Category Archives: FATCA

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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A Simple Regulatory Fix For The FATCA problems of dual citizens from birth

Prologue

It is clear that the US extraterritorial tax regime, which imposes taxation on the non-US source income of US citizens living outside the United States, is an outrageous violation of the sovereignty of other nations. It is also an extreme injustice inflicted on US citizens living outside the United States. The US has successfully exported the extraterritorial tax regime to the world through a combination of (1) The US Internal Revenue Code (2) the FATCA IGAs (hunting down US citizens) and (3) the saving clause in US tax treaties (Country X agrees that the US can impose tax on any individual who has been identified as a US citizen and is tax resident of Country X). To understand the interplay between (1), (2) and (3) above see the following article I wrote for the American Expat Finance News Journal.

The three groups most visibly impacted by the US Extraterritorial tax regime (in different ways) and its enforcement outside the United States include:

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Part 2 – The Warren “Ultra-Millionaire Tax Act of 2021” and The Wealth Of Other Nations

The fact that …

Leads to the obvious question of …

Hmm…

The fact is that Senator Warren is proposing to impose her wealth tax on property located outside the United States, purchased by individuals who live outside the United States, who have no connection to the United States other than (perhaps) the circumstance of having been born in the United States. Yup, it’s true.

On March 18, 2021, FATCA will turn on 11. The Senator’s proposed wealth tax explicitly states that FATCA is to be used to enforce this tax! Finally an (il)legitimate use for FATCA.

In the 18th Century Adam Smith wrote “The Wealth Of Nations”. In the 21st Century Senator Warren is proposing to impose a wealth tax on “The Wealth Of OTHER Nations”.

Discussion And Analysis

This is the second of what I expect to be a multi-part series on Senator Warren’s proposed wealth tax of 2021. As the above tweet makes clear, the practical utility of the tax depends on US citizenship-based taxation (to whom it applies) and FATCA (how are non-US assets located). In my first post, I referenced Senator Warren’s statement that:

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Circa 2014 – A trip Down Memory Lane: #FBAR #FATCA And The Use Of Non-US Banks

This 2014 hearing held by the US Senate on Permanent investigations is very interesting.It features Senators Levin and McCain and includes discussion of tax evasion, Swiss banks, tax treaties, FATCA the Offshore Voluntary disclosure programs and more.

The logic of the United States is approximately this:

Homeland Americans use non-US bank accounts.

Americans abroad use non-US bank accounts.

Therefore, (but not acknowledging Americans abroad) both Homelanders and Americans abroad use non-US banks for the same (nefarious) reasons.

Fascinating discussion with @Scaramucci: They want the #expat vote, but don’t want to understand the #FATCA life! #Citizide continues

Fascining discussion. In this election season the politicans are agressively courting the vote of Amerians abroad. Yet, they seem unwilling to take the time to understand the problems of Americans abroad and how FATCA has destroyed many life – resulting in many renunications of US citizenship.

About #FATCA and @Citizenshiptax: Here is the @DemsAbroad Interview with @AmyKlobuchar on January 22, 2020

This is an interesting interview with an interesting candidate. But, it is very clear that Senator Klocbuchar (1) believes in FATCA and (2) has no interest in abolishing citizenship-based taxation. You can pick this up at the 27 minute mark.

It’s interesting that the two candidates endorsed by the New York Times (Elizabeth Warren and Amy Klobuchar) are hostile (more so than most other Democrats) to the interests of Americans abroad.

Here is an interesting Facebook discussion about this interview, which includes the following comment:

DA Q and Sen K A on RBT: DA: Most Americans living abroad think that the time has come for residency based taxation, the principle guiding all other country’s tax systems and a fix for numerous unjust burdens on Americans living and working abroad. Now there are bipartisan, revenue neutral proposals to implement our Beatie that include robust provisions to protect the laws from abuse by tax evaders. All we need is a moment of leadership to get this done. Will you be that leader?

Sen K: Well, I have not taken a position to change that at this time. I’m always open to looking at things. And if I could just step back on our taxes in general. There just has not been the opportunity to step back and look at our tax code to see what works for regular people. Because when you think about it, when President Obama was in, we did some things, but we were in a deep recession and it was hard to make the changes that need to be made. Then President [00:03:30.0] Trump comes at it and they pass his tax bill, which really. Oh, wait. It was weighted toward people at the top and has added over a trillion dollars in debt. And when you look at his time period, while he gloats about what things, what’s happening in our country, we’ve had a 30 percent over the last decade, even before him slow down in startups. We call it the startup slump because of consolidations and other things. And we just don’t have a good tax enforcement, as I already mentioned. And then there’s just a bunch of things I think that we need to change. When it comes to our tax code, including closing some loopholes and doing something about the Buffett Rule and bringing in reversing some of the corporate tax cuts he made, I was in the group that wanted to bring the corporate tax rate down, but not to the level near the level that he brought it to. Every pointing went down was one hundred billion. And I would actually take a big chunk of that money and put it into infrastructure. Another chunk to start working on the deficit, which is brought to record levels. And I just think there’s much more we have to do to keep our economy strong for the long term.

The interview speaks for itself. It’s as though the Democrats think that the only purpose of life is to avoid taxes.

It’s pretty clear that a vote for the Democrats is a vote against Americans Abroad. (I am not, by this statement, taking any position on the Republicans.

About #FATCA and @Citizenshiptax: Here is the @DemsAbroad Interview with @TulsiGabbard on January 15, 2020

With respect to U.S. FATCA and Citizenship-based taxation, her answers were:

1. FATCA: She would direct Treasury to take the necessary steps to alleviate the problems that Americans abroad experience with banking access.

2. Citizenship-based taxation: Bear in mind that the DA question always includes (1) a recognition that revenue neutrality is possible and (2) that any remedial legislation must be carefully constructed to “prevent abuse” (whatever that means). Ms. Gabbard said:

– in principle she believes in a move to residence-based taxation

– it must be constructed in such a way that the wealthy don’t leave the USA to avoid U.S. taxation

– it MUST be revenue neutral

FATCA @Citizenshiptax and Wealth taxes: Laura Snyder Engages @Gabriel_Zucman In The Twittersphere

Introduction

Citizenship-based taxation, FATCA and how the interact can best be understood by Americans abroad.

The professors (who have clearly never lived under a citizenship taxation regime and have limited understanding of FATCA) explain the relationship between U.S. citizenship-based taxation and the success of a – “Made In The USA” wealth tax – in the article which includes:

The situation in the United States is different. You can’t shirk your tax responsibilities by moving, because U.S. citizens are responsible to the Internal Revenue Service no matter where they live. The only way to escape the IRS is to renounce citizenship, an extreme move that in both Warren’s and Sanders’s plans would trigger a large exit tax of 40 percent on net worth.

Some people tweet. Some people tweet for fun. Some people tweet to educate.

The purpose this post is to collect the series of tweets that Laura Snyder complied to provide a higher level of education to the professors.

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Recently Released Survey Report Dispels Myth of the Wealthy American Abroad and Demonstrates Why Middle Class Americans Abroad Are Forced To Renounce US Citizenship

This blog post features the research of Laura Snyder. It is (I believe) the single and most comprehensive study of (1) the U.S. legislation that is understood to apply to Americans abroad and (2) the disastrous impact this legislation has on them. To put it simply, Congress is forcing Americans Abroad to renounce their U.S. citizenship.

The bottom line is that for Amerians Abroad:

“All Roads Lead To Renunciation!”

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And now over to Laura Snyder with thanks.
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