Category Archives: U.S. tax treaties

Americans Abroad Aren’t Denouncing Because They Want To. They Are Renouncing Because They Feel They Have To

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Introduction/background:

Denunciation of U.S. Citizenship – From the perspective from a U.S. Senator

Renunciation of U.S. Citizenship – From the perspective of a U.S. journalist

It’s hard to have a discussion about why Americans abroad are renouncing U.S. citizenship. There are many different perspectives about renunciation. There is very little “shared reality”. Tax academics (who have the resources to know better), “pensioned intellectuals”, politicians and most journalists see this from a “U.S. resident perspective”. They don’t understand the reality of the lives of Americans abroad. But, Americans abroad are NOT a monolith. The ONLY thing they have in common is that they live outside the United States. Their circumstances vary widely. There is little “shared reality” among Americans abroad of what the issues are. AT the risk of oversimplification, I have attempted to divide “Americans abroad” into four categories (as defined below). The categorization will explain why different groups of “Americans abroad” experience the U.S. extra-territorial tax regime differently.

Hint: Americans abroad aren’t renouncing U.S. citizenship because they want to. They are renouncing U.S. citizenship because they feel they have to.

Politicians, tax academics, “pensioned intellectuals” and many journalists deal in the world of opinions. The opinions they hold are often “myths”. They are not “facts”. They are entitled to their opinions (as misguided and ignorant as they may be). They are NOT entitled to their “facts”.

This post is to describe the facts about how the extra-territorial application of the Internal Revenue Code and the Bank Secrecy Act pressure many Americans abroad to renounce U.S. citizenship. Interestingly a large percentage of those renouncing owe ZERO taxes to the U.S. government. They renounce anyway!

First, a bit of background to the problem – what is the problem and who is affected?

They do NOT meet the test of being “nonresident aliens” under the Internal Revenue Code

As SEAT cofounder, Dr. Laura Snyder explains, in the first of her 16 “working papers” describing the problems of Americans abroad:

The people most affected by the U.S. extraterritorial tax system are not a monolithic group. Some left the United States recently, some left years or decades ago. Some left as adults (some young, some middle-aged, and some retirees), while others left as children (with their families), and some have never lived in the United States (they are U.S. citizens by virtue of the U.S. citizenship of at least one parent). Some intend to live in the United States (again) in the near or distant future, while others do not intend to ever live in the United States (again). Some identify as Americans while others do not. Many are also citizens of the country where they live (dual citizens) while others hold triple or even quadruple citizenships. In referring to this group, there is no one term that sufficiently reflects its full diversity. What unites them is that they do not meet the test of “nonresident alien” under the Internal Revenue Code. Depending upon the context, this series of papers will use terms such as “persons,” “individuals,” “affected individuals,” and “overseas Americans.” The latter term has a drawback, however: it emphasizes connections to the United States while minimizing the important connections that such persons have to the countries and communities where they live.

That said, what divides Americans abroad may be greater than what unites Americans abroad!

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

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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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How U.S. Citizenship Tax, The Treaty “Saving Clause” and FATCA Create A Fiscal Prison For Dual Tax Residents

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Introduction – The Problem Of Dual Tax Residency For U.S. Citizens

A “Hell greater than the sum of the parts”

There are people in the world who really don’t understand (or say they don’t) what exactly is the problem with U.S. citizenship based taxation. They claim to not understand why defining “tax residency” based on the “circumstances of birth” rather than the “circumstances of life” is a problem. They fail to consider how taxation based on “circumstances of birth”, interacts with U.S. tax treaties and FATCA to create a “hell that is greater than the sum of the parts”.

This is the third post in a series designed to explore and facilitate the understanding of the U.S. “citizenship based” extra-territorial tax regime. The first post explored the practical meaning of U.S. citizenship-based taxation (it’s primary effects are on people who live outside the U.S.). The second post explored the fact that tax residency based on “citizenship” is tax residency based on the “circumstances of one’s birth” rather than the “circumstances of one’s life” (its effects are primarily based on the circumstance of birth in the U.S.). The conclusion drawn from these first two posts was that the U.S. citizenship based extra-territorial tax regime is one in which:

The circumstance of a U.S. birthplace is used as a justification to regulate the lives of people with no connection to the United States and impose U.S. taxation on income that has no connection to the United States and is received by someone who does not live in the United States.

Citizenship taxation has practical and contextual meaning only its application to tax residents of non-US countries. The U.S. uses the circumstance of a “U.S. birthplace” to reach out and “claim” the tax residents of other countries as U.S. “tax residents”.

The purpose of this post is to explain how the interaction of U.S. citizenship taxation (claiming those with a U.S. birth place as U.S. tax residents when they are tax residents of other countries), the “saving clause” (not allowing U.S. citizens with dual tax residency to assign tax residency to the country where they actually live) and FATCA (the tool to hunt, find and enforce the extraterritorial U.S. tax and regulatory regime on the residents of other countries) creates a whole hell greater than the sum of the parts.

Many people understand the three components of “citizenship taxation”, the “saving clause” and “FATCA” as separate entities. Few appear to understand how those three components interact together to destroy the lives of U.S. citizens with dual tax residency. The U.S. has created a “fiscal prison” for its citizens. Seven video accounts of the impact of the U.S. citizenship tax regime are available here.

This problem can be solved ONLY by the United States redefining its rules for “tax residency” so that “citizenship” (the circumstances of one’s birth”) is not relevant to “tax residency” (the circumstances of one’s life).

This post is to identify the component “Part”(s) of the problem. It is organized in “Sections” and “Parts” as follows:

Section I – How The Problem Was Created

Part A – Tax, Residency and Tax Residency
Part B – The general problem of dual tax residency
Part C – Introducing the treaty tie break and how it can be used to end “dual tax residency” under a relevant Canadian tax treaty”
Part D – The general principles of the U.S. Canada “tax treaty tie break – How “circumstances of life” are used to assign tax residency
Part E – Food for thought – Citizenship the least important factor for the treaty tie break
Part F – Two possible examples of assigning residence to one country by using the “treaty tie break” – Green Card Edition
Part G – U.S. Citizens CANNOT Benefit From The “Tax Treaty Tie Break” – Hello “Saving Clause”
Part H – The “Saving Clause” And The Inability For U.S. Citizens To Use The “Treaty Tie Break” Is How The United States Captures The Residents Of The Treaty Partner Country And Claims Them As U.S. Tax Residents
Part I – The Tax Treaty Tie Break And Implications For U.S. Tax Compliance And For FATCA And The CRS Reporting

Section II – How Dual Tax Residents Experience The Extraterritorial Tax Regime

Part J – The U.S. exports a more punitive from of taxation to tax residents of other countries
Part K – The Problem Of Investing, Retirement planning and Retirement Planning – The Punitive Taxation And Reporting Requirements of PFICs and Foreign Trusts
Part L – The Problem Of Non-U.S. Pensions – How Are They Treated Under The Internal Revenue Code? – Different Rules For Different Countries
Part M – Discouraging U.S. Small Business Abroad – The Treatment Of Small Business Corporations Generally And On A Country By Country Basis
Part N – The “FBAR Marriage”: How Marriage To An Alien Results In Higher Taxation, More Reporting, Difficulties With Asset Transfers, Higher Divorce Costs And Possibly A Requirement To File A Tax Return With As Little As $5 Of Income

Section III – How The U.S. Extraterritorial Tax Regime Attacks The Sovereignty Of Other Countries

Part O – The U.S. taxation of residents of other countries attacks and erodes the tax base of those other countries

Section IV – Solving The Problem: Regulatory And Legislative Solutions

Part P – Regulatory Solution: “A Regulatory Fix For Citizenship Taxation
Part Q – Regulatory Solution: Amending The “Saving Clause” In U.S. Tax Treaties
Part R – Territorial Taxation For U.S. Citizen Individuals
Part S – Redefining U.S. Tax Residency To Move To Residence-based Taxation”

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

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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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Some US Citizens And Green Card Holders Resident In Belgium Are Excluded From Benefits Under The Tax Treaty Available To US Citizen Residents

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Prologue

I was recently alerted to a provision in the US Belgium Tax Treaty (a similar but not identical provision also appears in the US UK Tax Treaty – which I have explored in this earlier post.). Normally all US Citizens and Green Card holders are defined as “US Residents” under US tax treaties. The US Belgium Tax Treaty (and the US Uk Tax Treaty) contain an interesting exception to the general principle that US citizens and Green Card holders are “US Residents” under the Tax Treaty. Think of it as a “residency carve out”. The purpose of this post is to describe this “carve out” and explore the (some) practical implications of what this means. Interestingly it is one more example of how the US tax treatment of Americans abroad depends on their country of residence.

Just when you think the US tax treatment of Americans abroad couldn’t be worse, the US never ceases to amaze. Seriously, this is the tax treaty version of “Shock and Awe”! It demonstrates that any general discussion about tax treaties is, well just “general”. One must always understand the specific provisions of the specific treaty. Before, anybody gets overly upset, no need to worry. Even those US citizens who do get the benefits of the US Belgium tax treaty don’t (because of the “saving clause”) get much. Nevertheless, the US Belgium Tax Treaty affords a good opportunity to read tax treaties carefully. It also provides a good reminder that the “saving clause” excludes US citizens from most benefits of the tax treaty (even when US citizens meet the residency requirements of the treaty). Finally, this analysis reinforces how carefully tax treaties must be read. Does a provision talk about “citizens”, “nationals”, “residents” …?

The Readers Digest Version Of This Post

US citizens and Green Card holders are US tax residents wherever they live in the world. Most US tax treaties define citizens and Green Card holders as US tax residents. Yet, there are some treaties that “may” not define “US Persons Abroad” as “residents of the United States”. The treaties that “may not” define Green Card holders and citizens as “residents of the United States” include Belgium and the UK. It appears that Green Card holders are the biggest losers. That said, the Belgium and UK tax treaties demonstrate that “US Persons Abroad” may receive fewer tax treaty benefits than resident Americans. Significantly this means that there are certain US tax treaties that actually discriminate against US citizens and Green Card Holders who live outside the United States without a residential nexus to the United States.

Although perhaps enacted without considering the impact on “US Persons Abroad”, this demonstrates (yet again) how attempts to curb certain abuses create negative consequences for Americans abroad because and only because of citizenship taxation. We have seen these consequences in conjunction with the 877A Exit tax rules, the PFIC rules, Subpart F, the Transition Tax, GILTI and now “treaty shopping”.

Surely, this is one more example of the clear principle that US citizens abroad are subjected to a more punitive tax system than resident Americans.

It is absolutely essential that the United States end citizenship taxation and transition to residency based taxation that completely severs US citizenship from US tax residency..

For those who want to better understand this …

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The Competent Authorities Should Agree That the Canadian TFSA Has The Same Treaty Status As The US Roth IRA

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2018 Prologue

In 2018 I wrote a post arguing that it is reasonable to conclude that the text of the Canada US Tax Treaty should be interpreted to mean that a Canadian TFSA is – like a US ROTH IRA – a pension within the meaning of the Canada US Tax Treaty. The 2018 post was arguing for equal treatment without the intervention of the respective Canadian and American Competent Authorities.

The Punitive Taxation Of US Citizens Living Outside The United States Continues

I have previously and repeatedly made the point that:

The United States imposes a separate and more punitive system of taxation on US citizens living outside the United States than on US citizens living in the United States.

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Eroding the tax base of other countries by imposing direct US taxation on the residents of those countries

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This is the fourth of a series of posts about international tax reform generally and how FATCA, CRS, citizenship-based taxation, GILTI, etc. work together.

The first three posts were:

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

The Pandora Papers, FATCA, CRS And How They Have Combined To Create Tax Haven USA

How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries

This fourth post continues where the third post – How The World Should Respond To The US FATCA Driven Attack On The Tax Base Of Other Countries – left off. That post described in a general way that FATCA facilitated the US taxation of residents of other countries. The purpose of this post is to give a small number of important examples. To repeat:

The imposition of FATCA on other countries means that …

The United States has effectively expanded its tax base into other countries by claiming residents of other countries as US tax residents. This is a direct attack on and the erosion of the tax base of those other countries.

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

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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

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

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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.