Should The U. S. Impose Worldwide Taxation And Reporting On People Who Are Residents Of Other Countries?

In January 2013, the United States implemented a new law called FATCA (Foreign Account Tax Compliance Act). This law was included in President Obamas Jobs Act as a revenue-raising provision. FATCA has been a nightmare for many people around the world who reside in other countries. Many politicians have outwardly ignored its impact on citizens who are residents of other countries and do not reside in the United States, yet the United States expects them to pay taxes. We have heard their voices at TaxConnections for several years now and are grateful to all the people who participate in educating us on the issues surrounding FATCA.

The United States Government laws have a great impact on people who do not reside here. In fact, the U.S. State Department data shows renunciations of U.S. citizenship increased from 1,601 to 4,449 from 2011 through 2016 likely due to FATCA.

TaxConnections invites you to join us on May 17th 2019 as we spotlight two highly respected experts on Citizenship Taxation to discuss and present both sides of the FATCA Issue. Viewers will receive a world-class education on major issues surrounding FATCA.

Citizenship Taxation Questions Asked By Persons Registered To Watch Live Stream YouTube Event

The General Accounting Office (GAO) recently issued a report citing numerous problems directly linked to citizenship-based taxation and FATCA affecting expats while overseas. One of the issues raised was the ability of Americans to hold jobs. Does it serve the national interest where Americans cannot compete globally for jobs?

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Many of the problems faced by nonresident US citizens arise from the incompatibility of US tax rules with the tax rules of the country where they actually live. Furthermore, dual citizenship is now much more common than it was in the 1860s (or 1960s).

If citizenship is a gap filler to assign domicile where none is otherwise assigned, shouldn't citizens who are actually domiciled in another country be treated as tax resident only in that country? Shouldn't the residence tiebreaker clauses in the treaty be available to citizens who have emigrated and/or who are dual citizens?

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Gaining citizenship in another country can take many years, sometimes even decades and sometimes it is not possible for someone who was not born in that country to become a citizen. Until such a time that someone is able to gain citizenship in their resident country the non-citizen generally needs a passport from their home country and a visa.

With this in mind, how can a US citizen living abroad retaining their US citizenship be used to justify taxing them on their non-US source income?

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With the US charging the highest citizenship renunciation fee in the world, giving up US citizenship for many US citizens abroad is out of reach. Most US citizens abroad are working and middle class living in countries with taxes higher than the US and current laws means many are trapped. They can't afford the compliance fees to file their US taxes saying they owe no US tax yet can't afford to renounce their US citizenship (if they are even able to get a second citizenship).

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Why was FATCA modification not included in recent efforts to move away from citizenship-based taxation?

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Considering that 242 out of 244 existing worldwide tax jurisdictions use residence-based taxation as a standard for the taxation of individuaqs and do not tax their diaspora, what justifies the US doing so?

In particular, what exceptional rights, advantages and benefits does the US diaspora receive from the US that are objectively definable and measurable that diasporas from other comparable countries, in means and will, do not receive from their respective countries of origin?

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Now that most other developed countries have adopted the CRS (FATCA-lite), doesn't this change the debate from "Isn't America bad" to "Should governments in general be allowed to monitor"?

How do you propose to administer this tax on people, some of whom never step foot in this country?

While they are citizens of the US, they often have not been in the country for years, and may not be for years to come. Other nation’s diaspora’s have dedicated representation in government. What is the process for USG to enact similar legislation?

(The US House of Representatives has one voting member for every 747,000 or so Americans. If US expat population is estimated to be 9M they should be entitled to 12 members. Currently having zero members dedicated to their unique situation this is clearly a case of taxation without representation.)

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What are the consequences of tax and FBAR non-compliance for an Accidental American (i.e. dual citizen living outside the US) with no US assets or income?

Does the IRS in fact make any attempt to contact or pursue non-compliant, non-filing non-residents, even those who have been identified by FATCA reporting?

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Is it possible to renounce US citizenship without coming into any form of US tax compliance, and if so, what are the potential consequences of doing so?

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Is it ethical for tax advisors to take on non-resident US person clients without informing them of the answers to the three questions listed above?

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Why should Americans living permanently abroad have any loyalty, promote or conduct business dealings, which all economically benefit the US for $0 costs, when the US consistently in return makes their lives more difficult and burdened?

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How is it fair that the US punitively taxes foreign retirement funds (most are classified as PFICs) when that is the only retirement vehicle available to some?

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How is the Net investment tax - a tax that unilaterally abrogates most tax treaties the US is part of, morally justified?

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It is fair or morally right that the minimum charge for that exit is $2,350 but for most it involves thousands of dollars to become 'compliant" on top of that $2,350 just to exit a system that has never been part of their life?

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How is it fair to advocate for taxation without representation which is exactly what CBT is and does?

Recently I tried to apply for an investment account at HSBC in the country I live outside the US. They outright rejected me because I am an American passport holder due to FATCA; (and they stated this fact in writing) they don't want to deal with Americans at all, so could you tell us how Americans living overseas are supposed to invest for their retirement when every year there are more and more regulations stacked against us?

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An additional question is, when banks in countries where we reside discriminate against Americans in general, what rights do we have to fight back?

It seems we have none, even based on local laws there seem to be no protections when FIs decide they don't want a specific client.

What are future expats going to do when they can't even open a bank account in the country they wish to live and work in?

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How can FATCA be moral when it is forced on a person that never lived or worked in the USA?

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What is the status of the Holding legislation, and what can we do to support this effort?

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Why did the U.N. condemn Eritrea's tax policy, and are there other nations that the U.N. should condemn for similar reasons?

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Article 4, Section 2 of the Constitution states "The citizens of each state shall be entitled to all privileges and immunities of citizens in the several states.’ As the GAO recently reported, Americans abroad are not enjoying the same privileges as those in the states. Why does Congress encourage such blatant discriminatory practices?

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Does the IRS publish audit statistics for people who renounce citizenship or are they included in a broader or different category or categories of taxpayers?

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Why did the U.N. condemn Eritrea's tax policy, and are there other nations that the U.N. should condemn for similar reasons?

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What is the status of the Holding legislation, and what can we do to support this effort?

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Question for Prof Zelinsky: The General Accounting Office (GAO) recently issued a report citing numerous problems directly linked to citizenship-based taxation and FATCA affecting expats while overseas. One of the issues raised was the ability of Americans to hold jobs. Does it serve the national interest where Americans cannot compete globally for jobs?

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Please consider the position of these people. Although they are American residents, they pay no US income tax. They pay no US income tax because they are not US citizens. If the US based it's income tax obligations on residency like most other countries, this avoidance couldn't happen.

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For Edward Zelinsky, How this avoidance is justified as part of his support for the status quo.

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How do you justify the extra expense that is incurred by American's filing US tax returns and FBAR from Abroad, especially if their finances require the services of a fully qualified CPA accountant, when citizens of nearly every other country in the world who happen to live in another country where they are tax resident do not have to do this? How does this make hiring Americans competitive? why do Americans resident abroad have to bear the burden of the extra costs related to the necessity of filing and compliance to the IRS and the US Treasury?
My UK accountant charges me £1000, and my UK based CPA will charge me approximately £1500 for handling my 2018 USA accounts and tax return submission. I am willing to show you the bills that I will be paying this year.

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How do you justify a system that greatly frightens and penalises old and infirm US people, people with dementia, or their heirs if any, people who live permanently in another country with no US address to "come home to'? The IRS / US Treasury has no pity and no methodology for helping to reduce the burden on these people. How can you justify this?

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Detailed información on foreign pensión funds classification as PIFIC or trusts would be highly appreciated.

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How is GILTI tax ethical when applied to indépendant service providers, such as consultants, who are treated as Conrolled Foreign Corporations? Worse yet, to apply GILTI tax to an Alien Spouse by pretexting Ownership Attribution based on family relationship?

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Yes, three questions as follows: 1.) How can the U.S. "morally justify" worldwide taxation when it does immoral things as it searches for information, cuts us off from our local banks and makes us pay exorbitant fees to accountants so we can file taxes? Is it not immoral for the IRS to know exactly how much my French husband earns, what his French investments are, where they are (name of financial institution, address, all particulars? I call this "foreign intrusion". Related to this: Is it "morally justifiable" to ask an expatriate who has not used U.S. roads or gone to U.S. schools or been in a U.S. hospital for fifty years (!!!) and who does not have Medicare or Medicaid to pay a U.S. tax accountant in France each year to file her U.S. taxes?

2) Is it not morally wrong to make U.S. citizens abroad, who already pay taxes in their countries of residence, file and depending on the case pay U.S. taxes as well? We U.S. expatriates are probably the most "moral" Americans around. We represent the U.S. wherever we go and some of us haven't even lived in the country for years. Yet, rather than being lauded, we are treated like dishonest pariahs.

3) Is it morally justifiable that my US representatives in the House and Congress show no interest in the problems of expats and therefore do not represent us? I therefore and unfortunately have no interest in voting for them because of their tunnel vision and their ignorance of the problems of overseas Americans.

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I brought these issues up with a fellow expat who was not in the know. His response, "Why didn't the US Government contact me to inform me of this?".

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The topic for the event asks the question "Is it morally justified?" That's the wrong question, in my opinion. Taxes, by and large, pay for local services. There isn't a question of morality here, but rather of practicality. A worldwide system of budget allocation for taxes collected would be utterly unworkable. So I think your question should be "Is Citizenship And Worldwide Taxation Practically Justified or Unjustified" to mirror the reality that US expats are experiencing. Please discuss.

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f5472 and f5471 and other business related forms ---- are they affordable for a new small European business startup or are they out of reach? How could I start up a European small business with initially low profits if I know that US form paperwork might cost me $20,000 per year? (My envisioned profits before US-accounting-costs for years zero through five would be $10,000 , $20,000, $50,000, $50,000, $50,000). Would all of my profits be eaten up by f5471 and f5472 accounting costs?

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What do the speakers each think about the provisions in TCJA in which both the transition tax (deemed repatriation tax) and GILTI become the tax obligation of the individual American owner of his foreign corporation, even though no funds may have passed from the corporate entity to the individual?

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Regarding private citizens only - who have no business entanglements - and whose foreign citizenship passport (in this case, Canada) posts country of birth as U.S., and so that both the ex-pat and the U.S. Government can reach a mutually agreeable compromise (and, so that the U.S. Gov't can obtain its pound of flesh from the renouncers/renounciators), whereby U.S. Customs would charge a $XX.00 U.S. entry fee and exit fee? Those ex-pats who are too apprehensive/frightened/or refuse to visit the U.S. [including to visit family members] could now 'safely' do so and having the peace of mind that they would not be detained at the border nor constantly be fearful and live with forever doubts and emotional stress that they are exposed to financial ruin? The entry/exit fee would essentially be a human "import/export tariff"

A - Series of questions for Professor Zelinksy:

You have published extensively in defense of taxing US citizens on the basis of citizenship. Your publications do not address in any significant manner the hardships and anguish that current US non-resident taxation and banking policies cause to US citizens and others living overseas. You may have seen a recent series of posts on John Richardson's website, Citizenship Solutions, where US citizens living overseas describe their experiences using words such as “constant fear,” “extreme anxiety,” “life turned upside down,” “threatened,” “desperate,” “worried,” “menacing,” “intimidation,” “trouble sleeping,” “nightmare,” “traumatic,” “living hell,” “dangerous,” “paralyzed,” “lives ruined,” “significant strain on my marriage,” no-win situation,” “sick in my stomach," “my family and I will be harmed no matter what option I choose,” “divorced for tax purposes only,” ”unsustainable,” “dangerous,” “untenable situation,” “harassed,” “cannot manage,” “punishment for leaving the homeland,” “threats hanging over my head,” “major problems were he to pass away.”

See this link for the first in this series of five posts: http://www.citizenshipsolutions.ca/2019/05/13/part-11-in-series-the-emotional-toll-of-us-non-resident-taxation-and-banking-policies-i-feel-threatened-by-my-very-identity/.

My questions to you are:

1) Do you acknowledge or do you deny that such policies cause hardships?

2) If you deny that such policies cause hardships, then what is your message to those who describe experiencing the emotions listed above as a result of such policies? That is, please explain to them either why they are actually not having those experiences or how those experiences are due to some other cause unrelated to the policies.

3) If you acknowledge that such policies cause hardships, then do you believe that the hardships are acceptable and justified?

4) If you believe that the hardships are acceptable and justified, then what is your message to those who are experiencing these hardships? That is, why do you believe that the hardships are acceptable and justified? (Before you respond to this question please be sure to read this post which explains the problems with the responses that are typically given to this question:a https://www.taxconnections.com/taxblog/it-hurts-my-heart-the-case-for-fairer-taxation-of-non-resident-us-citizens-part-4-of-4/)

5) If you do not believe that the hardships are acceptable or justified then what are your realistic proposals in order to end the experience of these hardships by US citizens residing overseas and their families?

B - Series of questions for Mr. Richardson:

Among those who are actively working to have US non-resident taxation and banking policies changed there is general agreement that the policies result in unacceptable and unjustified hardships. However, there is significant disagreement as to what the appropriate legislative solutions are. As just one example, some advocate for a full repeal of FATCA whereas others advocate for same country exception. There is also significant disagreement as to the best procedures to follow in order to achieve legislation change. As just one example, some are trying to avoid Congressional hearings whereas others are seeking to hold them.

My questions to you are:

1) Why do you think there is so much disagreement in this manner?

2) What would you propose in order to address (and possibly even resolve) these kinds of disagreements and better unite these different factions of activists (under the assumption that they could fight more effectively if they were better united)?

3) More generally speaking, in your opinion, how could those seeking to have these policies changed work more effectively together?

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Professor Zelinsky asserts that citizenship is a reasonable proxy for domicile. While that may have been true at the time of the civil war, and in the 1920s when the Supreme Court decided Cook v Tait, citizenship is a very poor proxy for domicile in the 21st century. US citizenship in particular is too freely granted and too hard to lose. Since the Supreme Court decision in Afroyim v Rusk, the potentially expatriating acts in the Immigration and Nationality Act have been much less likely to result in a loss of US citizenship. And, since 2014 it costs US$2,350 to obtain a Certificate of Loss of Nationality, a document required under IRC 877 to properly exit the US tax system. Furthermore, citizenship as a proxy for domicile only applies to those living outside the US. For US residents, both aliens and citizens are subject to US tax on their worldwide income.

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Not only is US citizenship hard to lose, the cost of being subject to the US tax system has increased substantially in recent decades. Since the inclusion of subpart F in the Internal Revenue Code in 1962, the US tax treatment of non-US businesses and investments has become increasingly punitive. For a US citizen who has emigrated to another country, this combination of sticky citizenship and punitive taxation is not a mere inconvenience; US tax rules make it very difficult for these emigrants to start a business or save for their retirement in their new home.

How would Professor Zelinsky modify citizenship-based taxation to ameliorate the problems caused by these changes in both the nature of citizenship and the punitive provisions of the US tax code?

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These questions are for John Richardson:

Among US citizens living overseas there are a wide range of experiences with respect to worldwide taxation by the United States. As you've well documented, many suffer greatly from the policies, to the point of seeing no way out other than the drastic step of renouncing their US citizenship. On the other hand, some seem to not suffer at all. Some of those, yes, have not entered the US tax system and do not file US tax returns. On the other hand, some who claim to not suffer from the policies are in the US tax system and they file US tax returns each year. They ask "what's the big deal?" A third category of people are in between these two extremes: they suffer from the policies but not (yet) to the point of seeking to renounce their US citizenship.

1) Can you explain these wide differences of experience?

2) Does the fact that some US citizens are not suffering under the policies cast doubt upon the claims of suffering made by others? Does it mean that those who claim to suffer are exaggerating - or are simply wrong - and that their claims of suffering should be discounted if not outright ignored?

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Citizen Based Taxation seems to have been largely unenforceable so far given the small number of international tax returns filed each year. Is effective enforcement of Citizen Based Taxation actually possible?

To what extent are the violations of privacy and other individual rights of US citizens resident outside the US justified for the assessment of tax solely on the basis of citizenship?

Are US citizens living outside the US entitled to the rights and protections enshrined in the US constitution?

Is the threat of sanctions to foreign financial institutions & governments worth the damage to the reputation of the US internationally?

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Is it really necessary to comply with section 965?

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I am a self-employed dual citizen in Canada. My pension + retirement is a PFIC. My business is a CFC with GILTI + Transition tax (double taxed). My TFSA/RESP is taxed and a "foreign trust". Ontario First Time Homebuyer plan is taxed. My principal residence sale is taxed (tax free in Canada). My citizenship taints potential joint partnerships / corps. I pay thousands yearly in compliance costs.

I cannot fathom how taxing the tax residents of other countries is justified. What benefits does it provide besides benefiting accounting firms?

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In 1978 the US residency requirement of those living abroad to retain US citizenship was removed. This has resulted in a huge increase in the number of people considered to have US citizenship living abroad. People relied on this law to lose their US citizenship. This major change was never communicated to those living abroad. Many cannot afford the excessively high "freedom fee" of $US 2,350 that now exists to rid them of this "forced" unwanted/unasked for citizenship. Please explain why these people should be paying taxes to the US and adhering to US financial restrictions. Keep in mind that many left the US as minors with their families back to their home countries and others having been born outside the US never to set foot in the US? Why is it okay to make their lives a living nightmare?

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How can the USG impose a tax law on their citizens if they never inform you of this? I was born in 1963 and left in 1970 with my Dutch parents, who were not informed. CBT is inconceivable, double taxation doesn't enter your mind because it's so exceptional. I pay plenty tax in The Netherlands, I have zero ties with the US and am a Dutch citizen. Had I known I would have naturally renounced my US citizenship when I turned 18, now it's too late because it's too costly.

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Say that I am a 30% owner of an Italian corporation along with another two Italian partners, and we also have a Board of Auditors (Italian). The partners and auditors would never let me give away the money of our Italian company, of which I am only a partial owner, to the US government. What is it that I am supposed to do about this according to the US government?

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Within Australia individual retirement accounts are called superannuation. Australian employers are required by law to deposit 9.5% of wages into superannuation accounts. The Australian Government taxes contributions on the way in and taxes account income along the way annually. Do you see U.S. double taxation of these accounts additionally on the way out (and without credit / indexed credit for Australian taxes paid during one’s career), to be double taxation that should not occur?

How can you say U.S. citizenship-based double taxation of residents of other countries is justified, when the double taxation does not meet international norms on the justification of taxation? International norms provide justification of taxation if one can receive/or members in one’s local community can receive in exchange for taxation: (1) benefit of resident services such as Food Stamps, unemployment support, and infrastructure, (2) benefit of protection of local property, and (3) benefit of protection of local rights.

How can this FBAR regulation be justified: reporting accounts one has signatory authority over for employer accounts for employment and business outside the US. Providing such information to FINCEN is in violation of company confidentiality and is clear grounds for employment termination. Such rules hurts employment, promotion, and partnership prospects, and are all not required of US persons within the U.S.

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Let’s assume all nations move to citizenship based taxation coupled with the fact that nations create the criteria to determine their citizens and with the advent of DNA testing- is it not possible for an individual to be subjected to many tax regimes? How many tax regimes should a person be subjected to based on nothing more than their spit? Over time does this give rise to a system that benefits those that are ethnically pure as they will be subjected to less tax regimes? Do U.S. RESIDENT citizens pay their taxes because of love of country or do they pay because they expect a service in return? Do U.S. resident tax payers , yourself included, willingly pay more than the required amount simply because you love your country? How do U.S. resident tax payers react when a service is cut and taxes are raised? If US resident tax payers operate as if taxes are paid because they are resident then is it justified to apply a different standard to non-residents? Why is citizenship the compelling reason for non-residents when it is not the compelling reason for residents?

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IRC 877A and relinquishing citizenship, why aren't more expats doing this?

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