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2017 Residence Based Taxation Request To Chairman Hatch



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).

Speaking of “tax reform”: Introducing Jackie Bugion

Jackie Bugnion is a U.S. citizen who has lived in Switzerland for 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).

Jackie has returned with her 2017 submission to Senator Hatch.

Jacqueline Bugnion

Submission to Chairman Hatch’s request for tax reform proposals

Adopt residence-based taxation (RBT) for Americans resident overseas

The Senate Finance Committee and the House Ways and Means Committee have both cited the need to review the way that the United States taxes its citizens and green card holders who reside overseas. The current policy known as citizenship-based taxation (CBT) is increasingly called into question as it taxes Americans on their worldwide income irrespective of their residence, domestic or overseas. I am an American citizen who has resided overseas for 52 years, as my husband is a foreigner. I have personally observed the devastating consequences of CBT on Americans abroad and strongly urge Congress to adopt residence-based taxation (RBT).

What is RBT? Under RBT, the U.S. would tax its citizens and green card holders who reside abroad the same way that the U.S. currently taxes non-resident aliens, i.e. through taxation of U.S.-source income only. FDAP (Fixed, Determinable, Annual, Periodic) income would be taxed largely through withholding at source by the paying agent. Effectively connected U.S.-source earned income would be reported on Form 1040NR and taxed under U.S. income tax rules. Foreign-source income would not be taxable.

RBT would apply to all bona-fide overseas residents. RBT would be immediate and automatic, but would not be open to residents of Puerto Rico or to military and diplomatic personnel stationed abroad. As an obvious anti-abuse measure, RBT would not be available to residents of designated tax havens. RBT would not be compulsory; Americans abroad for a short period of time, such as academics on sabbatical, may opt to stay under CBT.

The rules for RBT are already in place as they apply to foreigners with U.S.-source income. Withholding taxes on FDAP U.S.-source income would lead to automatic, efficient tax collection. In fact, withholding tax at source would in certain circumstances shift taxation from foreign countries to the U.S.

Shifting from CBT to RBT would be close to tax revenue neutral. Analysis of the IRS 2555 statistics, relating to the foreign earned income exclusion reported by overseas Americans, shows that a significant share of wages and salaries of the highest income groups is U.S.-source, and hence would continue to be taxed by the U.S. under RBT. The top 1% income group account for more than 50% of all taxes paid. In addition, the U.S. today under CBT renounces most claim on tax liability on foreign earned income, by allowing foreign tax credits and the foreign earned income exclusion. These two factors and few minor ones, lead to a neutral tax revenue situation. Any possible difference between CBT and RBT would be utterly insignificant in the U.S. budget – less than 0.001% – so small that it could swing either way.

IRS enforcement costs under the current international tax system are disproportionate to revenue. The international tax forms create burdensome filing costs for taxpayers and create heavy administrative costs for the IRS; this is terribly inefficient when the vast majority of overseas taxpayers owe no U.S. tax.

Tax collected currently under CBT, other than that linked to U.S.-source income, comes from unacceptable instances of double taxation. Incompatibilities between the U.S. tax code and foreign tax systems lead to double taxation. The outrage of Boris Johnson, at the time Mayor of London, when the U.S. taxed the capital gain on the sale of his U.K. home illustrates this issue very well. There are numerous examples of differences between U.S. and foreign tax systems which penalize Americans abroad. To cite just a few:

  • IRS does not recognize foreign pension funds and therefore taxes all contributions; it treats income generated over the years as coming from a PFIC fund, guaranteeing a negative return.
  • U.S. legislates double taxation in the cases of the NIIT and the Additional Medicare Tax since neither allow foreign tax credits. This is particularly cynical since these taxes aim to finance U.S. medical care; Americans abroad pay into their foreign health programs and are excluded from the Affordable Care Act.
  • Some countries have a wealth tax on all net assets instead of a capital gains tax on securities investments. The U.S. taxes the capital gains, but does not allow foreign tax credits against this income.
  • Definitions of what is an income tax and what is a social security tax varies enormously from country to country, with onerous tax consequences for U.S. citizens abroad.
  • All OECD countries, except the U.S., have replaced sales taxes by VAT, which can range up to 20% of the price of goods and services purchased. The U.S. does not recognize VAT paid as compensation for the U.S. tax liability, even though it does accept deduction of U.S. state sales tax.
  • Entrepreneurs in countries without a totalization agreement are subject to double contributions to social security, in the foreign country and in the U.S.

Beyond the immediate issue of taxation, moving from CBT to RBT would have major advantages for Americans abroad, at essentially no cost or lost revenue to the U.S.:

  • CBT tax law and related FATCA asset and revenue reporting requirements amount to a bank lockout for Americans abroad. FATCA reporting rules imposed by the U.S. on foreign financial institutions, accompanied by draconian penalties for non-compliance, strongly discourage foreign banks from accepting American citizens as clients. In addition, the U.S. Patriot Act know-your-client requirements have effectively cut off Americans abroad from access to U.S. financial institutions. It is difficult to function without a bank account in today’s world.
  • FBAR and Form 8938 reporting requirements shut off employment and investment opportunities for Americans abroad. The FBAR requirement to report bank accounts with only signature authority eliminates jobs in financial positions. Foreign employers refuse to have their accounts reported to the United States, and such reporting is illegal in many countries. Form 8938 requires foreign companies in which an American holds 10% ownership to report this ownership to the IRS. This measure has shut out entrepreneurial and partnership opportunities for Americans overseas.

Consequently, the number of renunciations of U.S. citizenship is skyrocketing from a few hundred in 2008 to well over 5,000 in 2016. And this is just the tip of the iceberg. The blatant discrimination and unfair treatment of Americans abroad at the hand of their own government has created massive anger and frustration in the overseas community of more than 8 million Americans. The financial burden of compliance is far in excess of reporting requirements for U.S. residents and easily runs into the thousands of dollars, which is all the more ludicrous when the vast majority have no U.S. tax liability.

Adopting RBT meets three of the four tax reform objectives cited by Senator Hatch.

  • First, it provides relief to middle-class individuals and corrects major unfairness.
  • Second, it removes impediments and disincentives for savings and investments.
  • Third, it makes Americans abroad and therefore the United States more competitive in the global economy while preserving the tax base.

I thank you for your attention to the above.

Sincerely yours,

Jacqueline Bugnion

July 8, 2017

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

5 comments

  1. laura says:

    The pain and suffering the US government has inflicted on its own people is beyond despicable.

    They are more than aware that citizenship based taxation is immoral, unethical, unjustifiable, causing unmitigated harm. Instead of addressing the problem they chose to attenuate it with toxic twin, FATCA.

    They have created refugees without refuge; the US is out to financially destroy anyone with the remotest of US indicia and their home nations have been extorted into not protecting them. Even worse, readily handing them over to the US to abuse.

    Not one human rights group or nation will speak out for nor protect these innocents. Shame on America, shame on the world. Those deemed by the US to be Americans have NO human rights outside of US borders.

    There would be hue and cry if any other group was singled out and denied even basic banking services, not allowed to save/invest for retirement, to educate their children, to protect their disabled children. But, if your deemed American that is just fine. Pretty disgusting world we live in.

  2. Charles Buckley says:

    I support this strongly — such a change is vital to the US ability to power their way back to economic health by becoming an export powerhouse, as so many other countries around the world are (like Germany). I wrote of this and of an expedited legislative way to implement these changes in my submission to the Senate Finance Committee.

  3. Larry Greer says:

    I have written four, one page letters pertaining to tax reform. I would really like them to be considered. Do you know an e-mail address I can send them to?

  4. Dominic Ferszt says:

    Jackie Bugnion does an excellent and articulate job of summarising the escalating injustices being suffered by Americans abroad over the past decade.

    There is perhaps another element to this story which sould receive Congressional consideration: that of families where one spouse is foreign.

    Foreign spouses living in the US are invariably US taxpayers, but foreign spouses of Americans abroad need to create ‘financial firewalls’ against their partners. Many homemakers have had to face the real prospect of choosing between their US citizenship or their marriage.

    Congressional hearings on such matters frequently express the commitment that they shouldn’t create two classes of taxpayer in the U.S. But the reality is that there’s already many classes of U.S. taxpayer including: Puerto Rico residents; ‘covered expatriates’; the Section 877A “Dual Citizen” taxpayer; and the nonresident alien taxpayer. In addition, the taxpayer who marries a nonresident alien cannot realistically share the marital assets as may be required by their laws or customs.

    Residence based taxation would not create another category of taxpayer, as Americans abroad would be taxed in the same manner as nonresident aliens.

    However, citizenship based taxation has created a second category of spouse; a development which should offend the family/social values embraced by both sides of the Congressional aisle.

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