Before moving to the post, if you believe that Americans abroad are being treated unjustly by the United States Government: Join us on May 17, 2019 for a discussion of U.S. “citizenship-based taxation” as follows:
This is part of a series of post I have written as a run up to the May 17, 2019 Tax Connections discussion about U.S. citizenship-based taxation.
Introducing Jackie Bugnion …
Jackie Bugnion was an important part of “American Citizens Abroad” for many years. She has an unusually nuanced understanding of the problems that citizenship-based taxation inflicts on Americans abroad. She was (and continues to be) a tireless advocate for the principle that the United States must transition to a system of residence-based taxation. When she retired she was the Tax Director at ACA. She was the author of some of the very best articles about citizenship-based taxation.
In addition, Jackie organized the first ever conference to study and discuss “citizenship-based taxation”. The conference took place in Toronto, Canada on May 2, 2014. This conference featured a debate between Professor Michael Kirsch and Dr. Bernard Schneider.
What follows are her thoughts on a second debate about “citizenship-based taxation”.
Looking forward to Zelinsky-Richardson debate
I look forward to the upcoming debate between Professor Edward Zelinsky and John Richardson on citizenship-based taxation (CBT) which will take place May 17th at 2:00 p.m. ETS, available at www.taxconnections.com. This should be an enlightening follow-up to the 2014 debate organized in Toronto by the American Citizens Abroad Global Foundation between Professor Michael Kirsch and Dr. Bernard Schneider.
Professor Kirsch defended CBT on the principle that maintaining U.S. citizenship when residing overseas reflects a voluntary identification as a part of U.S. society. In his view, the intrinsic benefits of citizenship – ability to return to the United States, to pass U.S. citizenship onto one’s children and to vote – also carry the responsibility to share in the burden of supporting the society through taxation. However, Professor Kirsch concedes that if the implementation of the taxation is so complicated, costly and burdensome that it pushes individuals to renounce their U.S. citizenship, the practical administrative issues must be fixed by Congress and the Department of the Treasury.
Professor Kirsch has two key concerns about any possible implementation of residence-based taxation (RBT). First and foremost is that, if Americans abroad are taxed the way non-resident aliens are taxed, very wealthy individuals would possibly have a tax incentive to establish overseas residence, in particular with regard to estate and gift tax planning. This concern has, however, become a non-issue under the proposed RBT legislation, “Tax Fairness for Americans Abroad Act (HR 7358), introduced in December 2018 by Congressman George Holding. The bill limits its focus to taxation of income; it proposes that U.S. citizens residing overseas be taxed by the United States only on their U.S.-source income, not on their worldwide income. U.S. gift and estate taxation rules remain applicable to Americans resident abroad on the same basis as U.S. residents. Professor Kirsch’s second concern is the possibility, under current substantial presence rules, that Americans could claim they are residents abroad and yet spend up to 4 months a year in the United States; he suggests that a shorter period should be allowed for Americans abroad who are taxed under RBT. He is also concerned about how the IRS would be able to monitor the number of days spent in the United States.
Dr. Schneider advocates RBT. He notes that the base for taxation is, in general, either residence or source. If one is not a resident, are you really a member of the society? Do you get benefits to warrant taxation based on citizenship? In Dr. Schneider’s view, membership in a community is not a sufficient reason for taxation, particularly for long-term overseas residents, accidental Americans (those born in the U.S. of foreign parents who have lived only briefly in the U.S. and have not been raised as an American) and unaware citizens fully integrated into a foreign society (individuals born abroad who, through the U.S. citizenship of a parent, are legally American but are not aware of it). The connection of these individuals to U.S. society is very limited, often inextant.
Dr. Schneider emphasizes the substantial collateral damage imposed by U.S. CBT not only on U.S. citizens, but also on their foreign spouses and business partners. CBT has turned U.S. citizenship into a liability for those residing overseas. He highlights the administrative hassle, the high cost of compliance, the required use of the U.S. dollar as a functional currency leading to fictive capital gains, the U.S. treatment of foreign pensions which nullifies savings benefits for retirement, the penalizing PFIC rules restricting investment options, the intrusive limitations on banking access and the excessive potential penalties associated with international filings. Concerns about practical on-the-ground issues far outweigh theoretical consideration of any connection to the United States. Dr. Schneider noted in 2014 that enforcement by the IRS was extremely difficult. With FATCA in place today, enforcement is facilitated, but at the same time, the complexity of the U.S. tax laws and compliance requirements are much more penalizing. The prime example comes from the Tax Cuts and Jobs Act of 2017; the “deemed repatriation tax” and the “GILTI tax” imposed on Americans abroad who own and operate their local business through a foreign company are strangling American entrepreneurs overseas, significantly reducing their competitiveness and in some instances driving them out of business.
It will indeed be interesting to listen to the positions of Professor Zelinsky who defends CBT and John Richardson who proposes RBT.
Former Tax Director of ACA
May 9, 2017
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