Exporting U.S. taxes, forms and penalties to the residents of other countries
In the Moore appeal, the Supreme Court of the United States is charged with the task of determining whether “realization” is a necessary condition, for an “accession to wealth”, to qualify as “income” under the 16th Amendment. This broad question arises in the context of the Moores, who as “U.S. Shareholders” of a CFC, were subjected to the MRT which facilitated the double taxation of the Moores. The Moores, who reside in the United States, certainly have not and have no expectation of receiving a distribution from the India corporation. As problematic as the MRT was for the Moores, the MRT was far more devastating for Americans abroad, who were operating businesses that although “foreign to the United States”, were “local” to them. For the Moores their investment in the CFC represented an investment in a corporation that was “foreign” to both the Moores and the United States. Americans abroad were shareholders in CFCs (unlike the Moores and other resident Americans) that were “local” to them but foreign to the United States. In addition, for Americans abroad the CFC typically represents a pension/retirement planning vehicle. How can it be that the MRT could apply to individuals who live in other countries and are shareholders of corporations created in those countries? The answer is of course the extra-territorial application of the U.S. tax system to residents of other countries who happen to be U.S. citizens. In fact, the use of Canadian Controlled Private Corporations by dual US/Canada citizens living in Canada, demonstrates that it is possible for a U.S. citizen in Canada to be a shareholder in a Canadian corporation that would not qualify as CFCs if owned by U.S. residents.
The key takeaway is that the U.S. tax system, because of the extra-territorial tax regime (citizenship-based taxation) has a profoundly negative effect on individuals who are residents of other countries! U.S. tax law applies NOT only to U.S. residents but to residents of other countries who cannot demonstrate they are nonresident aliens. Therefore, a decision that the 16th Amendment does NOT require “realization” means that the U.S. will export the taxation of “unrealized income” to residents of other countries. The U.S. would tax the “unrealized income” of residents of other countries even when those other countries did not recognize the unrealized income as a taxable event!
In some circumstances the taxation of unrealized income would lead to double taxation. In other circumstances the taxation of unrealized income would frustrate the objectives of the tax policy of the other country. In many circumstances the taxation of “unrealized income” allows the United States to tax the wealth of other nations. It’s important to recognize that when the Supreme Court rules in the Moore appeal, it will also be deciding whether the U.S. can export the taxation of “unrealized income” to other countries! This has huge implications for both the residents and tax sovereignty of other countries.
Some EXISTING examples
Purpose Of This Post – The “Readers Digest” Version
FATCA is administered through the FATCA IGAs (international agreements) and not through the U.S. Internal Revenue Code (domestic law of the United States). the FATCA IGAs do NOT include a provision to change the meaning of “U.S. Person”. Rather the meaning of “U.S. Person” is permanently defined as a “U.S. citizen or resident”. There is no provision in the IGA to change this definition. Therefore, the IGAs are written so that they will ALWAYS apply to U.S. citizens regardless of whether the U.S. continues citizenship taxation.
In effect, implementing FATCA through the IGAs has had the practical impact that:
(One Of The Top Blog Posts We Are Reposting Today)
On February 28, 2019 TaxConnections kindly posted my first post comparing the way that 19th Century Britain and 21st Century America Treated Its Citizens/Subjects. The post received a great deal of interest resulting in more than 120 comments (largely reflecting the frustration of Americans abroad and accidental Americans).
The purpose of that post focused largely on citizenship and the fact that the United States imposes worldwide taxation on U.S. citizens who are tax residents of other countries and do NOT live in the United States. What that post did NOT do was to focus on HOW the Internal Revenue Code applies to U.S. citizens who do NOT live in the United States.
The Bottom Line Is:
The United States is in effect imposing a separate and more punitive tax system on its citizens abroad. Strange but true. The purpose of this post is to explain how that works and to provide specific examples.
Do you recognize 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 TaxConnections Post 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 marriage of Meghan Markle to Prince Harry has generated an awareness of the regulatory requirements on U.S. citizens who live outside the United States. This is only part of the problem. To focus on how U.S. citizenship-based taxation affects ONLY U.S. citizens is selfish and misguided. After all, by marrying Prince Harry, Meghan Markle is now part of a family which includes non-resident aliens.
How do the rules of U.S. “citizenship-based taxation” affect people who are not U.S. citizens, but have chosen to interact with U.S. citizens?
Forget Meghan and the baby. Time to ask: How might being the father of a U.S. citizen and the husband of a U.S. citizen create a link between Harry and the IRS? “American expats hoping global spotlight on royal baby’s U.S. tax affairs will drive change.
My thinking along these lines began with:
What about Internal Revenue Code Section 318? This would deem “Baby Sussex” to be (for IRS purposes) the owner of any the shares of any U.K. corporations that Harry might own. This is only one of many instances where (to put it simply) the U.S. citizenship of one family member can become a problem for the whole family. In any event, this series really needs a post, describing what could happen, when a U.S. citizen becomes part of what is otherwise, a family of “non-resident aliens”.
Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join me on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:
You are invited to submit your questions in advance. In fact, PLEASE submit questions. This is an opportunity to engage with Homelanders in general and the U.S. tax compliance community in particular.
I hope that this series of posts will give you ideas for questions and concerns that you would like to have addressed in the May 17, 2019 Tax Connections – Citizenship Taxation discussion.
Laura Snyder has graciously contributed four posts of this series. In her series of four posts, she has outlined the origins and requirements of U.S. citizenship-based taxation.
Ms. Snyder grew up in the United States and moved to Europe as an adult. The tone and pain reflected in her writing suggests that she truly identifies as being a citizen of the United States.
An article we posted recently by Professor Edward Zelinsky had the impact of a lightening rod and sparked considerable discussion and commentary. You can view the post by going to this posted link on Defining Residency For Income Tax Purposes. The post was a catalyst for a debate we have now scheduled on Citizenship Taxation.
On Friday, May 17th starting at 11:00 AM PST/2:00 PM EST
TaxConnections is hosting a live stream YouTube Event having invited legal scholar Professor Zelinsky to present his views for Citizenship Taxation. We have also invited John Richardson to present his views and opposition to Citizenship Taxation.
The education these gentlemen will provide on the issues surrounding Citizenship Taxation and FATCA are important to bring to light to the public. We want taxpayers to have the answers they need; we want the tax professional community to have accurate information; and we want to understand the issues that need to be resolved by the US government.
We invite you all to join us during this very lively and educational debate. Register to receive a complimentary invitation to view the debate online live stream through YOUTUBE.
ABSTRACT: The United States’ worldwide taxation of its citizens is less different from international, residence-based norms than is widely believed and is sensible as a matter of tax policy. An individual’s citizenship is an administrable, if sometimes overly broad, proxy for his domicile, his permanent home. Both citizenship and domicile measure an individual’s permanent allegiance rather than his immediate physical presence. Because citizenship and domicile resemble each other, and because other nations often define residence for tax purposes as domicile, the U.S. system of citizenship-based taxation typically reaches the same results as the residence-based systems of these other nations, but reaches these results more efficiently by avoiding factually complex inquiries about domicile.
In contrast, the traditional justification of U.S. citizenship-based taxation, the putative benefits of such citizenship, is not persuasive. In this context, three models of U.S. citizenship are relevant, namely, the minimalist model, the psychological model, and the Tiebout/purchase model. None of these models justifies the worldwide taxation of U.S. citizens on a benefits basis. Rather, such taxation is persuasive because of administrative considerations, i.e., the close resemblance of domicile and citizenship that makes the latter an administrable proxy for the former.
TaxConnections CEO Kat Jennings is happy to announce that both John Richardson and Edward Zelinsky have agreed to present their views on Citizenship Taxation on a live stream YOUTUBE event on Friday, May 17th 2019. The mission of this presentation is to provide both sides of the views on Citizenship Taxation.
We have asked the following question to both speakers:
“Should The United States Impose Worldwide Taxation And Reporting On People Who Are Residents Of Other Countries?”
TaxConnections Mission In This Livestream Presentation:
1. Presenting two opposing perspectives on FATCA compliance.
2. Educate taxpayers and tax professionals on FATCA and Foreign Assets.
3. Receive input and perspective from taxpayers and tax professionals.
4. Educate U.S. Congressional Representatives on the impact of FATCA.
5. Provide ideas and solutions to fix the problems associated with Citizenship Taxation on those who do not reside in U.S.
Please register for a complimentary invitation and updates on this very important and educational event for all. You can help us by sharing this blog post with everyone you know who may be affected by Citizenship Taxation or who want to learn from two leading experts on the subject.
Register Here For Complimentary Invitation To Watch Live Stream
The uniquely American practice of “imposing direct taxation on the citizen/residents of other nations” (“citizenship-based taxation”) has NO identifiable group of supporters (with the exception of a few academics who have never experienced it and do not understand it).
The Uniquely American practice of imposing direct taxation on the citizen/residents of other nations has large numbers of opponents (every person and/or entity affected by it). In addition to the submissions of Jackie Bugnion, “American Citizens Abroad“, “Democrats Abroad“, Bernard Schneider there is significant opposition found in the submissions of a large number of individuals. It is highly probable that the submissions come from those who are attempting compliance with the U.S. tax system.