Category Archives: Little Red Tax Treaty Book

Aroeste v. United States – November 2023

Introduction – Aroeste v. United States

Who you are is different from what you must do! Filing a 1040 instead of a 1040NR will NOT convert a treaty nonresident into a U.S. resident for tax purposes!!

Warning!! Warning!! Warning!!

Green Card holders who are “long term residents” and who file as “treaty non-residents” may be deemed to have expatriated and will be subjected to the exit tax rules to determine whether they are “covered expatriates”. Do NOT ever file as a treaty nonresident without proper advice.

(This does NOT seem to have been explored in the Aroeste case.)
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The summary of Aroeste is found in the conclusion …

IV. CONCLUSION

Based on the foregoing, the Court DENIES the Government’s motion for summary judgment and GRANTS IN PART AND DENIES IN PART Aroeste’s motion for summary judgment.

Specifically, the Court finds Aroeste is a United States person, but ceased to be treated as a lawful permanent resident of the United States because he commenced to be treated as a resident of Mexico under the Treaty, did not waive the benefits of such Treaty, and notified the Secretary of the commencement of such treatment. Thus, Aroeste is not subject to FBAR penalties. The Government must discharge Aroeste’s liability for penalties still outstanding for the non-filing of a FBAR for the years 2012 and 2013 pursuant to 31 U.S.C. § 5321, totaling $21,851.76, and must refund Aroeste’s payment of $3,004.

The Court further finds Aroeste untimely notified the Secretary of the commencement of treatment as a resident of Mexico, and thus is subject to penalties pursuant to I.R.C. § 6712(a) equal to $1,000 per failure to timely report his Treaty position, totaling $2,000 for 2012 and 2013. The Government may proceed accordingly in this later regard.

The Court ORDERS the Clerk of Court to CLOSE THIS CASE.

The purpose of this post is to compile both the Aroeste decision and the relevant provisions of the statutes, regulations and treaty in one place for easier reference.

In January of 2024 the U.S. Government announced that it would appeal the decision in Aroeste.

At present (subject to appeal) the Aroeste case stands for these principles:

1. A Green Card holder who is treated as a nonresident of a tax treaty who gives “notice to the Secretary” is NOT a “U.S. Person” for the purposes of the FBAR regulation 1010.350 and is NOT required to file an FBAR.

2. Notice can be given to the government retrospectively. In 2016 Mr. Aroeste notified the government that he was a treaty nonresident pursuant to 7701(b)(6) and the provisions of the U.S. Mexico Tax Treaty.

3. Filing the wrong kind of tax return. (1040 instead of 1040NR) does NOT waive the treaty benefits!

4. Notice 2009-85 may not be valid because of a failure to meet the APA requirements for notice and comment.

Al link to the Aroeste decision is here …

Aroeste-v-United-States-Order-Nov-2023

Part A – The FBAR Statute – 31 U.S.C. 5314

31 U.S. Code § 5314 – Records and reports on foreign financial agency transactions
(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:

(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.

(b) The Secretary may prescribe—
(1) a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;
(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;
(3) the magnitude of transactions subject to a requirement or a regulation under this section;
(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and
(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section.

(c) A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.

(Pub. L. 97–258, Sept. 13, 1982, 96 Stat. 997.)

Regulations under 1010.350 – Who is a U.S. person?

https://www.law.cornell.edu/cfr/text/31/1010.350

Part B – The FBAR Regulation

Regulations under 1010.350 – Who is a U.S. person?

https://www.law.cornell.edu/cfr/text/31/1010.350

31 CFR § 1010.350 – Reports of foreign financial accounts

§ 1010.350 Reports of foreign financial accounts.

(a) In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD–F 90–22.1), or any successor form. See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.
(b) United States person. For purposes of this section, the term “United States person” means—
(1) A citizen of the United States;
(2) A resident of the United States. A resident of the United States is an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations thereunder but using the definition of “United States” provided in 31 CFR 1010.100(hhh) rather than the definition of “United States” in 26 CFR 301.7701(b)–1(c)(2)(ii); and

Part C – IRC 7701(b)(6)

6) Lawful permanent resident For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if—
(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
https://www.law.cornell.edu/uscode/text/26/7701

Part D – IRC 7701(b)(6) Treasury Regulations

See the Appendix below.

https://www.law.cornell.edu/cfr/text/26/301.7701(b)-7

Part E – The U.S. Mexico Tax Treaty

ARTICLE 4
Residence
1. For the purposes of this Convention, the term “resident of a Contracting State” means any person
who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. However, this term does not include any person who is liable to tax in that State in respect only of income from sources in that State.
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his residence shall be determined as follows:
a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests);
b) if the State in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to
be a resident of the State of which he is a national;
d) in any other case, the competent authorities of the Contracting States shall settle the
question by mutual agreement.

https://www.irs.gov/pub/irs-trty/mexico.pdf

John Richardson – Follow me on Twitter @Expatrationlaw

Appendix – 26 CFR § 301.7701(b)-7 – Coordination with income tax treaties.

§ 301.7701(b)-7 Coordination with income tax treaties.

(a) Consistency requirement—(1) Application. The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner. A “dual resident taxpayer” is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner’s internal laws. If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder (including the withholding provisions of section 1441 and the regulations under that section in cases in which the dual resident taxpayer is the recipient of income subject to withholding) with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.
(2) Computation of tax liability. If an alien individual is a dual resident taxpayer, then the rules on residency provided in the convention shall apply for purposes of determining the individual’s residence for all purposes of that treaty.
(3) Other Code purposes. Generally, for purposes of the Internal Revenue Code other than the computation of the individual’s United States income tax liability, the individual shall be treated as a United States resident. Therefore, for example, the individual shall be treated as a United States resident for purposes of determining whether a foreign corporation is a controlled foreign corporation under section 957 or whether a foreign corporation is a foreign personal holding company under section 552. In addition, the application of paragraph (a)(2) of this section does not affect the determination of the individual’s residency time periods under § 301.7701(b)–4.
(4) Special rules for S corporations. [Reserved]
(b) Filing requirements. An alien individual described in paragraph (a) of this section who determines his or her U.S. tax liability as if he or she were a nonresident alien shall make a return on Form 1040NR on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident. The individual shall prepare a return and compute his or her tax liability as a nonresident alien. The individual shall attach a statement (in the form required in paragraph (c) of this section) to the Form 1040NR. The Form 1040NR and the attached statement, shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an individual described in paragraph (a) of this section may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.
(c) Contents of statement—(1) In general—(i) Returns due after December 15, 1997. The statement filed by an individual described in paragraph (a)(1) of this section, for a return relating to a taxable year for which the due date (without extensions) is after December 15, 1997, must be in the form of a fully completed Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)) or appropriate successor form. See section 6114 and § 301.6114–1 for rules relating to other treaty-based return positions taken by the same taxpayer.
(ii) Earlier returns. For returns relating to taxable years for which the due date for filing returns (without extensions) is on or before December 15, 1997, the statement filed by the individual described in paragraph (a)(1) of this section must contain the information in accordance with paragraph (c)(1) of this section in effect prior to December 15, 1997 (see § 301.7701(b)–7(c)(1) as contained in 26 CFR part 301, revised April 1, 1997).
(2) Controlled foreign corporation shareholders. If the taxpayer who claims a treaty benefit as a nonresident of the United States is a United States shareholder in a controlled foreign corporation (CFC), as defined in section 957 or section 953(c), and there are no other United States shareholders in that CFC, then for purposes of paragraph (c)(1) of this section, the approximate amount of subpart F income (as defined in section 952) that would have been included in the taxpayer’s income may be determined based on the audited foreign financial statements of the CFC.
(3) S corporation shareholders. [Reserved]
(d) Relationship to section 6114(a) treaty-based return positions. The statement required by paragraph (b) of this section will be considered disclosure for purposes of section 6114 and § 301.6114–1(a), but only if the statement is in the form required by paragraph (c) of this section. If the taxpayer fails to file the statement required by paragraph (b) of this section on or before the date prescribed in paragraph (b) of this section, the taxpayer will be subject to the penalties imposed by section 6712. See section 6712 and § 301.6712–1.
(e) Examples. The following examples illustrate the application of this section:

Example 1.

B, an alien individual, is a resident of foreign country X, under X’s internal law. Country X is a party to an income tax convention with the United States. B is also a resident of the United States under the Internal Revenue Code. B is considered to be a resident of country X under the convention. The convention does not specifically deal with characterization of foreign corporations as controlled foreign corporations or the taxability of United States shareholders on inclusions of subpart F income, but it provides, in an “Other Income” article similar to Article 21 of the 1981 draft of the United States Model Income Tax Convention (U.S. Model), that items of income of a resident of country X that are not specifically dealt with in the convention shall be taxable only in country X. B owns 80% of the one class of stock of foreign corporation R. The remaining 20% is owned by C, a United States citizen who is unrelated to B. In 1985, corporation R’s only income is interest that is foreign personal holding company income under § 1.954A-2 of this chapter. Because the United States-X income tax convention does not deal with characterization of foreign corporations as controlled foreign corporations, United States internal income tax law applies. Therefore, B and C are United States shareholders within the meaning of § 1.951–1(g) of this chapter, corporation R is a controlled foreign corporation within the meaning of § 1.957–1 of this chapter, and corporation R’s income is included in C’s income as subpart F income under § 1.951–1 of this chapter. B may avoid current taxation on his share of the subpart F inclusion by filing as a nonresident (i.e., by following the procedure in § 301.7701(b)–7(b)).

Example 2.

The facts are the same as in Example 1, except that B also earns United States source dividend income. The United States-X income tax convention provides that the rate of United States tax on United States source dividends paid to residents of country X shall not exceed 15 percent of the gross amount of the dividends. B’s United States tax liability with respect to the dividends would be smaller if he were treated as a resident alien, subject to tax on a net basis (i.e., after the allowance of deductions) than if he were treated as a nonresident alien. If, however, B chooses to file as a nonresident in order to claim treaty benefits with respect to his share of R’s subpart F income, his overall United States tax liability, including the portion attributable to the dividends, must be determined as if he were a nonresident alien.

Example 3.

C, a married alien individual with three children, is a resident of foreign country Y, under Y’s internal law. Country Y is a party to an income tax convention with the United States. C is also a resident of the United States under the Internal Revenue Code. C is considered to be a resident of country Y under the convention. The convention specifically covers, among other items of income, personal services income, dividends and interest. C is sent by her country Y employer to work in the United States from January 1, 1985 until December 31, 1985. During 1985, C also earns United States source dividends and interest and incurs mortgage interest expenses on her personal residence. The United States-Y treaty provides that remuneration for personal services performed in the United States by a country Y resident is exempt from United States tax if, among other things, the individual performing such services is present in the United States for a period that is not in excess of 183 days. The treaty provides that the rate of United States tax on United States source dividends paid to residents of Y shall not exceed 15 percent of the gross amount of the dividends and it exempts residents of Y from United States tax on United States source interest. In filing her 1985 tax return, C may choose to file either as a resident alien without claiming any treaty benefits or as a nonresident alien if she desires to claim any treaty benefit. C files as a nonresident (i.e. by following the procedure described in § 301.7701(b)–7(b)). Because C does not satisfy the requirements of the United States-Y treaty with regard to exempting personal services income from United States tax, C will be taxed on her personal services income at graduated rates under section 1 of the Code pursuant to section 871(b) of the Code. She will not be entitled to deduct her mortgage interest expenses or to claim more than one personal exemption because she is taxed as a nonresident alien under the Code by virtue of her decision to claim treaty benefits, and section 873 of the Code denies nonresidents the deduction for personal residence mortgage interest expense and generally limits them to only one personal exemption. C will be subject to a tax of 15 percent of the gross amount of her dividend income under section 871(a) of the Code as modified by the treaty, and she will be exempt from tax on her interest income. C is not entitled to file a joint return with her spouse even if he is a resident alien under the Code for 1985.

Example 4.

The facts are the same as in Example 3, except that C does not choose to claim treaty benefits with respect to any items of income covered by the treaty (i.e., she files as a resident). Therefore, she is taxed as a resident under the Code and pays tax at graduated rates on her personal services income, dividends, and interest. In addition, she is entitled to deduct her mortgage interest expenses and to take personal exemptions for her spouse and three children. C will be entitled to file a joint return with her spouse if he is a resident alien for 1985 or, if he is a nonresident alien, C and her spouse may elect to file a joint return pursuant to section 6013.
[T.D. 8411, 57 FR 15251, Apr. 27, 1992; 57 FR 28612, June 26, 1992, as amended by T.D. 8733, 62 FR 53387, Oct. 14, 1997]

Canada’s Underused Housing Tax May Violate The Non-discrimination Clause In Tax Treaties

Purpose and summary of this post:

Because Canada’s Underused Housing Tax treats nonresidents of Canada differently, based on their citizenship, the tax may violate the non-discrimination Article in many of Canada’s tax treaties (including the Canada U.S. tax treaty). Nonresidents of Canada are treated differently depending on whether or not they are Canadian citizens. For example a Canadian citizen who is a nonresident of Canada is “excluded” from the tax. But, a U.S. citizen who is a nonresident of Canada is “affected” by the tax. This appears to violate paragraph 1 of Article XXV of the Canada U.S. tax treaty (and other Canadian tax treaties).

Paragraph 1 of Article XXV of the Canada U.S. tax treaty:

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected. This provision shall also apply to individuals who are not residents of one or both of the Contracting States.

The question is what is meant by “in the same circumstances”. Relevant commentary from the OECD and from U.S. Treasury underscores that the words “particularly with respect to taxation on worldwide income” include whether the individual is taxed as a tax resident of the country or as a nonresident of the country.

Arguably all “nonresidents” of Canada are “in the same circumstances” (in relation to Canada’s tax system). Hence, “nonresidents” should not be treated differently depending on their citizenship.

Discussion and analysis follows.

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Introduction – The Hypocrisy Of Representative Brian Higgins Continues

“Good Americans should NOT have a Canadian tax imposed on them!”

This is a recent statement from Congressman Brian Higgins. Click on the following tweet to listen to a recent interview with the Congressman.

The background …

As discussed here, Canada has a number of “Vacant Home Taxes“. Canada’s Underused Housing Tax is taxation based on citizenship and/or immigration status. (It is NOT based on “tax residency” and “tax residency” is irrelevant.) Notably the United States is the only major country in the world that makes citizenship and/or immigration status a sufficient condition for “tax residency”. In fact the United States imposes worldwide taxation and FATCA compliance on a approximately one million Canadian residents. Nevertheless, Congressman Higgins is certain of the injustice of Canada’s imposition of a citizenship based tax on U.S. residents. (The fact that the tax is based on property located in Canada appears to him to be irrelevant.) Furthermore, he seems intent on NOT acknowledging that:

“Good Canadians should not have an American tax imposed on them”.

Apparently what’s okay for the USA is somehow not okay for Canada.

But, hypocrisy aside …

Congressman Higgins’s objections hopefully will generate a discussion of the injustice of citizenship taxation generally. While ignoring the fact that the U.S. citizenship tax regime imposes direct U.S. taxation on the Canadian source income of millions of Canadian residents, Congressman Higgins is certain that Canada’s tax (which affects at most a few thousand Americans) violates the U.S. Canada tax treaty. In other words, Congressman Higgins’s hypocritical position appears to include:

Only the United States has the right to impose taxation on the residents of other countries under the principle of citizenship taxation“.

In the spirit of affirming that Canada’s citizenship tax on Americans is in violation of the principle that only the United States has the right to engage in citizenship taxation, Congressman Higgins appeared as a witness before a Canadian Parliamentary Committee to discuss Canada’s Underused Housing Tax. The hearing took place in June 2023. During the hearing he raised the spectre of two possible legal challenges to Canada’s threat to the (presumptive) U.S. monopoly on citizenship taxation. The claim that Canada’s Underused Housing Tax violates the “non-discrimination” Article of the Canada U.S. tax treaty (and other Canadian tax treaties) is the subject of this post.

Food for thought:

The non-discrimination clause in the standard tax treaties suggests that certain kinds of citizenship taxation may be inappropriate. (How this reality bears on the question of U.S. citizenship taxation generally will be the subject of a separate post.)

Outline:

Part A – About Canada’s Underused Housing Tax
Part B – Representative Brian Higgins June 5, 2023 testimony to Canadian Parliamentary Committee – Includes “potential violations”
Part C – Thinking about the “non-discrimination” clause – A basic analysis
Part D – What does U.S. Treasury’s Technical Explanation suggest?
Part E – What about Canadian tax treaties with other countries? – Considering the Canada UK treaty
Part F – Appendixes – Various Tax Treaties

Part A – About Canada’s Underused Housing Tax

The statute and regulations are here. S. 2 of the statute deems certain individuals to be “excluded owners” of residential property. Those “excluded” from the application of the Act are defined to include:

(b) an individual who is a citizen or permanent resident, except to the extent that the individual is an owner of the residential property in their capacity as a trustee of a trust (other than a personal representative in respect of a deceased individual) or as a partner of a partnership;

To put it simply: Canadian “citizens” and those with the legal status of being “permanent residents” of Canada are excluded from the application of the statute. They are not subject to the tax. Those who are NEITHER Canadian citizens NOR permanent residents of Canada are (depending on the occupancy of the property) subject to the tax. This means that (in general) U.S. citizens, living in the United States, are subject (as”affected” owners) to the statute and may (depending on the occupancy of the property) be required to pay the tax.

To simplify the application of the law:

Canadian citizens and permanent resident owners (regardless of whether they are tax residents of Canada) are not subject to the tax.

U.S. citizens (who are neither Canadian citizens nor permanent residents) are subject to the tax.

To simplify the context:

Imagine four neighbors living in Buffalo, New York. They all drive Ford trucks. They all drink Budweisers. They all watch the Buffalo Bills on Sundays. They all work for the same company. They all file taxes jointly with their spouses. They all own seasonal homes (in their names only) located in Fort Erie Ontario, Canada (where they become “neighbours” instead of “neighbors”. Interestingly and completely arbitrarily, Canada’s Underused Housing Tax may or may apply to them. Let’s see how the tax might affect each of them.

Neighbor 1: Neither a Canadian citizen nor permanent resident of Canada – subject to the tax

Neighbor 2: A dual citizen of Canada and the United States – NOT subject to the tax

Neighbor 3: A U.K, citizen who has the legal status of “permanent resident” of Canada, but also a U.S. Green Card holder – NOT subject to the tax

Neighbor 4: A U.K. citizen living in the United States on an L visa – subject to the tax.

Notice that all four of these neighbors live in Buffalo, New York and are NOT tax residents of Canada. Neighbor 2 (Canadian citizen) and Neighbor 3 (permanent resident of Canada) are NOT subject to the tax. Neighbors 1 and 4 (neither Canadian citizens nor permanent residents of Canada are subject to the tax).

Part B – Representative Brian Higgins June 5, 2023 testimony to Canadian Parliamentary Committee – Includes “potential violations”

Excerpt from his testimony:

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Bonjour Part 2 – US Citizens Living In France Can Use French Tax As A Credit To Offset The Obamacare Surtax!

A Quick Synopsis

Congratulations to lawyers Stuart Horwich & James Lieber for their work and success in achieving this result for Americans abroad.

Because of the specific provisions of the France/U.S. tax treaty, U.S. citizens who are resident in France are eligible to use French income tax paid as a tax credit against the 3.8% Obamacare surtax. Depending on the terms of the tax treaty in their country of residence, it is possible that U.S. citizens residing in other countries may be able to use taxes in their country of residence as a tax credit against the 3.8% Obamacare surtax.

As described below, I expect that to be able to use foreign taxes paid as a credit against the 3.8% Net Investment Income Tax, the “Double Taxation” article in the relevant tax treaty must include a specific provision for “U.S. citizens residing in the country of residence”. (Canada comes to mind. But, I will have to some more research …)

Note that it is very possible that this decision will be appealed. The US government will be unhappy with this decision.

For more detail and analysis, keep reading. This post in organized into the following parts:

Part A – Introduction – Background
Part B – Before moving to another country, pay special attention to the tax treaty between the US and that country!
Part C – MATTHEW AND KATHERINE KAESS CHRISTENSEN V. UNITED STATES – Why does the US/France tax treaty work for them?
Part D – Not all tax treaties are the same! What kind of tax treaty provision create the eligibility to use foreign tax credits to offset the Obamacare surtax?
Part E – It’s great that I am entitled to a foreign tax credit. But, how is the tax credit to be calculated?
Part F – The Question: I live in country X. May I use foreign tax credits to offset the Obamacare surtax?
Part G – Dang! Can I get a refund? It appears that refunds ARE available to those who improperly were charged the Obamacare surtax!
Appendix – ARTICLE 24 Of the 1994 France/US Tax Treaty with the later protocols taken into account

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The Issue Is Not @CitizenshipTax. The Issue Is Whether The US Can Claim The Tax Residents Of Other Countries As US Tax Residents!

Introduction – The United States has the “sovereign right” to define who are its “tax residents, but …”

Prologue

There is presently heightened advocacy directed toward the goal of influencing the United States to take action to end (what is described as) U.S. citizenship taxation. Notably this goal is for the purpose of influencing the United States to take action.

Perhaps it would be equally useful to define a separate goal of:

Not allowing the United States to claim the residents of other countries as U.S. tax residents!

Notably this goal would be to engage the governments of other countries!

Ideally both Americans abroad and their countries of residence should seek to stop the United States from reaching into those other countries and claiming the residents of those countries as U.S. tax residents!

In FATCA related discussions it has been common for Government Officials to claim that the United States has the sole right to determine who are its tax residents. Although true, this cannot mean that the United States (or any country) has the right to claim the residents of another country as its tax residents. (The debate is illuminated here and here.)

(Interestingly when the European PETI delegation visited Washington in July of 2022 they made it clear that they did NOT question the right of the United States to define European residents as U.S. tax residents. Rather, they just wanted to find a way to make it easier for European residents to be permitted to have access to bank accounts in the European countries where they live.)

It is appropriate for other countries to accept that the United States has the right (like any country) to define who are U.S. tax residents. It is completely inappropriate for Europeans to accept that the United States has the right to treat European tax residents (who actually live and work in Europe) as U.S. tax residents. By protecting European residents from the United States, European countries would be acting in a manner that is consistent with the OECD tax treaty which anticipates situations of “dual tax residency”. In circumstances of dual tax residency, the model OECD tax treaty (Article 4) provides that the treaty “tie break” will be used to assign tax residency to the country that correlates with the “circumstances of life”. (See page 111 in the document linked to in the previous sentence.) Interestingly, citizenship which absent naturalization, is based on “circumstances of birth” is considered to be the least important criterion under the treaty “tie break”rules.

The treaty tie break rules presumptively assign tax residency based on the “circumstances of life” and not on the “circumstances of birth“.

The bottom line is that, it’s time for the world to simply say:

Of course the United States can define who are its tax residents. But, the United States will NOT be permitted to treat the tax residents of our country (who actually live in our country) to be treated by the U.S. as though they are the tax property of the United States! That is the simple message that must be conveyed!!

Let’s now analyze how the United States goes about claiming the residents of other countries as U.S. taxable property. It’s explained by Mr. Paolo Gentoloni as follows …

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Bonjour: Different US Tax Treaties Provide Different US Taxation For Different Groups Of Americans Abroad

Introduction, purpose And summary

It is clear that US citizens, who are tax resident of countries outside the United States are generally subjected to a more punitive system of taxation than US residents. That said, the U.S. has different tax treaties with different countries. Some treaties (example Australia) make living outside the United States very difficult. Other tax treaties (Canada and the UK) make living outside the United States easier in a relative sense. The relative difficulty is somewhat dependent on the extent to which the treaty contains provisions for U.S. citizens who are “resident” in the treaty partner country. These treaties are an additional recognition of U.S. citizenship taxation.

If a U.S citizen contemplating a move abroad asked the following question:

Q. How will I be taxed if I move outside the United States and live as a tax resident of another country?

The answer will be:

A. I don’t really know. It depends what country you are considering moving to.

Not only are US citizens living outside the United States taxed more punitively than U.S. citizens living inside the United States, but their taxation by the United States depends on the country they move to! (In addition, both income tax treaties and estate tax treaties may contain provisions that affect the way U.S. citizens may be taxed by the treaty partner country!)

The curious case of the U.S. France Tax Treaty and U.S. Citizens resident in France

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Toward A Definition Of US Citizenship Taxation

Prologue

The term “citizenship tax” is abstract and meaningless without context. What does it really mean? In this short post I attempt to describe the defining aspect of US tax residency in simple terms.

Bottom line:

The ONLY contextual meaning of taxing based on citizenship is that it allows the US to impose tax on income earned outside the United States by people who live outside the United States.

Here is why …

What exactly is “citizenship taxation”? How/why does citizenship matter? It’s not what the “treaty partner” countries think!

1. Like all countries the United States imposes worldwide taxation on its residents. Individuals living in the United States will meet the “substantial presence” requirements and are therefore taxable on their worldwide income. Citizenship is irrelevant.

2. Like all countries the United States imposes taxation on income sourced in the United States. Generally the United States will have the first right of taxation and has the ability to withhold tax. Citizenship is irrelevant.

3. Like no other country (OK, sort of Eritrea) the United States imposes taxation on the non-US source income of people who do not live in the United States and do live in other countries. The US usually claims this right because those people were “Born In The USA” (making them US citizens). Therefore, the US imposes worldwide taxation on people who live in other countries. Citizenship is relevant because it is why the US claims the right to tax people who don’t live in the US and are residents of other countries.

4. 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!

5. This means that: Every country in the world who signs a tax treaty with the United States that includes a “saving clause” is agreeing that the United States has the right to tax income earned in the treaty partner country by residents of the treaty partner country. It is obvious that countries signing these treaties have no idea what they are signing. The problem has been further illuminated by the recent US Croatia tax treaty that allows the United States to imposes taxation on Croation residents who ARE and WERE US citizens.

So, US citizenship taxation means that the US can tax the non-US source income of residents of other countries!

John Richardson – Follow me on Twitter @Expatriationlaw

Croatia Agrees To Allow The US To Impose Tax, Forms And Penalties On Its US Citizen Residents

Big News – December 2022

On December 7, 2022 a US Treasury Press Release included:

December 7, 2022
WASHINGTON — In a ceremony held at the U.S. Department of State today, Under Secretary of State for Economic Growth, Energy and the Environment Jose W. Fernandez and Croatia’s Minister of Finance Dr. Marko Primorac signed a comprehensive income tax treaty between the United States and Croatia. The new tax treaty is the first of its kind between the United States and Croatia.

“I am honored to sign the U.S.-Croatia income tax treaty with you today, Finance Minister Primorac,” said Under Secretary Fernandez. “We look forward to taking this monumental step towards further strengthening trade and commercial ties between the United States and Croatia.”

“The Treasury Department is pleased to conclude this new tax treaty with Croatia. It is the first comprehensive tax treaty that the United States has signed in over ten years and reflects our current tax treaty policies and is a milestone in the Treasury’s efforts to expand the U.S. tax treaty network. We appreciate the collaboration Croatia showed throughout the negotiations,” said Lily Batchelder, Assistant Secretary (Tax Policy).

The new tax treaty closely follows the U.S. Model income tax treaty. Key aspects of the new treaty include:

Elimination of withholding taxes on cross-border payments of dividends paid to pension funds and on payments of interest;

Reductions in withholding taxes on cross-border payments of dividends other than those paid to a pension fund, as well as royalties;

Modern anti-abuse provisions intended to prevent instances of non-taxation of income as well as treaty shopping;

Robust dispute resolution mechanisms including mandatory binding arbitration; and
Standard provisions for the exchange of information to help the revenue authorities of both nations carry out their duties as tax administrators.

The new tax treaty will enter into force after the United States and Croatia have notified each other that they have completed their requisite domestic procedures, which in the case of the United States refers to the advice and consent to ratification by the U.S. Senate.

The text of the treaty document can be found at: https://home.treasury.gov/system/files/131/Treaty-Croatia-12-7-2022.pdf

Treaty-Croatia-12-7-2022

Of particular note in Treasury’s announcement is:

“The Treasury Department is pleased to conclude this new tax treaty with Croatia. It is the first comprehensive tax treaty that the United States has signed in over ten years and reflects our current tax treaty policies and is a milestone in the Treasury’s efforts to expand the U.S. tax treaty network. We appreciate the collaboration Croatia showed throughout the negotiations,” said Lily Batchelder, Assistant Secretary (Tax Policy).

The new tax treaty closely follows the U.S. Model income tax treaty.

Treasury’s announcement focuses on the mutually beneficial aspects of the US Croatia tax treaty. Notably Treasury’s announcement fails to comment on the inclusion of the enhanced “saving clausewhich is identical to the following provision in the 2016 US Model tax treaty.

4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.

5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 3 of Article 7 (Business Profits), paragraph 2 of Article 9 (Associated Enterprises), paragraph 7 of Article 13 (Gains), subparagraph (b) of paragraph 1, paragraphs 2, 3 and 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support), paragraph 3 of Article 18 (Contributions to Pension Funds), and Articles 23 (Relief From Double Taxation), 24 (Non-Discrimination) and 25 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under paragraph 1 of Article 18 (Contributions to Pension Funds), and Articles 19 (Government Service), 20 (Students and Trainees) and 27 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that Contracting State.

This represents a significant expansion of the “saving clause” to allow the US to impose US taxation NOT only on its” residents (as determined under Article 4 (Resident)) and its citizens” but also on “a former citizen or former long-term resident” which may are permitted to be subjected to any relevant future provisions of the Internal Revenue Code.

From the perspective of Croatia, the “saving clause” found in Paragraph 4 of Article 1 means:

4. Except to the extent provided in paragraph 5 of this Article, this Treaty shall not affect the taxation by the United States of its residents (as determined under Article 4 (Resident)) and residents of Croatia who happen to be US citizens. Notwithstanding the other provisions of this Convention, a former US citizen or former long-term US Green Card holder who is a resident of Croatia may be taxed by the United States according to the Internal Revenue Code.

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

Prologue

The rules of taxation should follow changes in society. The ordering of society should NOT be hampered by the rules of taxation!

As the world has become more digital, companies can carry on business from any location. Individuals have become more mobile. Multiple citizenships, factual residences and legal tax residencies are not unusual. It has become clear that the rules of international tax as reflected in tax treaties (as they apply to both corporations and individuals) are in need of reform.

The purpose of this post is to identify two specific areas where US tax treaties are rooted in the world as it was one hundred years ago and NOT as it is today.

First: The “Permanent Establishment” clause found in US and OECD tax treaties

Second: US Citizenship-based taxation which the US exports to other countries through the “saving clause” found in almost all US tax treaties

Each of these will be considered.

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German tax authorities reported to be imposing German taxation on US military personnel stationed in Germany

Prologue

This post draws heavily from the reporting of John VanDiver who has written a number of articles in Stripes. His most recent article is here:

“You don’t want to be chased and harassed by a government office. It is scary,” said Melissa Howell, the spouse of a U.S. soldier who is being targeted by a tax office in Germany’s Landstuhl area. “I don’t know how they expect people to come up with that money.”

Howell, a German who lives with her American husband and children, said she ran into trouble in June when she went to file her taxes at the local finance office.

She said she was interrogated about her husband and told to fill out a questionnaire that probed information about his employment.

She then received a letter ordering her to hand over her husband’s W-2 and other tax forms.

“I did it because I didn’t know. I found out that

was a mistake,” she said.

After that, she got a phone call from the tax office, saying that their case was getting handed over to a case manager who handles “American-German couples.”

As reported by John VanDiver in Stripes – July 27, 2020 – ‘Harassed’ by German tax offices, more US military families face financial threats

Certain US Soldiers In Germany Targeted By German Tax Authorities For Taxes On Their Military Wages – Reminiscent Of The “Oh My God Moment

Many Americans abroad have experienced the “Oh My God Moment.” This is the moment that they learn that they are targeted by the USA – a country that they don’t live in – for taxes on their non-US source income. Well, it appears that for some, the shoe is now on the other foot. Germany is apparently targeting certain US soldiers – stationed in Germany – for taxes on their US military pay! The US claim is NOT based on any connection with the United States (other than circumstances of birth). At least (to its credit), Germany’s claim is based on a connection to Germany that makes these US soldiers “tax residents” of Germany. Therefore, the “moment” may be the same. But, the justification for taxation is not he same. To put it simply: Germany is claiming that when the circumstances of a US soldier’s stay in Germany ceases to be “solely” for military service AND their factual circumstances meet the test for tax residency in Germany, they are are subject to German taxation.

Analysis

In an ongoing story, that is certain to be of interest to Americans abroad, Germany has begun treating certain US Military Personnel as tax residents of Germany. In other words, Germany is imposing tax (and apparently penalties) on the income earned by US military personnel stationed in Germany. The starting point is that US Forces in Germany (and other countries) are governed by the SOFA (“Status Of Forces Agreement”) agreement. Among other things, the SOFA agreement exempts US service personnel from being treated as tax residents of the country where they are serving. In simple terms: As long as the individual serviceman meets the conditions in the SOFA agreement, he/she would NOT be treated as a tax resident of Germany.

The provisions of the NATO SOFA are unremarkable. What is remarkable is that Germany appears to be the first country, to determine that certain US Military Personnel, are not entitled to use SOFA as a “shield” against being treated as a tax resident and therefore subject to taxation.

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Of all the different kinds of residency, the one that matters most is your “tax residency”

Introduction

In a world of information exchange (FATCA and CRS), fiscally challenged governments (United States and other Western Democracies) and expanding notions of taxation (GILTI, France Digital Tax, etc.), your “tax residency” matters. In fact, in the 21st Century the most interesting thing about a person is his tax residency (or residencies).

At the same time, we are living in a world of increased Global Mobility. There are more and more opportunities for residency and citizenship. As people and capital have become more global, tax authorities have worried more and more about how human migration impacts their their tax bases. For example, people are severing tax residency with high tax states like New York and California. The level of (and form) of taxation impacts investment and migration decisions.

Taxation matters. Tax residency matters. People must keep track of both their “citizenship” and “tax residency” portfolios. It’s important to understand how the concepts of “citizenship”, “nationality”, “domicile”, “deemed residency”, “actual residency” and “tax residency” relate.

I recently came across the following article that explores these concepts. Please note that the article uses the term “fiscal residency” as synonymous with “tax residency”.

The following post was authored by Marios S. Kalochoritis, Managing Partner of Loggerhead Partners. We are reproducing this with the full permission of Loggerhead Partners.

Loggerhead Partners is a provider of “multi-family office” services including, estate planning, transaction advisory, corporate structuring and tax planning.

Loggerhead Corporate Services is the Dubai-based specialized entity of Loggerhead Partners that optimizes tax and preserves the wealth of its clients, through tailor-made, corporate structuring solutions with a focus in the UAE

Enjoy …

John Richardson – Follow me on Twitter

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