxable years ending before the date of the loss of status, or (b) the net worth of such individual as of the date of the loss of status. The thresholds are adjusted annually for inflation. Section 877(c) provides certain exceptions to these presumptions of tax avoidance. Paragraphs 7 and 8 provide similar factors that will be considered in favor of the taxpayer for purposes of determining whether one of the principal purposes of a change in status of a former citizen or long-term resident is the avoidance of tax.
Subparagraph (b) of paragraph 6 defines the term “long-term resident” of a Contracting State as an individual (other than a citizen of that State) who is a lawful permanent resident of that State in at least 8 of the 15 taxable years ending with the taxable year in which the individual ceased to be a long-term resident. In determining whether this threshold is met, the Convention provides that an individual will not be treated as a lawful permanent resident for any year in which the individual is: (1) treated as a resident of the other Contracting State, or as a resident of
any country other than the first-mentioned State under the provisions of any other tax treaty of that Contracting State, and (2) the individual does not waive the benefits of such treaty applicable to residents of the other country. This test is consistent with U.S. law.
Paragraph 7
In the case of an individual who is a former citizen of a Contracting State, a number of factors may be considered by that Contracting State in determining whether or not one of the principal purposes of that individual’s loss of citizenship (“expatriation”) was the avoidance of tax. Paragraph 7 sets forth the following factors which will be considered in favor of the taxpayer for purposes of determining whether a former citizen had a tax avoidance purpose for expatriating: (1) the individual is, at the time of his expatriation, a resident fully liable to tax in the other Contracting State, or becomes a resident fully liable to tax within a reasonable period after his expatriation; and (2) the individual meets one of the following four additional requirements: (a) the individual was a citizen of both Contracting States at birth and has remained a citizen of the other Contracting State; (b) at the time of expatriation (or within a reasonable period thereafter), the individual was or became a citizen of the other Contracting State, and that other Contracting State is the individual’s country of birth, the country of birth of that individual’s spouse, or the country of birth of either of that individual’s parents; (c) in the 10 years prior to expatriation, the individual was present in the Contracting State from which heexpatriated for no more than 30 days in each taxable year or year of assessment; or (d) the individual expatriated before he reached the age of 18 ½ years. This provision is consistent with U.S. law.
Paragraph 8
In the case of an individual who is a former long-term resident of a Contracting State, a number of factors may be considered by that Contracting State in determining whether or not oneof the principal purposes of that individual’s loss of long-term resident status (“expatriation”) was the avoidance of tax. Paragraph 8 sets forth the following factors which will be considered favorably for purposes of determining whether a former long-term resident had a tax avoidance purpose for expatriating: (1) at the time of the individual’s expatriation (or within a reasonable time thereafter) the individual is or becomes a resident fully liable to tax in the other Contracting State and that other Contracting State is the individual’s country of birth, the country of birth of that individual’s spouse, or the country of birth of either of that individual’s parents; (2) in the 10 years prior to expatriation, the individual was present in the Contracting State from which he expatriated for no more than 30 days in each taxable year or year of assessment; or (3) the individual expatriated before he reached the age of 18 ½ years. This provision is consistent with U.S. law.
https://home.treasury.gov/system/files/131/Treaty-Mexico-Pr2-TE-3-5-2003.pdf
