Purpose Of This Post – The “Readers Digest” Version
FATCA is administered through the FATCA IGAs (international agreements) and not through the U.S. Internal Revenue Code (domestic law of the United States). the FATCA IGAs do NOT include a provision to change the meaning of “U.S. Person”. Rather the meaning of “U.S. Person” is permanently defined as a “U.S. citizen or resident”. There is no provision in the IGA to change this definition. Therefore, the IGAs are written so that they will ALWAYS apply to U.S. citizens regardless of whether the U.S. continues citizenship taxation.
In effect, implementing FATCA through the IGAs has had the practical impact that:
– the FATCA partner country has changed its domestic laws to adopt the provisions of the FATCA IGAs which are intended to impose specific rules on “U.S. Persons” who are defined as “U.S. citizens or residents”
– those domestic laws reference the FATCA IGAs which contain no provision to change or adapt the meaning of “U.S. Person” which means that discrimination against “U.S. citizens” is permanent.
– resulting in a situation where the FATCA partner country is obligated under its own domestic law to target “U.S. citizens” for special treatment!
Note that this is irrelevant to how the United States defines tax residency! A move to residence-based taxation will not change this basic fact.
Bottom line: The United States has forced other countries to permanently discriminate against U.S. citizens. Because the discrimination is enshrined in the FATCA IGAs, the United States has effectively created an extra-territorial jail for its own citizens, forced other countries to lock U.S. citizens up and effectively thrown away the key!!
Introduction And Background On FATCA
FATCA has created many difficulties for Americans abroad. It has caused great anxiety, created an awareness of US citizenship taxation, expanded the US tax base into other countries and resulted in a growing number of Americans renouncing US citizenship. Because the US employs citizenship taxation, FATCA has created a situation where information flows from a country where Americans abroad live (for example Canada) to a country where they do not live (the United States). Any suggestion that FATCA and the CRS (“Common Reporting Standard”) are some how equivalent is wrong. Many of the differences between FATCA and the CRS are explained here. Finally, neither the FATCA IGAs nor FATCA as defined in the Internal Revenue Code (Chapter 4) impose any obligation of reciprocity on the United States. This has had the consequence of (1) the United States not providing information about accounts held by the tax residents of those countries in the United States while (2) demanding information about the accounts held by US citizens in those other countries. In other words: the combination of the US FATCA law coupled with the US refusal to adopt the CRS has supercharged the United States as a significant tax haven! All of this has had a considerable and life altering impact on US citizens who live, work and engage in retirement/financial planning outside the United States.
FATCA And Citizenship Taxation
There has been considerable discussion about how FATCA interacts with US citizenship taxation and what can be done to mitigate the effects of FATCA on the community of Americans abroad. There is an obvious correlation between the enactment of FATCA and renunciations of US citizenship. What is the solution? If the United States severed “citizenship” from its definition of tax residency (abolishing citizenship taxation) would that solve the FATCA problem for Americans abroad?
Severing citizenship from US tax residency – how would FATCA continue to apply to Americans abroad?
In Part 1 I considered the question of whether a move from citizenship taxation to residence based taxation would end the FATCA problems for Americans abroad under the Internal Revenue Code. I concluded that severing citizenship from tax residency would solve the FATCA problem for Americans abroad in the Internal Revenue Code. The problem is that FATCA is NOT administered through the Internal Revenue Code. FATCA is administered through the FATCA IGAs (“Inter-governmental Agreements”). It’s important to understand that implementing FATCA through the FATCA IGAs has meant that:
1. The FATCA IGAs (agreed to by both the United States and the partner country) have replaced the Internal Revenue Code (a US law made by and only by the United States) as the vehicle through which FATCA is implemented; and
2. The partner country has enacted the terms of the FATCA IGA as the domestic law of that country.
To put it simply, the use of the FATCA to implement FATCA has meant that other countries (at the request of the United States) have adopted laws for the express purpose of identifying US citizens, reporting their financial accounts to the IRS and ultimately discriminating against US citizens by not allowing them access to financial services! In 2008, Candidate Obama defined his vision as “Change You Can Believe In”. He neglected to say that the change included the United States forcing other countries to change their domestic laws to punish US citizens who live in their country!
In this post – Part 2 – I consider whether a move to residence taxation would end the FATCA problem for Americans abroad as it is defined in the FATCA IGAs. I conclude that it would NOT end the FATCA nightmare caused by the FATCA IGAs.
Therefore, a move to residence taxation would NOT end the FATCA nightmare for Americans abroad.
This issue is explored in the following four parts:
Part A: A Move To Residence-based Taxation Under The Internal Revenue Code Would End The Application Of FATCA To Americans Abroad Under The Internal Revenue Code
Part B: A Move To Residence-based Taxation Under The Internal Revenue Code Would NOT End The Application Of FATCA To Americans Abroad Under The FATCA IGAs
Part C: The FATCA IGAs Have Been Legislated As Domestic Law In The FATCA Partner Countries
Part D: What Amendments To The IGAs Would Be Required If The U.S. Severed Citizenship From Tax Residency?