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.
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.