Tag Archives: Americans abroad

The United States imposes a separate and more punitive tax system on US dual citizens who live in their country of second citizenship

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Prologue

Do you recognise yourself?

You are unable to properly plan for your retirement. Many of you with retirement assets are having them confiscated (at this very moment) courtesy of the Sec. 965 transition tax. You are subjected to reporting requirements that presume you are a criminal. Yet your only crime was having been born in America (something you didn’t even choose) and attempting to live as a U.S. tax compliant American outside the United States. Your comments to my recent article at Tax Connections reflect and register your conviction that you should not be subjected to the extra-territorial application of the Internal Revenue Code – when you don’t live in the United States.

The Internal Revenue Code: You can’t leave home without it!

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Part 21 – @ACAVoice makes presentation at October 22/18 IRS @USTransitionTax hearing – argues both that Regulatory Flexibility Act should apply and/or that de minimis rule be created

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Introduction


This is Part 21 of my series of posts about the Section 965 transition tax.
The Section 965 “Transition Tax” saga continues. Americans abroad may have political differences. They may have philosophical differences. They may live in different countries with different tax treaties. But, opposition to the Section 965 Transition Tax and GILTI appear to have unified all Americans abroad.


To put it simply: The application of the Section 965 transition tax to the small businesses operated by Americans Abroad is the most unjust, most punitive, most egregious and most unjustified piece of legislation over to come from the Homeland (assuming – which I doubt – that it was every intended to apply to Americans abroad in the first place). Significantly, the transition tax is a benefit to Homeland Americans but can confiscate the retirement plans of Americans abroad. In other words, the transition tax is one more punishment that America is meting out to its citizens who dare to leave the United States.
Boldly Go, where no fictitious tax event has gone before …
The transition tax is also a direct attack on the tax base of the countries where Americans abroad live. To put it simply: the transition tax is a fictional tax event, that allows the United States to take a preemptive tax strike against the tax base of other countries. By so doing, the transition tax allows the United States to siphon tax revenue from other countries, that it could never siphon before. (Well, the S. 877A Exit Tax rules also create a fictitious tax event that allows the United States to siphon capital from other countries.) The impact of the transition tax on Canadian residents (who are also U.S. citizens) has been explored in CBC reporter Elizabeth Thompson’s series of posts about the transition tax.
The Transition Tax when applied to Americans abroad is:

The retroactive taxation of undistributed earnings of a non-US corporation, based on NO event that generates taxable income, which almost certainly subjects Americans abroad to double taxation.

The parts I have bolded provide arguments for why the “transition tax” violates numerous tax treaties.
In Part 20 I explored the arguments for why/how the Treasury Regulations are not compatible with the Regulatory Flexibility Act. Part 20 included a discussion of the arguments made by ACA for why the Regulatory Flexibility Act should apply to the regulations.
In Part 21 (this post), I am highlighting the submission of American Citizens Abroad (ACA), who argues IN ADDITION (this is a no brainer) that there should be a threshold level of undistributed earnings before the Section 965 confiscation can apply – period.
Thanks to ACA (“American Citizens Abroad”) for taking the time to organize these arguments and present them at the October 22, 2018 IRS hearing on the “transition tax”.
What follows is the email I received from ACA – I strongly suggest that you follow the links. ACA has done a superb job of demonstrating how the Treasury can exempt Americans abroad from this particularly draconian and confiscatory piece of legislation.
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As Sir John Templeton said: The best time to invest is when you have the money – The 7 Habits Of Highly Effective #Americansabroad

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The late Sir John Templeton pioneered the concept of “international” investing. Of course, by the standards of today, this would be considered “offshore investing”. He also pioneered the concept of “renouncing U.S. citizenship“. It is clear that Sir John’s renunciation of U.S. citizenship was the best investment decision he ever made. Like many Americans who are forced to renounce U.S. citizenship to create business opportunities, Sir John likely renounced to save his mutual fund business.

Sir John was fond of saying:

“The best time to invest is when you have money.”

Of course, that is a more difficult concept for Americans abroad. (The problem is particularly acute in Australia where it is believed that the Australian Superannuation may be subject to U.S. taxation.) Time after time, in country after country, I speak with people who avoid investing because they are Americans abroad. This is a great mistake.

It’s important for Americans abroad to heed the teaching of Sir John Templeton. They must (1) learn to invest when they have the money and (2) discipline themselves to acquire the money to invest!

One of my most consistently read posts is “The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians“.

I have been meaning to write a “follow up” post for a long time. Perhaps, the message was too simple. Perhaps it is only worth a tweet. Perhaps it’s dangerous to expand such a simple thought into multiple paragraphs, but here goes …

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If you want to be a shareholder in our Canadian business then you must renounce U.S. citizenship

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The unified message from all should be that: The United States should stop imposing “worldwide taxation” on people who have “tax residency” in other countries and do NOT live in the United States! This is a message that all advocates of tax reform can support. As recently explained in a post from “ACA”, the mechanism (RBT vs TTFI) used to achieve this change is less important.


It is no secret that Congressman George Holding is working on a proposal to end the U.S. practice of imposing “worldwide taxation” on those who have “tax residency” in other countries. If successful, this would be a positive change for the United States, U.S. citizens who choose to live outside the United States and the residents of other (including “accidental Americans”) countries. None of these should be burdened by the extra-territorial application of U.S. tax laws!
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Part 5: Responding to the Sec. 965 “transition tax”: Shades of #OVDP! April 15/18 is your last, best chance to comply!

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Introduction
This is the fifth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by tax paying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.
The purpose of this post is to argue that (as applied to those who do not live in the United States) the transition tax is very similar to the OVDP (“Offshore Voluntary Disclosure Programs”) which are discussed here. Some of my initial thoughts (December 2017) were captured in the post referenced in the following tweet:


The first four posts in my “transition tax” series were:
Part 1: Responding to The Section 965 “transition tax”: “Resistance is futile” but “Compliance is impossible”
Part 2: Responding to The Section 965 “transition tax”: Is “resistance futile”? The possible use of the Canada U.S. tax treaty to defeat the “transition tax”
Part 3: Responding to the Sec. 965 “transition tax”: They hate you for (and want) your pensions!
Part 4: Responding to the Sec. 965 “transition tax”: Comparing the treatment of “Homeland Americans” to the treatment of “nonresidents”
*A review of what what the “transition tax” actually is may be found at the bottom of this post.
This post is for the purpose of the arguing that, as applied to those who live outside the United States, payment of the “transition tax” in 2018, is the financial equivalent to participation in 2011 OVDI (“Offshore Voluntary Disclosure Program”).
 


Seven Reasons Why The U.S. Transition Tax as applied to “nonresidents” is similar to the “Offshore Voluntary Disclosure Program As Applied To “Nonresidents”. In both cases there are benefits to Homeland Americans and extreme detriments to “nonresidents”. These detriments amount to a punishment for living outside the United States and becoming a “tax resident” of another country.
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Americans abroad opposing "taxation-based citizenship" should retire the "Taxation Without Representation" argument

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In a recent comment reproduced as a post at the Isaac Brock Society and at Citizenship Taxation, I argued that it’s time for people to unite with one simple message. The message captured in the following tweet:


“The United States must not impose “worldwide taxation” on those who have “tax residency” in other countries and do not live in the United States!”
I propose this for the following reasons:
1. There is not a single person or organization on the planet that could not support this and credibly claim that they want to end U.S. extra-territorial tax policies.
2. It places the focus of U.S. tax policies on how the policies affect the citizens and residents of other countries and NOT on those who identify as U.S. citizens living abroad AKA “Homelanders Abroad”. There is no suggestion of seeking exemptions for certain “tax compliant people”, …
3. It resonates with “accidentals” (AKA those carbon life forms that the United States considers to be life long tax slaves) because they were born in the United States.
4. It naturally leads to a discussion of how U.S. extra-territorial taxation affects the economies (“steals from their tax base) of other countries.
5. By focusing on “tax residents” of other countries, it avoids alltogether the idiotic “baff gablle” of: “Well, you are a member of the political community”, “patriotism”, “right to live in the USA” and all of these “academically focussed) distractions.
6. It avoids getting into the incredibly difficulty problem of explaining precisely HOW the Internal Revenue Code applies in different countries (in practical terms it applies differently in different countries). Almost nobody understands how the Internal Revenue Code actually applies in other countries (including the IRS) …
7. It bypasses arguments like: “What do you mean you are complaining? I hear you exclude about 100,000 using this thing called the “Foreign Earned Income Exclusion”. If you can exclude 100,000 when you don’t even live in the USA, then why can’t I as a Homelander exclude at least 100,000″ …
Again to agree to the message:
“The United States must not impose “worldwide taxation” on those who have “tax residency” in other countries and do not live in the United States!”
should avoid the distractions described in points 1 – 7.
“Taxation without representation argument”
But, I want to focus on an argument/point that I think is a particular time waster and probably hurts the cause rather than helps it.
The ONLY Americans who have representation in the political process are those who have the money to “buy the laws” that they want. The American legislative process is nothing more and nothing less than a “pay to play casino”. It’s that simple. America is one of the world’s most dysfunctional democracies. In fact it is a democracy only in the sense that some Americans (including some but not all Americans abroad) have the right to vote. Having a vote is a necessary but not a sufficient condition for a functioning democracy. A vote matters only if there are viable candidates to vote for. In the America of today, who the candidates are, is tightly controlled by the political parties. Do you really think that if America had a functioning democracy, that allowed for democratically selected candidates, that the 2016 election would have come down to:
Donald Trump vs. Hilary Clinton?
Not a chance. My point is that almost no Americans have political representation in any case. By making the “taxation without representation argument”, Americans abroad are asking for something that Homelanders don’t have!

So, please let’s retire the:

“Taxation without representation argument”!
John Richardson
My morning thoughts on this were generated by the comments in the following tweets (all of which were generated by the Financial Times discussion on the Sec. 965 Transition Tax:

U.S. Tax Reform and the "nonresident" corporation owner: Does the Sec. 965 transition tax apply?

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Prologue:
The United States has a long history of imposing “worldwide taxation”on the INDIVIDUAL “tax residents” of other countries. The United States cannot impose direct taxation on “non-U.S corporations” that have no business connection to the United States. That said, the United States (along with certain other countries) has “CFC” (Controlled Foreign Corporation) rules that impose taxation on the “United States Shareholders” of “non-U.S. corporations. In general, these rules simply attribute certain types of corporate income directly to the individual “United States Shareholder”.
U.S. Tax Reform 2017 (well at least “International Tax Reform”)
In early November 2017, it appeared that U.S tax reform “might” include a provision that would in effect impose retroactive taxation on the retained earnings of Canadian (and other non-U.S.) small business corporations. I wrote about that here.
On December 22, 2017 President Donald Trump signed into law the “Tax Cuts and Jobs Act”. The uniquely U.S. policy of imposing “worldwide taxation” on the tax residents and citizens of other countries continues. FATCA continues. In other words, in spite of the educational campaign orchestrated by individuals and groups (Americans Citizens abroad and Republicans Overseas) the U.S. Government (although aware of the aware of the problems) declined to make the changes necessary to allow U.S. citizens to live normal financial lives outside the United States. An earlier post, describing “How U.S. Citizens Can Live Abroad In An FBAR and FATCA World” demonstrates that the rules of the Internal Revenue Code involve far more than taxation, but include a number of “penalty laden, intrusive information reporting requirements”. Significantly these rules impact people who are resident/citizens of other countries who are subject to the tax systems of those countries. Many of those impacted do not even consider themselves to be U.S. citizens. Some of them don’t even speak English. Few of them can afford the expensive compliance costs. How could things get worse?
Well, it is possible (but not certain) that things have gotten worse. Incredibly there are some people impacted by U.S. tax rules who are “tax residents” of other countries AND have made the decision to create small businesses where they live. Furthermore, some of them have opted to carry on those businesses by creating “local corporations”. In Canada these “local corporations” are called “Canadian Controlled Private Corporations”. Every country has its own “culture of corporations”. In Canada (to the chagrin of Prime Minister Trudeau and Finance Minister Morneau) these corporations are used as “private pension plans”. (This is because entrepreneurs rarely have access to other traditional pension plans.)
So, what does all this have to do with U.S. tax?
1. The U.S. Internal Revenue Code cannot impose direct taxation on Canadian (or other foreign) corporations.
2. As a result, the U.S. Internal Revenue Code has traditionally attributed the “passive earnings” of many “Canadian Controlled Private Corporations”, to the individual “United States Shareholder”. (See Subpart F: Sections 951 – 965 of the Internal Revenue Code – you have no chance of understanding the legislative scheme.)
3. The Internal Revenue Code has NOT previously attributed the active business of “Canadian Controlled Private Corporations” to the individual “United States shareholder”.
4. The Tax Cuts and Jobs Act has added a new Sec 965 to the Internal Revenue Code that purports to retroactively impose U.S. taxation on this (previously untaxed) active business income RETROACTIVELY FROM 1986. Yes, you read correctly.
I made the following comment to an article in the Financial Times which I believe fairly summarizes what this “tax” means in the lives of the “tax residents” of other countries (who are subject to U.S. taxation”:

Interesting article that demonstrates the impact of the U.S. tax policy of (1) exporting the Internal Revenue Code to other countries and (2) using the Internal Revenue Code to impose direct taxation on the “tax residents” of those other countries.
Some thoughts on this:
1. Different countries have different “cultures” of financial planning and carrying on businesses. The U.S. tax culture is such that an individual carrying on a business through a corporation is considered to be a “presumptive tax cheat”. This is NOT so in other countries. For example, in Canada (and other countries), it is normal for people to use small business corporations to both carry on business and create private pension plans. So, the first point that must be understood is that (if this tax applies) it is in effect a “tax” (actually it’s confiscation) of private pension plans!!! That’s what it actually is. The suggestion in one of the comments that these corporations were created to somehow avoid “self-employment” tax (although possibly true in countries that don’t have totalization agreements) is generally incorrect. I suspect that the largest number of people affected by this are in Canada and the U.K. which are countries which do have “totalization agreements”.
2. None of the people interviewed, made the point (or at least it was not reported) that this “tax” as applied to individuals is actually higher than the “tax” as applied to corporations. In the case of individuals the tax would be about 17.5% and not the 15.5% for corporations. (And individuals do not get the benefit of a transition to “territorial taxation”.)
3. As Mr. Bruce notes people will not easily be able to pay this. There is no realization event whatsoever. It’s just: (“Hey, we see there is some money there, let’s take it). Because there is no realization event, this should be viewed as an “asset confiscation” and not as a “tax”.
4. Understand that this is a pool of capital that was NEVER subject to U.S. taxation on the past. Therefore, if this is a tax at all, it should be viewed as a “retroactive tax”.
5. Under general principles of law, common sense and morality (does any of this matter?) the retained earnings of non-U.S. corporations are first subject to taxation by the country of incorporation. The U.S. “transition tax” is the creation of a “fictitious taxable event” which results in a preemptive “tax strike” against the tax base of other countries. If this is allowed under tax treaties, it’s only because when the treaties were signed, nobody could have imagined anything this outrageous.
6. It is obvious that this was NEVER INTENDED TO APPLY TO Americans abroad. Furthermore, no individual would even imagine that this could apply to them without “Education provided by the tax compliance industry”. Those in the industry should figure out how to argue that this was never intended to apply to Americans abroad, that there is no suggestion from the IRS that this applies to Americans abroad, that there is no legislative history suggesting that this applies to Americans abroad, and that this should not be applied to Americans abroad.
7. Finally, the title of this article refers to “Americans abroad”. This is a gross misstatement of the reality. The problem is that these (so called) “Americans abroad” are primarily the citizens and “tax residents” of other countries – that just happen to have been born in the United States. They have no connection to the USA. Are these citizen/residents of other countries (many who don’t even identify as Americans) expected to simply “turn over” their retirement plans to the IRS???? Come on!

Further commentary on this article is here.
Dr. Karen Alpert offered the following insightful comment to an article in Canada’s Financial Post:

It is patently clear that Congress was not thinking about the impact of tax reform on non-resident US citizens. None of the discussion in the lead-up to tax reform, or in the committee hearings, indicated that Congress intended to punish the citizens and residents of other countries who happen to be claimed by the US as citizens. Nothing written by the IRS so far has indicated that they believe this applies to non-resident individuals – every example in the IRS notices has specifically looked at corporate shareholders. The only indication that this might apply to non-resident individual shareholders is from the tax compliance industry that stands to earn a large amount of fees on attempts to comply with this extra-territorial over-reach by the US.
If applied to non-resident individuals, the “transition” tax would be a pre-emptive grab at the tax base of Canada and every other country where US emigrants and Accidental Americans are living. The “deferred foreign income” that would be confiscated is money that was never subject to US tax, and is only claimed by the US because of a fictional “deemed repatriation”. Think about what that really means – the US is pretending that US emigrants are “repatriating” funds back to a country where they don’t live, and that they may no longer really identify with. The only good that could possibly come from this is the long overdue realisation that US taxation of the citizens and residents of other countries is contrary to the national interests of those countries and contrary to normal international practice.

(I encourage to read this insightful summary by Patricia Moon which appeared at the Isaac Brock Society.)
Should this “tax” apply to the “tax residents” of other nations, this would be an extraordinary escalation of the U.S. imposing “worldwide taxation” on the residents of other countries. The stakes are indeed high for individuals and for their countries of residence. After all, the application of this “tax” would be certainly a preemptive strike against the “tax base” of other countries! After all, this “tax” is not based ANY “realization event” whatsoever.
Understanding the problem in a 7 Part Video Series – Dr. Karen Alpert and John Richardson
(A description of each video is found along with the individual video. I suggest that you watch the videos in order.)
https://www.youtube.com/playlist?list=PLHF3nvfM47b1dWAvmqcrkVgEQ50BYQ-jv
Dr. Karen Alpert – FixTheTaxTreaty.org
John Richardson – CitizenshipSolutions.ca

Jackie Bugnion 2017 Residence Based Taxation: To Chairman Hatch's request for tax reform proposals

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Introduction: It’s tax reform season and Senator Orrin Hatch wants to hear from you (again)
As reported on the Isaac Brock Society and other digital resources for those impacted by U.S. taxes, you have until July 17, 2017 to tell Senator Hatch what you think needs to be changed in the Internal Revenue Code. After great deliberation, it occurred to me that people who either are (or are accused of being) U.S. citizens or Green Card holders living outside the United States, might want the USA to stop taxing them. After all, they already pay taxes to the countries where they reside. This is your opportunity to “Let your voices be heard” (well maybe).

The Senate Finance Committee is yet again asking the general public to send comments on tax reform. The deadline is July 17, and the email address is taxreform2017@finance.senate.gov.
https://www.finance.senate.gov/chairmans-news/hatch-calls-for-feedback-on-tax-reform

(July 17, 2017 is coming quickly. Please take a few moments to send your thoughts to Senator Hatch. Tell him you feel about FATCA, citizenship-based taxation, FBAR, etc.)
Speaking of “tax reform”: Introducing Jackie Bugion

Jackie Bugnion is a U.S. citizen who has lived in Switzerland for many many years. She has been a tireless advocate for “residence based taxation”. She worked with “American Citizens Abroad” for many years and has recently retired. She was recently honoured with the Eugene Abrams award by ACA – an event that was the subject of a post at the Isaac Brock Society – that described her many achievements (over a long career).
She was the principal organizer of the “Conference on Citizenship Taxation” which took place in Toronto, Canada in May of 2014. The Conference was widely discussed on the Isaac Brock Society here and here. The live video of the “Kirsch Schneider debate” is here.
I have reproduced a number of her written submissions and posts on this blog, specifically:

Jackie Bugnion – 2013 Submission to the House Ways and Means Committee – Explains the upcoming New American Revolution


The submission referenced in the above tweet describes the history of the construction of the U.S. “fiscal prison” brick by legislative brick! (Forward it to anybody and everybody with a interest in this.)
Jackie has returned with her 2017 submission to Senator Hatch.
Jackie Bugnion – 2017 submission to Chairman Hatch – reproduced with permission of Jackie Bugnion
 
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Tweet #Citizide: The new response of US citizens to #FATCA #FBAR #PFIC

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"A Proposal for Fair US Tax Treatment of Foreign Pensions" from @JackieBugnion and Paula Singer

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“Even in retirement Jackie Bugion writes the best arguments against citizenship taxation ever“. Other references to Ms. Bugnion’s work are here.
In this new post published on May 30, 2016 at Tax Analysts, Ms. Bugnion collaborates with U.S. tax lawyer Paula N. Singer to explain the problems experienced by Americans abroad who have pensions in their country of residence.
This new article explains:
1. The problem – how U.S. tax laws destroy the value of the “foreign pension” as a “pension” at all
2. The treatment of non-U.S. pensions under various U.S. tax treaties (underscoring now tax treaties are very different)
3. The proposal – how the Internal Revenue Code can be simply amended to fix this simple but painful problem.
Below you will find the PDF of this must read article. Please note that this article appears on CitizenshipSolutions.ca under the following conditions:

Permission is for this one use and is contingent on properly crediting the article to the respective authors and to Tax Analysts as the original publisher. Using the PDF attached above covers proper attribution. Any other requests would need to be addressed separately.

Bugnion-Singer (05-30-2016)
John Richardson

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