Category Archives: U.S. taxation Americans abroad

The Internal Revenue Code does NOT explicitly define "citizen", "citizenship" or require "citizenship-based taxation"

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It is widely understood that the United States Internal Revenue Code requires that “U.S. citizens” are subject to U.S. taxation wherever they may live in the world. Although this is true, Subtitle A (Income Taxes) of the Internal Revenue Code:

  1. Does NOT explicitly say that U.S. citizens are subject to U.S. taxation on their world income wherever they reside; and
  2. Does NOT explicitly define the term “citizen” or “U.S. citizen”. (This contrasts with the the terms: “U.S. Person”, “Permanent Resident”, “Substantial presence”, etc. that ARE explicitly defined in the Internal Revenue Code here and here. This means that the starting point for the definition of “U.S. citizen” is in the 14th Amendment of the Constitution and the United States Immigration and Nationality Act.

(Interestingly it appears that only the “Estate Tax” provisions in Subtitle B of the Internal Revenue Code (Internal Revenue Code S. 2001) specifically impose tax liability on the “taxable estate of every decedent who is a citizen or resident of the United States”.)
Some thoughts on each of these points …
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Forms required by #Americansabroad 101 – The Explanation

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The above tweet references a comment that I left on a medium.com post written by Rachel Heller titled “Why I renounced my US citizenship” (Hint: It’s not because I’m avoiding taxes!“.
The article was well written, interesting and attracted responses from Homeland Americans. (It was reproduced here and attracted even more comments.) The comments from U.S. residents demonstrated again that they do NOT understand the problems experienced by Americans abroad. Although Rachel DID mention the problem of “forms” as a contributing factor to her renunciation, at least one comment – ” indicated “disbelief” that “forms” could be a contributing factor to the renunciation of U.S. citizenship.


It is clear that this person, well intentioned as he/she may be simply does NOT understand what forms mean in the lives of Americans abroad. It’s as though he/she thinks that filling out a form is akin to completing a customer satisfaction survey.
As I result, I wrote a reply in the hopes of inviting him/her to understand what forms really mean in the lives of Americans abroad. (This post is a modified version of that “reply”.)
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Obama budget: "Dual citizens from birth" who are NOT "US residents" should be taxed as non-residents

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“It’s unjust, it’s inhumane, I didn’t choose where I was born!”
This accurately describes the sentiments of those who are the target of FATCA Hunt. “Place Of Birth Taxation” is unfair to ALL those it affects. The most visible and egregious example of the unfairness is it’s application to “Accidental Americans“.
The context just imagine …
Imagine having been born in the United States, never having lived in the United States and then being “captured in FATCA Hunt”. It appears that the Obama administration has realized that the most visible unfairness of “place of birth” taxation is the application to Accidental Americans.
As a result, both the 2016 and 2017 Obama budget proposals have contained provisions to allow “Accidental Americans” to relinquish U.S. citizenship without being subject to the S. 877A Exit Tax or without having to certify U.S. tax compliance with respect to worldwide income. Those who qualify would be required to certify U.S. tax compliance on the basis that they were/are subject to the U.S. tax system as “non-resident aliens”. This raises the twin questions of:
1. Who is a “non-resident” alien? – See Internal Revenue Code S. 7701(b); and
2. How is a “non-resident” alien taxed? – See Internal Revenue Code S. 2(d) and S. 871.
I wrote a detailed post, referenced by the following tweet, about this issue in 2015.


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Physical presence as a necessary condition for being a US "resident" under the Internal Revenue Code

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Introduction

Every country in the world with the exceptions of Eritrea and the United States claim tax jurisdiction based on “residence”. Although the tests for “residence” may differ, “residence based taxation” means that it is possible to sever your tax connection to a country by severing residence.

The nations of Eritrea and the United States impose taxation based on citizenship. U.S. citizens (primarily those “Born In The USA”) can NEVER sever their tax connection to the United States as long as they remain citizens. When it comes to U.S. citizenship-based taxation it is possible to NEVER have lived in the United States and still be subject to taxation!

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US Passport application links Citizenship (State Dept) to Taxation (Treasury) to enforce "Taxation based Citizenship"

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Yesterday I was forwarded an email which originated from the U.S. Consulate in Toronto. The purpose of the email (included at the end of this post) was to give notice of  U.S. tax obligations for U.S. citizens living outside the United States. In other words, the State Department is assisting the IRS by notifying Americans abroad of their U.S. tax filing obligations. Put another way, this email represents:
“Tax Education Outreach” from the IRS delivered by the State Department”
I do NOT recall this in previous years. That said, this email notification is extremely significant. It means that the IRS can argue that those who received this email may well have had notice that they were required to file U.S. tax returns. Over time, this will increase awareness of U.S. tax filing obligations. The greater the increase in awareness of U.S. tax filing obligations, the harder it will be to claim ignorance of those obligations. (This is in addition to the “Educational Outreach” coming in the form of FATCA letters from your local bank and your friendly journalists. In both cases, you are being asked to consider the question of: “Are you or have you even been an American citizen?“) Although, this is NOT an immediate problem, it seems logical that sooner or later it will become more difficult for Americans abroad to claim ignorance of their U.S. tax filing obligations. This may have implications for coming into U.S. tax compliance.
 
Q. Who would have received this email from the U.S. consulate?
A. Anybody who is on the U.S. Consulate email list.
Q. Who would be on the U.S. Consulate email list?
A. It would include almost anybody who has applied for a U.S. passport.
To put it simply:
One who applies for a U.S. passport is now putting oneself in a position where one will be told about U.S. tax filing obligations. Since most Americans abroad need a U.S. passport, it stands to reason that those who apply for a U.S. passport are creating a situation where they will be told about U.S. “taxation based citizenship”. You can see where this is going.
This appears to be the next step in the progression that includes …
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"The long history of Americans fleeing to Canada for refuge"

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“My advice would be to research it very carefully,” Citizenship Lawyer John Richardson said. “If the whole idea is to somehow escape America, to be clear as an American citizen in Canada, you’re legally required to have more contact with the U.S. government while you’re living in Canada than you would if you were still living in the United States.”

Read more: http://www.cctv-america.com/2016/03/10/obama-trudeau-target-methane-emissions-in-new-agreement#ixzz42emdSIYKWatch us live anywhere at http://www.cctvamericalive.com

Even in “retirement” Jackie Bugnion writes the best arguments against citizenship taxation ever

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This article originally appeared on the Alliance For The Defence Of Canadian Sovereignty blog.

Introducing Jackie Bugnion …

Jackie Bugnion has published a superb article describing the problems of U.S. citizenship taxation and why the United States must move to residence based taxation. Before, describing her article, for those who don’t know …
On May 7, 2015 I received notification that Jackie Bugnion had submitted her resignation to the Board of ACA “American Citizens Abroad“. I read the notification with a combination of sadness and total appreciation for the incredible efforts that Jackie has made in advocating for the rights of Americans Abroad. Jackie was largely responsible for organizing the “Citizenship Taxation Conference” (featuring the debate between Michael Kirsch and Bernard Schneider) that took place in Toronto on May 2, 2014. Some of you may have had the privilege of meeting her there. It’s unlikely that she could be replaced by any one individual.
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Part 2: "What God Hath Wrought" – Interpreting the IGA: Definitions incorporated by reference reveal the true intent of the FATCA IGA

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Introduction – Updated April 4, 2016

The above tweet references a comment posted at iPolitics.ca

Thanks to Elizabeth Thompson for her continued coverage of the FATCA Chronicles.
Her article contains the following statement from the Minister of National Revenue:
“Minister Lebouthillier wants to reassure Canadians that all exchanges of information are subject to strict confidentiality rules,” reads the e-mail sent by Lebouthillier’s office.

“The CRA ensures that tax cooperation with its foreign partners is done in a manner fully consistent with privacy rights in Canada. It is important to note that Canada and the United States have a long history of exchanging tax information in a fair and responsible manner, going back to 1942.”

Whether the Minister believes what she says or not, FATCA supporters in the United States have made it clear that the use of information obtained pursuant to FATCA, should NOT to be used only for tax purposes. Since this post references, Liberal Leader Justin Trudeau’s letter to Lynne Swanson, I will reference you to a blog post written by Lynne Swanson which appears on her Maplesandbox.ca blog at:

http://maplesandbox.ca/2013/ca…

Ms. Swanson’s post references a 2012 letter written by the then U.S. Senator Carl Levin.
The letter from Senator Levin includes:

“Although FATCA is structured to address offshore tax abuse, offshore account information has significance far beyond the tax context, affecting cases involving money laundering, drug trafficking, terrorist financing, acts of corruption, financial fraud, and many other legal violations and crimes. Given the importance of offshore account disclosures, FATCA guidance and implementing rule should create account FATCA forms that are not designated as tax return information but, like FBARs, may be provided to law enforcement, regulatory, and national security communities upon request. FFIs are not, after all, U.S. taxpayers, and will not be supplying tax information on behalf of their U.S. clients; they will instead be providing information about accounts opened by U.S. persons. The U.S. Supreme Court has long held that bank account information is not inherently confidential but is subject to inspection by law enforcement and others in appropriate circumstances. Foreign account information is too important to a wide range of civil and criminal law enforcement and national security efforts to be designated as tax return information bound by Section 6103’s severe restrictions on access.”

You can read the letter yourself here:

CarlLevin

http://bsmlegal.com/PDFs/CarlL…

Ms. Swanson concludes her post by asking the obvious question:

“Why bother with a warrant or surveillance when you can simply declare someone a “US person” and FATCA them?!?”

In Part 1 I described how the FATCA IGA is being applied to a U.K. PTA. My next post will continue the discussion of “Entities”. That said, this series of posts is about how the FATCA IGA works and how it may be interpreted. This post will focus on how some of the definitions in the FATCA IGA are found NOT in the IGA but in other sources.

This post will also explain how the clear definitions  in the IGA (incorporation by reference from other sources) makes it clear that the purpose of the IGA is to extend beyond taxation. The IGA is supposedly justified as an extension to the Canada U.S. Tax Treaty which is found here.

Article XXVII of the Treaty reads as follows:

Article XXVII

Exchange of Information

1. The competent authorities of the Contracting States shall exchange such information as is relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which the Convention applies insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Article I (Personal Scope). Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the taxation laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the administration and enforcement in respect of, or the determination of appeals in relation to the taxes to which the Convention applies or, notwithstanding paragraph 4, in relation to taxes imposed by a political subdivision or local authority of a Contracting State that are substantially similar to the taxes covered by the Convention under Article II (Taxes Covered). Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. The competent authorities may release to an arbitration board established pursuant to paragraph 6 of Article XXVI (Mutual Agreement Procedure) such information as is necessary for carrying out the arbitration procedure; the members of the arbitration board shall be subject to the limitations on disclosure described in this Article.

To put it simply:

  1. The clear terms of the U.S. Canada Tax Treaty make it clear that the treaty is about taxation.
  2. The clear terms of the U.S. Canada IGA make it clear that it is about much more than taxation.

Yet, the Governments of both Canada and the United States claim that the IGA is justified as an extension of the tax treaty.

Introduction …

So much has been written about FATCA IGAs that few people consider the original FATCA legislation. The IGAs seem to have taken on a life of their own. As a reminder, the original FATCA legislation may be found in S. 1471 to S. 1474 of the Internal Revenue Code.

The title is: “TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS”.

Much has written about the reason for the FATCA IGAs. Much has written about the role that the Canadian banks played in lobbying for the FATCA IGAs. Much has written about the Canadian laws that have been changed to comply with the FATCA IGAs.

Very little has been written about how to interpret the IGAs. It is assumed that the FATCA IGAs are to facilitate the intent of FATCA as expressed in S. 1471 to S. 1474 of the Internal Revenue Code. A perusal of the definitions section of the Canada U.S. FATCA IGA suggests that this may not be true.

This post is to highlight certain definitions found in the IGA that are incorporated by reference from other sources. I believe that the passage of time will demonstrate how important these “incorporations by reference” are.

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Distributions from Canadian RRSPs are subject to #Obamacare surtax while distributions from US plans exempt

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Yes, you read right.

By way of background, Obamacare was financed in part by the 3.8% Net Investment Income Tax (“NIIT”). At the risk of oversimplification, this is a tax on passive income. What those Canadians who are also “U.S. persons” need to know includes:

1. The NIIT is an instance of pure double taxation. It is believed by most practitioners that this tax CANNOT be offset by the usual foreign tax credit rules. (But, then again – maybe the NIIT is really a Social Security Tax and therefore NOT payable under the Canada U.S. Social Security Totalization Agreement.)

2. Assuming that the NIIT is NOT a “Social Security Tax”: As is described in the following article by Toronto tax lawyer Sunita Dooby, distributions from Canadian RRSPs and RRIFs ARE subject to the NIIT. That said, comparable U.S. plans (401K and IRAs) are NOT subject to this tax.

In summary Ms. Doobay notes that:

Qualified pension plans are NIIT­ exempt under Code section 1411(c) (5), which exempts any distribution from a qualified plan and arrangement set out in Code section 401(a). RRSPs and RRIFs are not qualified plans or arrangements for these purposes.

Ms. Doobay’s article is referenced in the above tweet.

So, what does this mean? Well, Canadians are required to pay for the Health Care of Americans when similarly situated Americans are not required to pay for their health care.

While I’m at it, here is another interesting article from Ms. Doobay referenced in the following tweet:

Talk about freeloading and extracting capital from other nations …

Prologue: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – #Americansabroad and forced renunciation of US citizenship

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U.S. Citizenship Abroad in a FATCA and FBAR World

FATCA has inflicted pain on the world. The pain has been most acutely felt by those with a U.S. place of birth. The following report is shocking in its brutality.


Listen to the pain and anguish of the woman interviewed who can’t have a bank account simply because she is a “U.S. person”. Listen to the language she uses. Jen is proud to be an American, feels that she is being forced to renounce U.S. citizenship, and considers the current U.S. government to be a “bunch of extortionists”. She is clearly suffering extreme pain and anguish. Listen to the French citizen and resident, who doesn’t speak English and is claimed by the United States to be a “U.S. person”. Then listen to the unnamed “Voice of the Obama Administration”, which says:

“The U.S. Treasury Department has worked tirelessly to address many of these problems and most have been resolved. All you have to do is look to see how many countries have agreed to the law and how many financial institutions have signed on to the law.”

Clearly the voice of the Obama administration is either a liar or is delusional.

How we got there – A brief backgrounder on “how many countries have agreed to the law and how many financial institutions have signed on to the law”

FATCAHunt2
As you know the U.S. Government is hunting for those they consider to be “U.S. persons”. The hunt is taking place outside the United States. The hunt is intended to identify the residents and citizens of other nations that the U.S. chooses to define as “U.S. persons”. The vast majority of those deemed to be “U.S. persons”, are deemed so because they were born in the United States. To put it simply: The United States exercises taxing jurisdiction based on reasons that include “place of birth”. The fact that somebody is a citizen and resident of another nation is irrelevant. If you were born in the United States, then you are subject to U.S. law and control wherever you may reside. The only defense is to have “relinquished U.S. citizenship”. Relinquishment is a broad term that includes “renunciation”. President Obama promised “change you can believe in”. President Obama delivered. The most enduring legacy of the Obama presidency will be that he has made a “Certificate of Loss of U.S. Nationality” (“CLN”) the most sought after document in the world today.
Furthermore, the United States and the United States alone decides who is a U.S. citizen.
See comments about the BBC Interview here and here.
Some of the interesting comments include:

Great job Keith. Hearing Jen (?) speak was very powerful. Even with understanding what is going on with this mess, to hear her speak just opened the wound a little wider if possible.
How they cannot see how absolutely disgusting CBT/FATCA is and how “exceptionally” abusive they are I will never understand. This mess has taught me what hatred feels like, something I could have well lived without.

and

Made my blood pressure boil hearing Treasury quoted as saying the rest of the world wants FATCA – Mythster Stack is a &%#*}#!!!!

and

Giving up US citizenship is not an alternative. It is a last resort solution. Cutting off one’s arm to escape the trap. One doesn’t get rid of a problem by getting rid of the victims of the problem. The only real solution to this problem is for the US to adopt residence as a standard for taxation, the same as every other country in the world. Only then will non-resident US citizens be placed on an equal footing with other non-resident citizens from other countries and no longer have to suffer the consequences of discrimination.