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Former ACA Tax Director Jackie Bugnion Recalls The 2014 Kirsch Schneider Debate On Citizenship-Based Taxation



John Richardson CBT

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.

Jackie Bugnion
Former Tax Director of ACA

May 9, 2017

REQUEST ACCESS TO MAY 17th 2019 DEBATE

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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.

3 thoughts on “Former ACA Tax Director Jackie Bugnion Recalls The 2014 Kirsch Schneider Debate On Citizenship-Based Taxation

  1. Avatar cameron says:

    It makes no rational sense why CBT has any benefit. Its a MAJOR liability and the massive unjust punishment of double-taxation is not truly felt unless you are a dual citizen who lives abroad. Its completely insane. It was first imposed during the civil war to punish draft dodgers who fled the country. Why its still enforced today is like some sort of sick sadistic game. The revenue it makes is generally nil and only makes an extremely complicated 12 headed hydra of mind-mindbogglingly complexity which feeds on the flesh on US citizens and the IRS who have to administer this alien, non-sense rules. Anyone who supports it has their brains on a different planet or are somehow benefiting from it (compliance vultures).

    The advice of tax compliance yes men should be taken with a grain of salt. The only people that benefit from citizenship based double taxation are accounting firms who make hand over first on the hardships of dual citizens with lives outside the US.

    Im a dual citizen living in Canada and know first hand the life restrictions it imposes.

  2. Here is a major point not mentioned:

    The balance of the focus of the regulation needs to be against U.S. Government over-regulation and much less so against the individual. Currently it is all one way against individuals.

    The FACT is that U.S. persons resident overseas receive ZERO in the way of resident services, protection of local property, and protection of local rights in exchange for the double taxation.

    & on top of that they get a more onerous version of the tax code that penalises in a myriad of ways income and assets “foreign” to the U.S. The overlay of two different tax codes in different currencies substantially adds to complexity.

    There should be recognition that US persons overseas – ~92% in equal or higher taxing countries than the U.S. are the highest taxed Americans.

    The USG should recognise that its double tax claim is not justified as it provides ZERO resident services in exchange. Plus, USP overseas do not cost the USG in the use of Food Stamps, Unemployment assistance, and use of infrastructure etc.

    Just extrapolating the USG spend on U.S. residents to the 9 million U.S. persons overseas; IN EXCHANGE for the double taxation the USG should provide $113 billion a year in resident services to them, not $0 a year!

    Either the USG should provide such services or drop the unjustified claim of double taxation.

  3. In regards to point in the article body about escaping certain provisions of the tax code by moving:

    People do it all the time within the states. New Jersey and New York tax too high and then people may move to Texas or Florida then they get out from under the tax imposed by New York and New Jersey, as they are no longer residents there and no longer “benefit” from services there. If they move back to New York and New Jersey and reestablish residency then those states may rightfully tax them.

    This is a fantastic explanation:
    https://purpleexpat.org/wp/about/

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