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IRC Section 965 Transition Tax – Part 9



John-Richardson- Investigating the Transition Tax

From The “Pax Americana” To The “Tax Americana”

This is the ninth in my series of posts about the Sec. 965 Transition Tax and whether/how it applies to the small business corporations owned by taxpaying residents of other countries (who may also have U.S. citizenship). These small business corporations are in no way “foreign”. They are certainly “local” to the resident of another country who just happens to have the misfortune of being a U.S. citizen.

Introduction – The purpose of this post is …

to demonstrate that the “transition tax” is an example (particularly egregious) of the principle that (1) not only does the United States impose “worldwide taxation” on the “tax residents” of other countries, but  (2) it imposes a separate tax regime on certain “tax residents” of other countries that is different and far more punitive than the regime imposed on Homeland Americans. Yes, you read correctly!

It is the “Tax Americana”– a “form” (no pun intended) of an “empire” which is colonizing other countries through taxation.

A recent and most important example of the “Tax Americana” is the “transition tax” : A U.S. resident who has undistributed earnings in a U.S. corporation will NOT be subjected to the “transition tax”. A Canadian resident who has undistributed earnings in a Canadian corporation will be subjected to the “transition tax”!

The United States has a separate and more punitive tax and reporting regime which it imposes on those “non-residents” of the United States which it deems to be U.S. citizens or permanent residents!

How could this have happened? How could the United States concluded that it has the right to impose “worldwide taxation” on “tax residents” of other countries? Why would the United States imagine that it has the right to impose FATCA on a reluctant world while at the same time refusing to join the world in in adopting the “Common Reporting Standard” (CRS)? This combination of arrogance, confidence, disrespect and lack of concern for the rest of the world is possible only in the context of “empire”. The British Empire treated the Colonists with the same disrespect – imposing a “tax Britannica” – in the same way that America now treats other countries. This has been explained in wonderful language by Jackie Bugnion, which includes:

In 1776, the United States declared independence because the mother country on the other side of the ocean was imposing taxes on the colonies for the benefit of England. Resentment started when Britain tried to enforce the Navigation Act after 1763. Resentment increased with the Stamp Act in 1765, a way for Britain to tax the colonies. The British Tea Act of 1773 led to the Tea Party and we all know the outcome – the American Revolution and independence crying out “no taxation without representation”.

Today, the estimated 7 million Americans resident abroad, of whom the majority are long-term overseas residents in high tax OECD countries, face a comparable situation. Their representation in Congress is non-existent in reality. Americans abroad amount to only 1 to 2% of the votes in any particular state; Congressmen and Senators have ignored their tax issues. The unjustified myth that Americans abroad are wealthy and disloyal restricts a rational approach to the problems because of political image issues.

Empire and Taxation – From Part A to Part I:

Part A: From King George of England To King George W of America – How Did The Empire arise?

Part B: Bretton Woods – The Reserve Currency – Fertile Conditions For Evolution of The Empire

Part C: Citizenship And The Expansion of Empire – the United States

Part D: Citizenship And The Expansion of Empire –  Ancient Rome

Part E: Empire And Taxation: As Goes Taxation, So Goes Civilizations

Part F: Public Perception of Empire

Part G: Empire And Taxation: If You Were To Ask Your Friends The Following Question:

Part H: 12 Examples (in addition to the “transition tax”) Which U.S. Residents Can “Laugh About” And Canadian Citizens Can/Should “Rage About”

Part I: It’s The “Tax Americana” – A “Form” (pun intended) of “Tax Colonization”


Part A: From King George of England To King George W of America – How Did The Empire Arise?

Setting The Stage For “Empire” – Bretton Woods – 1945

Being left to the mercy of an all-powerful United States was intolerable, particularly as the U.S. Government had been determined to show its people that American boys had not been sacrificed to perpetuate the moral abomination of empire. Yet here at Bretton Woods was the American Treasury Secretary tethering the historic event to the mast of his country’s superpower ambitions. The British had been anxious to see themselves as partners with the Americans in creating the ground rules for the postwar order, yet at every step to Bretton Woods, the Americans had reminded them, in as brutal a manner as necessary, that there was no room in the new order for the remnants of British imperial glory.

– Benn Steil, The Battle of Bretton Woods

World War II was NOT prosecuted on North American soil. North America was far less impacted by the War than Europe and Asia. At the end of the War, many countries had to rebuild their infrastructure. North America was left with its infrastructure intact.

Part B: Bretton Woods – The Reserve Currency – Fertile Conditions For Evolution of The Empire

The end of World War II and Bretton Woods led to:

– an international economy, where the U.S. dollar became the dominant world reserve currency

– a “Cold War” where the United States was the leader of a “Free World” which was in opposition to a Soviet led “Communist World” (Think of President Kennedy’s Berlin Wall speech which began with the words: “There are many people in the world, who really don’t understand, or say they don’t, what is the great issue between the free World and the Communist World – Let them come to Berlin!

– an International Economy that was dominated by the United States and that was favourable to U.S. multi-national corporations

– the beginning (1962) of the U.S. “CFC and Subpart F regime” (of which the “transition tax” is an example) which was designed to keep U.S. corporations from deferring tax on certain kinds of income. (Along with the PFIC regime, the CFC rules are are the “corner stone” of the U.S. anti-deferral regime)

– the exporting of U.S culture (largely through U.S. multi-nationals)

– the exporting of a vast U.S. regulatory regime which was partly the result of the world dependence on the U.S. dollar as the dominant reserve currency

– the exporting of the Internal Revenue Code and the cultural values it enshrines, through the mobility of U.S. citizens, into other countries and into other cultures

The status of the U.S. dollar as the dominant reserve currency made the U.S. imposition of FATCA on the rest of the world (largely) possible.

Part C: Citizenship And The Expansion of The Empire – the United States

As The U.S. Empire Expanded: U.S. Citizenship became “Easier To Get” And “Harder To Lose”

Since the Civil War the United States has had a policy of “citizenship-based taxation”. At the time of the Civil War “citizenship” and residence were more closely linked. In fact, for the most part, “citizens were residents” and “residents were citizens”.

“Dual citizenship” was almost non-existent. The relevant U.S. nationality statutes made it clear that U.S. citizens who naturalized as citizens of other countries would lose their U.S. citizenship. As a result, “dual citizenship” (to the extent that it existed) was an accident of birth and NOT the result of an affirmative act.

Therefore, for the United States to impose taxation on U.S. citizens living outside the United States was generally NOT to impose taxation on people who were citizens of other countries.

In 1967 the U.S. Supreme Court in Afroyim v. Rusk set the stage for the recognition that U.S. citizens would NOT relinquish their citizenship if they naturalized as citizens of other countries. This decision opened the door to U.S. citizens acquiring dual citizenship.

Over time (1) dual citizenship has become common and (2) it is more common for U.S. citizens to live as dual citizens outside the United States.

Therefore, the U.S. policy of “citizenship-based taxation” has evolved into a system where the United States is imposing “worldwide taxation” on the citizen/residents of other countries (who also hold U.S. citizenship).

The rise of the U.S. Empire has coincided with the expansion of U.S. citizenship.

Part D: Citizenship And The Expansion of Empire –  Ancient Rome

As described by Andrew Henderson of Nomad Capitalist, in 212 AD the Roman Emperor Caracella expanded Roman citizenship by bestowing Roman citizenship on all free men. A listing in Wikipedia suggests that:

The Roman jurist Ulpian‘s Digest stated, “All persons throughout the Roman world were made Roman citizens by an edict of the Emperor Antoninus Caracas” (D. 1.5.17).

The context of the decree is still subject to discussion. According to Cassius Dio, the main reason Caracalla passed the law was to increase the number of people available to tax. In the words of Cassius Dio: “This was the reason why he made all the people in his empire Roman citizens; nominally he was honoring them, but his real purpose was to increase his revenues by this means, inasmuch as aliens did not have to pay most of these taxes.”[2] It should, however, be noted that Cassius Dio generally saw Caracalla as a bad, contemptible emperor.

Another goal may have been to increase the number of men able to serve in the legions, as only full citizens could serve as legionaries in the Roman Army. In scholarly interpretations that followed a model of moral degeneration as the reason for the fall of the Roman Empire, notably the model followed by Edward Gibbon, the edict came at the cost to the auxiliaries, which primarily consisted of non-citizen men, and led to barbarization of the Roman military

Clearly Rome was not the last empire to associate “citizenship” with “taxation”.

Part E: Empire And Taxation: As Goes Taxation, So Goes Civilizations

As the late Charles W. Adams wrote in his classic book – “For Good and Evil: The Impact Of Taxes On The Course Of Civilization” – the evolution of civilizations is a function of the tax policies of the civilization. Presumably as “civilizations expand into empires”, the tax policies of an empire are more likely to expand beyond the borders of the nation and into other nations. What the United States calls “citizenship-based taxation” (making it seem patriotic) is really the policy of imposing “worldwide taxation” on the “tax residents” of other countries. It is explainable as a part of the creation and expansion of empire. FATCA is the way that the American Empire has forced other nations to (1) impose U.S. taxation on the residents of those countries and (2) force those other countries to bear the cost of so doing.

Canada is probably the number one victim of U.S. “extra-territorial taxation”.

Part F: Public Perception of Empire

Former Canadian Liberal Leader Michael Ignatieff was a Harvard Professor when he was recruited by the Federal Liberals to return to Canada and lead the Liberals from the “waste land” to the “promised land”. Mr. Ignatieff was kind of a “public intellectual” who quickly learned that the “hard knocks” of political life were harder than the comforts of his academic appointments. In any case, Mr. Ignatieff recognized American Empire and wrote a fascinating article about it (which appeared in the New York Times in 2003 just prior to the Bush invasion of Iraq.) It’s a fascinating article. Well worth the read. It includes:

America’s empire is not like empires of times past, built on colonies, conquest and the white man’s burden. We are no longer in the era of the United Fruit Company, when American corporations needed the Marines to secure their investments overseas. The 21st century imperium is a new invention in the annals of political science, an empire lite, a global hegemony whose grace notes are free markets, human rights and democracy, enforced by the most awesome military power the world has ever known. It is the imperialism of a people who remember that their country secured its independence by revolt against an empire, and who like to think of themselves as the friend of freedom everywhere. It is an empire without consciousness of itself as such, constantly shocked that its good intentions arouse resentment abroad. But that does not make it any less of an empire, with a conviction that it alone, in Herman Melville’s words, bears ”the ark of the liberties of the world.’

In other words, the United States is a country that believes that all of its policies, actions and ambitions are cloaked in righteousness simply because it is the United States.

Part G: Empire And Taxation: If you were to ask your friends the following question:

Q. Do you think that the United States would impose more punitive taxation and compliance requirements on: (1) U.S. citizens living in the United States or (2) certain Canadian citizens living in Canada?

A. The probable answer would be: Don’t be absurd. Of course the United States imposes more punitive taxation on U.S.citizens living in the United States than on Canadian citizens living in Canada.

Wrong! Wrong! Wrong!

To put it simply: The Internal Revenue Code of the United States imposes taxes, sanctions and penalties on certain Canadian residents that are not imposed on Homeland Americans at all. The point its that “non-residents” are subjected to a harsher set of U.S. tax rules than are U.S. residents.

One answer to the question includes …

I know the answer to this question. I filed one year using TurboTax (and a host of paper filings since TurboTax falls way short of being sophisticated enough for a foreign return) and it had a helpful function at the end where you could compare your US tax liability against others in a similar income band. My US tax liability was 2.5x the average bill in the same income band. That’s not 2.5% but 2.5x. My “fair share” was more than twice as much for the same level of income as the homelander “fair share”.

Thankfully, the out of pocket cost was limited by the taxes I had already paid in the UK. But, it shows the cost of not living a life optimised for the rules of the US tax system can be enormous. If you live in the US, there are tax no brainers. If you live in the UK, there are tax no brainers. But if you’re subject to both systems at the same time, you can’t benefit from the tax no brainers since, by and large, the other country takes what the other giveth.

As I’ve said before, the US tax system includes on the basis of citizenship but excludes on the basis of physical location since participation in the tax no brainers is limited by things like US source earned income which you can, generally, only get when you live in the US.

 

U.S. taxation of residents of other Canada and other countries: It’s really “territorial taxation” in reverse

As Charles Bruce (ACA Legal Counsel) describes it:

Ironically, this is a prime example of “upside down” territoriality. Under a territorial approach, such as, residency-based taxation, the taxpayer is expressly not taxed on foreign income. Here, the taxpayer – say, an American abroad – for sure will be fully taxed on foreign income, whereas his or her cousin in the States who earns domestic business income will enjoy the 20% deduction.

Part H: 12 Examples (in addition to the “transition tax”) Which U.S. Residents Can “Laugh About” And Canadian Citizens Can/Should “Rage About”

1. Templeton Mutual Fund bought in the U.S. by a U.S. resident is NOT subject to PFIC confiscation. The same mutual fund (with exactly the same securities) bought in Canada by a Canadian resident is subject to PFIC confiscation. Furthermore, the Canadian resident is required to report his ownership in his Canadian mutual fund on Form 8621 – check it out here.

2. A U.S. resident who invests in a ROTH IRA has automatic “tax deferral” and is not subject to U.S. taxation. A Canadian resident who invests in an equivalent TFSA does not have “tax deferral” and is subject to U.S taxation on the income on TFSA even though he is not subject to taxation on the income in Canada.

3. A U.S. resident who invests in an ABLE plan (Achieving a Better Life Experience Act) has automatic tax deferral. A Canadian resident who invests in an RDSP (equivalent “special needs plan”) is subject to U.S. taxation on that income. Furthermore, the Canadian resident is required to report his ownership of his RDSP on Form 3520 – check it out here.

4. A U.S. resident who invests in a S. 529 “education plan” has automatic tax deferral. A Canadian resident who invests in an RESP (equivalent “education plan”) does not have “tax deferral” and is subject to U.S. taxation on that income. Furthermore, the Canadian resident is required to report his ownership in his RESP on Form 3520 – check it out here.

5. A U.S. resident who receives distributions from a 401K plan is not subject to the 3.8% Obamacare surtax. A Canadian resident who takes a distribution from an (equivalent) Canadian RRSP is subject to the 3.8% Obamacare surtax. Furthermore, the Canadian resident is required to report his Obamacare surtax  on Form 8960 – check it out here.

6. A U.S. resident is not required to report his local U.S. bank accounts to U.S. Financial Crimes. A Canadian resident is required to report his Canadian bank accounts to U.S. Financial Crimes. This is a very special category of “form crime” -see information about Mr. FBAR.

7. A U.S. resident is not required to report his U.S. financial assets annually to the IRS on Form 8938. A Canadian resident may be required to report his Canadian financial assets annually to the IRS on Form 8938. Form 8938 is an extremely intrusive, time consuming form. Check it out here.

8. A U.S. resident is NOT required to treat his business activities in the USA as foreign and subject to penalties and reporting. Certain Canadian residents are required to treat their business activities in Canada as foreign and subject to penalties and reporting. Check out Form 5471 and From 8865.

9. A U.S. resident married to a U.S. citizen spouse is allowed to make unlimited gifts to his spouse. A Canadian resident married to  a Canadian citizen spouse is NOT allowed to make unlimited gifts to his spouse. Furthermore, the Canadian resident is required to report certain gifts to his spouse on Form 709 – check it out here.

10.  A U.S. resident who renounces U.S. citizenship will not have his U.S. pension plan subject to confiscation because of the Section 877A Exit Tax. A Canadian resident who renounces U.S. citizenship would have his Canadian pension plan subject to confiscation because of the S. 877A Exit Tax. It’s because it the pension is NOT a “U.S. pension”, but is a “Canadian pension”.

11. The TCJA includes a provision that allows U.S. residents to deduct property taxes on their U.S. principal residences, but specifically does NOT allow a Canadian living in Canadian to deduct property taxes on his Canadian principal residence.

12. The TCJA provided allows a deduction of up to 20% of passthrough income for specified service business owners with income under $157,500 (twice that for married filing jointly) for certain income effectively connected with the conduct of the trade or business within the US. A U.S. resident operating a U.S. business is entitled to the deduction. A Canadian resident carrying on a small unincorporated business in Canada is NOT entitled to the 20% reduction.

An “Unintended Consequence” or “Willful”?

The vast majority of U.S. residents and Congressmen neither understand this nor know that this is taking place. That said, some members of the Treasury clearly do understand that:

Part I: It’s The “Tax Americana” – A “Form” (pun intended) of “Tax Colonization”

In any case – the “Tax Americana” must first be understood and then end:

The time has come for the United States to stop imposing “worldwide taxation” of people who are “tax residents” of other countries and do NOT live in the United States”.

The time has come for other countries to recognize the “Tax Americana” and realize how the “Tax Americana” is eroding the sovereignty of other nations!


IRC Section 965 Transition Tax- Part 1

IRC Section 965 Transition Tax- Part 2

IRC Section 965 Transition Tax- Part 3

IRC Section 965 Transition Tax- Part 4

IRC Section 965 Transition Tax- Part 5

IRC Section 965 Transition Tax- Part 6

IRC Section 965 Transition Tax- Part 7

IRC Section 965 Transition Tax- Part 8

 

 

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.

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