Category Archives: FATCA

Should tax residency Be Based On The “Circumstances Of Your Birth” Or The “Circumstances Of Your Life”?

Panel session – US Expat Tax Conference from Deborah Hicks on Vimeo.

Should taxation be based on the “circumstances of your birth” or the “circumstances of your life”? President Obama doesn’t think (apparently) that the “circumstances of your birth” birth should determine the “outcome of your life”. Should the “circumstances of your birth” determine your tax residency?

This is a second post exploring what is the true meaning of U.S. citizenship-based taxation. In an earlier post – “Toward A Definition Of Citizenship Taxation” – I explored the contextual meaning and effect of U.S. “citizenship taxation”. The only “contextual effect” and “practical meaning” of U.S. citizenship taxation may be described as:

Therefore, the practical meaning of “citizenship taxation” is the United States imposing taxation on the non-US source income earned by people who live in other countries. To be clear: citizenship taxation means that the United States is claiming the residents of OTHER countries as US residents for tax purposes!

That’s amazing stuff! Most countries believe that they are sovereign and that includes sovereignty over matters of taxation. Yet, any country that is a party to a U.S. tax treaty has actually agreed that a subset of the treaty partner’s tax residents are ALSO U.S. tax residents! Although nobody questions the right of the United States to prescribe its own definition of tax residency, few would agree that the United States has the right to claim the residents of other countries as U.S. tax residents. Yet, this is what the U.S. citizenship taxation regime means. This U.S. extraterritorial claim of taxation is at the root of the FATCA administration problems and at the root of the the events that led to Treasury Notice 2023-11 (released on December 30, 20220).

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Report Of Members Of The PETI Committee Of The EU Parliament Of Their July 2022 FATCA Visit To Washington

Prologue

July 2022 – A FATCA Delegation Goes To Washington, DC

This post is to document a small part of the practical impact of the US citizenship taxation regime. It is a continuation of a series of posts exploring what US citizenship taxation is and how it impacts people who live outside the United States and the countries where they live.

The first post – “Toward A Definition Of Citizenship Taxation” – concluded that the only practical and contextual meaning of citizenship tax is:

Therefore, the practical meaning of “citizenship taxation” is the United States imposing taxation on the non-US source income earned by people who live in other countries. To be clear: citizenship taxation means that the United States is claiming the residents of OTHER countries as US residents for tax purposes!

The second post – “Should tax residency Be Based On The “Circumstances Of Your Birth” Or The “Circumstances Of Your Life”?

The US claim of tax residency is based on the “circumstances of their birth”. The “push back” from those impacted is based on the “circumstances of their life”.

Combining the themes of the first two posts we see that:

The United States claims the right based on and only an individual’s “circumstances of birth” to impose regulations and taxation on that individuals’s income earned outside the United States when his “circumstances of life” are such that he lives outside the United States.

Or to describe it slightly differently:

The United States claims the right based on and only an individual’s “circumstances of birth” to impose taxation on the non-US source income of people when their “circumstances of live” are that do NOT live in the United States.

Or maybe …

The United States claims the right based on and only an individual’s “circumstances of birth” to regulate, penalize and tax those individuals when they no longer live in the United States. This includes imposing tax on the non-US source income of people who do NOT live in the United States.

It is very difficult to arrive at a succinct and simple description of what tax and regulation of individuals based on a a “U.S. birthplace” means.

The effect of claiming these nonresidents as US tax residents results in a massive interference (because of the punitive US tax treatment of non-US assets and income sources) in their ability save, invest and carry on businesses in their country of residence AND their ability (because of FATCA) to access bank accounts in their country of residence.

Categories of problems caused by this US extra-territorial claim of tax residency include (but are not limited to):

1. Direct taxation of non-US source income earned by nonresidents

2. Expensive and penalty compliance requirements which interfere withe the ability to manage the financial/retirement planning options in their country of residence

3. The ability to open and maintain basic bank and investment accounts

The problem of bank account access

The European Delegation visiting Washington, DC in July of 2022 was concerned with and ONLY with access to bank and financial accounts. Significantly and disappointedly the delegation expressed no objection to the U.S. extra-territorial tax policies that “claim” European residents as tax residents of the United States.

Banking Access Problems Of European Residents Who Are US Citizens

The perception in July of 2022

On July 18 to 22 of 2022, a delegation from the PETI Committee of the European Union made a visit to Washington, DC to discuss “FATCA Concerns” with US Treasury and certain members of Congress. An excellent report on the meeting was written by Helen Burggraf in the American Expat Financial News Journal. On January 25, 2023 those members delivered a live report to the European Parliament of the visit.

The perception in January of 2023

The following video – January 25, 2023 in which the delegates report on their trip to Washington to the PETI Committee is worth watching.

https://multimedia.europarl.europa.eu/en/event_20230125-0900-COMMITTEE-PETI_vd?start=20230125080941&end=20230125111858

The members discuss:

– how they experienced the meetings

– the necessity of continuing to work on the “European FATCA” problem

– the general attitude of their American hosts towards the FATCA problem (in some cases outright denial).

I would say that the sentiment was “cautious optimism”.

(The article by Stephen Gardner referenced in the above tweet continues additional commentary.)

The video also includes the thoughts of “Prof Carlo Garbarino – Bocconi University, Milano, Italy” who prepared the following report titled: “FATCA LEGISLATION AND ITS APPLICATION AT INTERNATIONAL AND EU LEVEL: – AN UPDATE”

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John Richardson – Follow me on Twitter @Expatriationlaw

Part 3 – Notice 2023-11: Is FATCA Aimed At Resident Americans, Residents Of Other Countries Or Both?

Summary – The Reader’s Digest Version …

Although FATCA was clearly motivated by the behaviour of US citizens resident in the United States, Treasury did NOT interpret the “purpose” as being limited to prevent abuses by “residents of the United States”. Rather Treasury appears to have interpreted the purpose of FATCA (very broadly) to target residents of other countries.

Had Treasury done what it was required by statute to do (consider the purpose of IRC 1471) it might have approached its responsibilities very differently. What began as an attempt to curb the behaviour of US residents became an attack on residents of other countries who happen to be US citizens. The evidence further suggest that the FFIs most heavily impacted by FATCA are located in the high tax jurisdictions where US citizens abroad are most likely to reside. Can it reasonably be concluded that the purpose of IRC 1471 – AKA FATCA – was to attack the residents of other countries and the banks in those countries? If not, then why did Treasury target the whole world, rather than the parts of the world with conditions that facilitated tax evasion for resident Americans? Can anybody seriously make the claim that banks in Canada, the UK, Australia New Zealand and other first world democracies were attractive locations for tax evaders? Yet, this is precisely what Treasury did.

It didn’t have to be this way!

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Part 2 – Notice 2023-11: Non-US Banks May Be Forced To Sever Ties With US Citizen Clients Because Of FATCA

Introduction – The Readers’ Digest Version

This is Part 2 of a series of posts discussing the world of FATCA and how IRS Notice 2023-11 is likely to impact it. In Part 1 I described how Notice 2023-11 imposes significant additional obligations on both non-US banks and the IGA Model 1 governments. (This post will be best understood by first reading Part 1 and understanding the additional compliance burdens imposed on non-US banks as a result of Notice 2023-11.) The purpose of this post (Part 2) is to suggest that the overall context of FATCA, the FATCA IGAs and US citizenship taxation will incentivize non-US banks to purge US citizen clients. It is reasonable to conclude, that US citizen clients are a clear and present danger to their businesses.

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Part 1 – Notice 2023-11: The Carrot, The Stick And Heightened FATCA Enforcement On Overseas Americans

Welcome To 2023 – A Year Of Heightened FATCA Enforcement

On December 30, 2022 US Treasury released Notice 2023-11. The broad purpose of the Notice is to prescribe conditions that would allow non-US banks to temporarily avoid a designation of “significant non-compliance” under the FATCA IGAs. It is important to note that Notice 2023-11 is NOT simply a “stay of execution”. It is a “stay of execution” that is conditional on both non-US banks and their governments participating in a significant escalation of FATCA enforcement on US citizens who live outside the United States.

The purpose of this post is to comment on and analyze the provisions of Notice 2023-13 which strongly incentivize non-US banks to purge themselves of existing US citizen clients. In Part 2 I will explain why I believe that non-US banks may be forced to close the accounts of all their US citizen customers.

n-23-11

Prologue And Summary Of The Issue

Through a combination of FATCA (“Foreign Account Tax Compliance Act”) found Chapter 4 of the Internal Revenue Code and the FATCA IGAs (the mechanism for countries to comply with FATCA) the United States has created conditions where US citizen customers are a burden and risk to non-US banks. These provisions have created conditions that threaten punitive financial sanctions on non-US banks who cannot notify the IRS of a US citizen’s Social Security Number. Generally this is because the US citizen has lived abroad for many years and does NOT have a SSN. This situation has created worry for the banks and for their US citizen customers. The fact that the US citizen does NOT have a SSN is NOT relevant to the reporting obligation imposed on the bank. To be clear: The FATCA IGAs mean that non-US banks can easily be in “significant non-compliance” for the failure to comply with something that is impossible to comply with.

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“Bear Necessities”: Argentina US #FATCA IGA Confirms No Obligation Of Reciprocity On US

The Readers Digest Version: A Tweet By Tweet Explanation

Prologue – Argentina December 5, 2022

The State Department website featured the following announcement:

On December 5, Ambassador Marc Stanley and Argentine Minister of Economy Sergio Massa signed an Intergovernmental Agreement (IGA) to facilitate implementation of the U.S. Foreign Account Tax Compliance Act (FATCA). The IGA advances the shared objective of improving international tax compliance. The United States enters into bilateral FATCA IGAs with foreign jurisdictions to provide for the implementation of FATCA through domestic reporting and automatic exchange of information.

This IGA will enable the reciprocal exchange of certain financial account information between the United States and Argentina, while ensuring appropriate data protection. The United States enacted FATCA in 2010 to combat offshore tax evasion. There are currently 113 FATCA IGAs in effect between the United States and foreign jurisdictions.

Note the inclusion of the word “reciprocal”. Describing an agreement as reciprocal does not make it reciprocal. The US Argentina FATCA IGA is a reminder of how one-sided and unequal these FATCA IGAs really are. The reason for the inequality is that the United States imposes “citizenship taxation” and Argentina (like the rest of the world) imposes “residence taxation”. Therefore, the terms of the FATCA IGAs reflect the attempts of the United States to use its system of “citizenship taxation” to claim the residents of OTHER countries as US tax residents.

Detailing The Inequality Of The US Argentina FATCA IGA

or read the Threadreaderapp version here.

In the spirit of bringing an exciting end to 2022, the United States and Argentina have entered into a FATCA Intergovernmental Agreement. The Model 1 FATCA IGAs are not and were never intended to impose reciprocal exchange of information obligations on the United States. Not only does the US get far more than it gives, but the definition of “reportable accounts” reflects the difference between a US tax system based on citizenship and an Argentine tax system that is based on “residence”. One result is that under the FATCA IGAs information flows from a country (Argentina) where the US citizens are likely to live to a country (the United States) where the US citizens reported on do NOT likely live. On the other hand, the agreement clearly states that the US will send information (what little it is obligated to send) from a country where the person does NOT live (the United States) to a country where they do live (Argentina). An important effect of the FATCA IGAs is they assist the United States in claiming the tax residents of other countries (in this case Argentina) as US tax residents as well. This is one of many respects in which the FATCA (“Foreign Account Tax Compliance Act”) is different from the CRS (“Common Reporting Standard”).

To put it simply: the FATCA IGAs have the effect of expanding the US tax system into the FATCA partner country (in this case Argentina).

Summary …

For the “Bare Necessities” click on the following tweet …

Those interested in a more detailed discussion of why the FATCA IGAs are not reciprocal are invited to read the discussion here.

John Richardson – Follow me on Twitter @Expatriationlaw

Part 2 – Would A Move To Residency-based Taxation Solve The FATCA Problem For Americans Abroad Created By The FATCA IGAs?

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!!

#YouCantMakeThisUp!

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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?

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Extradition Is One Way That Changes In Another Country’s Tax Laws May Change Your Tax Relationship With The US

Prologue

As long as the US continues to employ citizenship taxation any changes in US tax law will continue to have unintended consequences on Americans abroad. In March of 2022 I outlined how some of the tax changes proposed in the 2023 Biden Green book would impact US citizens who live outside the United States. As important as US tax changes are, Americans abroad must be aware of how changes in the laws of their country of residence may also impact their “tax relationship” with the United States.

The purpose of this post is provide five simple examples. Some of the examples are based on Canada’s tax laws and others are of a more general nature.

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John Richardson – Information Session – London, UK – Thursday Oct. 13/22 – 19:00 – 21:00

Attention!! Date, time and location updated!! – Thursday Oct. 13/22 – 19:30 – 21:30 – New location! See here.

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John Richardson – Information Session – London, UK – Thursday Oct. 13/22 – 19:00

What: John Richardson informal information and discussion session for those impacted by US extraterritorial overreach

When: Thursday October 13, 2022 – 19:00 – 21:00

Where: Pret A Manger – Directly Across From Russell Square Tube (careful to choose the correct Pret)
40 Bernard Street, London, WC1N 1LE
https://www.pret.co.uk/en-GB/shop-finder/l/london/40-bernard-street/284

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Federal Court Of Appeal Upholds Trial Decision Ruling Canada/US FATCA IGA Is Constitutional

Circa 2014

In June of 2014 the plaintiffs in the ADCS (“Alliance For The Defence Of Canadian Sovereignty”) lawsuit launched their legal challenge to the constitutionality of the Canada US FATCA IGA. The proceedings have gone through a Federal Court hearing in 2015, a second Federal Court hearing in 2019 and the Federal Court Of Appeal hearing in 2022. It has been a “long haul” and the plaintiffs (Ginny, Gwen and Kazia) – true unsung heroes in life – deserve the thanks of all Canadians.

On September 21, 2022 the Federal Court of Appeal dismissed the appeal from the trial decision (which ruled against the plaintiffs).

In other words, the US FATCA law continues to be endorsed by the Canadian courts as being the law of Canada too.

Every human being is a minority somewhere. US citizens living outside the United States are a minority wherever they live. Furthermore, because of FATCA (the tool to enforce citizenship taxation) they will ALWAYS have fewer rights than others in their country of residence. What is astounding is that the United States is ensuring that it’s own citizens are subject to discrimination! Such are the effects of citizenship taxation.

The advancement and protection of the rights of minority groups is always a marathon and not a sprint. It requires the relentless dedication to the goal of achieving justice. At this moment I would like to recognize and thank Patricia Moon, Carol Tapanila and Stephen Kish for their tremendous efforts, personal sacrifices and focus on this cause.

It’s also important and appropriate to recognize the support of the hundreds of anonymous people who contributed financially (in some cases their pension payments) and in other cases their encouragement that this legal challenge was necessary.

The next decision is whether to seek leave to appeal to the Supreme Court Of Canada.

I will write more about this in the next few days. What follows is a copy of the decision.

A-370-19_20220921_R_E_O_OTT_20220921132516

Those wishing to better understand the history, purpose and progression of this lawsuit might go here:

https://adcsovereignty.wordpress.com/the-summary-trial-book-of-posts/

John Richardson Follow me on Twitter @Expatriationlaw