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Making Citizenship-Based Taxation Reform Easy



Making Citizenship-Based Tax Reform “Easy”

Heitor David Pinto wants to “make it easy” for Congress to move from citizenship-based taxation (CBT) to residence-based taxation (RBT).

Pinto thinks CBT is “absurd.” And he aims to help Congress change it.

Because of CBT’s complexity and because it’s a low priority for Congress, Pinto was concerned Congress might take a long time or might not do tax reform at all for Americans abroad.  But, Pinto hopes “if it’s mostly done already, they might do it faster.”

When the naturalized American citizen immigrated to the United States from Brazil a decade ago, his taxes were simple. He filed tax returns and paid taxes to Brazil for the time he lived in Brazil.  He filed tax returns and paid taxes to United States for the time he lived in the U.S.

He had no further tax obligations to Brazil after that year.  “It never occurred to me it would be different if I was a U.S. citizen” moving to Brazil or elsewhere. “I thought the whole idea was absurd.”

“So Many Problems” of CBT

Even more absurd was learning about complexity for Americans abroad required to file tax returns to the United States, including sending Foreign Bank Account Reports (FBAR) to FinCEN (Financial Crimes Enforcement Network) on bank accounts held in counties where they live, earn their income—and pay taxes.

The situation worsened significantly for Americans abroad when Foreign Account Tax Compliance Act (FATCA) was passed by Congress in 2010 as part of the HIRE Act. Some had their bank accounts closed and mortgages cancelled in countries where they live—and are often citizens. Many object strenuously to private banking information being handed over to the U.S. just because they were born there.

CBT “creates so many problems for a lot of people for no good reason,” insists Pinto.

Connecting with Americans around the world through social networking, Pinto went to work.  With no accounting or law background, the electrical engineer studied the massive IRS Tax Code and CBT history evenings and weekend. “It’s what I do in my spare time,” explains Pinto.

What is CBT?

According to Pinto’s proposal Elimination of Citizenship-Based Taxation to Senate Finance Committee, CBT “is the imposition of taxes by a country on income not generated there, or on assets not located there, from an individual who does not live there, only because the individual is defined as a citizen of the country. The United States is the only country in the world that uses CBT (with the infamous exception of Eritrea).”

America’s CBT dates back to the Civil War and was originally directed at “people trying to escape their duties.”

There have been a myriad of changes since then, all bringing increasing complexity and demands.  While there may be a misconception today that Americans abroad are wealthy,  studies show most are not.  Over 80% who do file owe nothing, but costs for international tax accountants are exorbitant.

“I don’t think people move to other countries to avoid paying taxes,” says Pinto. In fact, many live in countries where they pay higher taxes than if they lived in the United States.

No Justification

In his reviews, Pinto discovered there is no valid justification for CBT. He says the “benefits of citizenship for non-residents are minimal and do not incur any cost to the government. Therefore, citizenship should not be used as a criterion for taxation.”

Recommendation for Reform

There have been numerous excellent comprehensive submissions made to Congress over decades detailing CBT problems and recommending conversion to RBT.

What makes Pinto’s proposal for Elimination of Citizenship-Based Taxation different is that it provides specific recommended changes to the Tax Code to make the shift to Residence-Based Taxation.

The major recommendation is:  Replace citizen or resident and non-resident alien with resident and non-resident everywhere in the Tax Code in the 300 places where those words appear.

After those changes are made, Pinto recommends further modifications, including definition of residence, substantial presence test, the Exit Tax, FBARs and FinCEN for non-residents.

Pinto has met with staff of some members of Congress. He “expect(s) that some changes will eventually become law.” He is not expecting changes “any time soon,” but hopes his proposal to “make it easy” for Congress will help speed up change.

7 comments

  1. Em R. says:

    Great article, Lynne Swanson. Heiter Pinto has everything right. There’s no excuse for Congress to twiddle their thumbs about adopting Residence-Based Taxation (RBT). Mr. Pinto has shown it can be done and how to do it. So just get it done, Congress. You’ll find you can sleep easier afterwards. Dare I presume that the members of the Senate Finance Committee are actually taking the time to read the nearly 500 submissions from Americans living outside the boundaries of the USA? They want RBT and they deserve RBT.

  2. JC Double Taxed says:

    Time For America to Join the Rest of The Developed World and Adopt: Residence Based Taxation.

    Americans in the US trumpet how great their freedom is. However the freedom of Americans is inferior to the freedom enjoyed by citizens of many countries such as Australia, Canada, and the UK and this freedom is this: the freedom to work and live in another country, and the freedom to leave one’s country.
    America’s tax and compliance laws have increasingly acted to keep Americans in by punishing harshly those who have left.

    Those impacted very much are part of the 99%, most part of the lower and middle class. If you are a US person living overseas, and there are 7+ million, then you are already getting taxed in the country where you live and receive government services. You receive $0 in US government services. The US with Citizenship Based Taxation wants to tax you as if you live in the US. The US allows tax credits. The conundrum comes in where the US has taxes that your country does not, then this flows on top of all taxes paid as double taxation.
    US persons living overseas are tremendously disadvantaged by US tax and compliance policies. All other countries of the OECD practice Residence Based Taxation. As a result while US persons overseas are tripped up by double taxation, reporting all their accounts, and onerous compliance and penalties; nationals from all other countries are free from such interference from their home countries.

    Any US persons living overseas caught up in all this must visit the message boards of The Isaac Brock Society, whose motto is: Liberty and Justice for all United States Persons Abroad. ADCS has initiated legal action against the Canadian FATCA IGA and is seeking donations in its fight against US government injustices against US persons overseas – check it out on The Isaac Brock Website.

  3. Shovel says:

    The article points out that a switch from Citizenship-based to residence-based would be procedurally simple.

    Now, if it only could be made politically simple.

    The U.S. has come up with a way to rob and extort money from other countries by abusing the U.S dollar’s (temporary) position as the world’s reserve currency. Greedy bullies with no sense of morality or justice like the U.S aren’t going to give up their short-term advantage because it is procedurally easy.

    The rest of the world needs to come back and make it hurt. And eventually, they will.

  4. Charles Buckley says:

    One of the problems with the way Congress work is that there are so many submissions for reform made, many of which are either incomplete or just downright lame, because people don’t coordinate.

    Many members offices valiantly try to sort through the volume, looking for pearls in the muck, but it just never ends. So the more pragmatic just give up and only pay attention to lobbyist who bring ‘talking money.’ It’s very sad.

    As far as swapping CBT for RBT, Jackie Bugnion of the ACA (American Citizens Abroad) has spearheaded a thorough legislative analysis, down to a comprehensive citation list of laws that would need to be changed. I was thoroughly impressed.

    Rather than starting over again, I would strongly recommend that people like Mr Pinto make themselves aware of other efforts of this kind, and work together to present a united front.

    I interacted with the ACA for quite a while, but stopped because, while their legwork and proposals were good, they seem to let themselves be deflected by the most inane of Congressional arguments. One argument that was relayed to me was essentially that “companies should decide who they want to send abroad, and switching to RBT wouldn’t bring much of a return.”

    This argument only says to me that Congress are firmly in the pockets of large companies, and not paying attention to the needs of small entrepreneurs. Back in the 70s, the South American companies were the same way — the laws were so stacked against the small guys, that the best choice was to immigrate to the US (which many did).

    Since only the US have CBT, this was not a problem. The countries from whence these entrepreneurs emigrated left them alone, just as Mr Pinto’s story shows. Now that the US has become so difficult for entrepreneurs that people want or need to leave, the CBT really holds them back.

    It would be well within the US interests to stop this nonsense, but the main problem is there is no major economic force out their who can afford to show up with the talking money required to get Congress to see things that way.

    Under the circumstances, the best hope is for coordination among people asking for this, and increasing the signal-to-noise ratio of what is presented to Congress.

    I would point out that Republicans (in the majority of both houses) put switching to RBT into their party platform last fall to win the midterm election. So the matter should be easy. The case has been made, the majority party agree, and the legislative legwork has been done.

    The only remaining obstacles would be to gett members of Congress to jump over their shadows, stop slow-tracking this because large corporate and foreign interests don’t like the competition, and doing what makes imminent good sense.

    Even a blind pig gathers a few acorns. Why not Congress?

    • Heitor David Pinto says:

      I did collaborate with ACA, in fact they included many of my suggestions in their RBT proposal last year. It’s certainly not my intention to compete with ACA. I just thought that it would be good if Congress heard about this subject from more people and with more details.

      You’re right, the only obstacle to RBT is the irritating inertia of Congress, as the current majority already agrees with the idea.

      • Charles Buckley says:

        Yes. the ACA say you did work with them, and that you did a lot of work on legal analysis. They also now claim they didn’t do one of their own, which I find a bit strange, as I remember reading parts of it in great detail last year. I guess I should download everything I come across that represents a significant amount of work, as things disappear from the Internet.

        I downloaded the 2015 Senate Finance Committee submissions, which took about 3 hours of clicking and saving. Apart from yours and a few others, most were the same as last year — lengthy stories of personal difficulty caused by the obtuse tax laws. One spends a lot of time reading them, with little new actionable information.

        It would be good to see submissions starting from the assumption that CBT is a known bad thing, and asking why Congress feel it will take long to change it. The big companies who write all those campaign checks like having it — they can afford to hire foreign staff, whereas entrepreneurs have to do the work themselves. So it’s a form of protectionism.

        In any case, Congress needs to function a bit more transparency and representatively. Social networking would be very useful, if used properly. Most Congressmen don’t, though.

  5. John says:

    CBT is an affront of foreign sovereignty. The $100+k tax on Boris Johnson was not American money but British money generated within their economy. CBT is stealing jobs and adding debt to all nations with American citizens living in them. CBT is an obscene international foreign relations practice, and this financial war alone should be enough to get congress to the table.

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