Tax Sovereignty: All countries (including the US) has the right to create its own domestic tax policy. The question is how to solve the problem of US citizenship-based taxation from an international perspective.

The problem: US citizenship-based taxation means that US citizens are tax residents of the United States even when they are tax residents of other countries. Interestingly US tax treaties contain a provision called the “saving clause” which denies US citizens the benefits of a tax treaties. See for example Article XXIX of the Canada US Tax Treaty. Tax treaties generally include a residence tie breaker (usually Article IV) which allocates the tax residency of dual tax residents to one country or another. See for example Article IV of the Canada/US Tax Treaty. The “saving clause” denies residency tie break provisions to US citizens.

A solution: The saving clause always contains provisions that specify circumstances where the saving clause would not apply (double taxation, pensions, etc.) If the Article 4 residency tie breaker were added to the list of exceptions to the saving clause, then under the treaty:

1. US citizens would be eligible to benefit from residency tie break provisions; and

2. The treaty would allocate tax residency to the country where the individual actually lived and would specifically mean that US citizens would NOT be tax residents of the United States.

Notice that this solves the problems for individuals in all countries without discussing the specific problems that citizenship-based taxation causes in any one country.

A New Multilateral Agreement?

In addition (or as an alternative) to amending existing tax treaties, it would make sense for there to be a new multilateral agreement which would establish the principle that individuals can be a tax resident of only one country at at time.

Listen To Podcast At This Link

Dr. Laura Snyder – @TAPInternation

Dr. Karen Alpert – @FixTheTaxTreaty

John Richardson – @Expatriationlaw