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Wisdom Of “Three Monkeys” Explains: Little Support For “Citizenship-Based Taxation” Makes Repeal Difficult



John Richardson, Citizenship Based Taxation

The uniquely American practice of “imposing direct taxation on the citizen/residents of other nations” (“citizenship-based taxation”) has NO identifiable group of supporters (with the exception of a few academics who have never experienced it and do not understand it).

The Uniquely American practice of imposing direct taxation on the citizen/residents of other nations has large numbers of opponents (every person and/or entity affected by it). In addition to the submissions of Jackie Bugnion, “American Citizens Abroad“, “Democrats Abroad“, Bernard Schneider there is significant opposition found in the submissions of a large number of individuals. It is highly probable that the submissions come from those who are attempting compliance with the U.S. tax system.

The “imposition of direct taxation” on the “citizen/residents of other nations” evolved from “citizenship-based taxation”. “Citizenship-based taxation” was originally conceived as a “punishment” for those who attempted to leave the United States and avoid the Civil War. I repeat, it’s origins are rooted in PUNISHMENT and PENALTY and not as sound tax policy.

In 1924, the U.S. Supreme Court in Cook v. Tait upheld the U.S. practice of “citizenship-based taxation”. This means only that (assuming the validity of the decision almost 100 years later), the U.S. has the right to impose “punishment and penalty” (Justice McKenna actually said that “government by its very nature benefits its citizens”) in the form of “citizenship-based taxation”. This does NOT mean it’s a good idea to do so. Cook v. Tait should be considered in terms of (1) the evolution of citizenship and (2) the evolution of taxation.

The United States has (at least in theory) been imposing direct taxation on Americans abroad (who are mostly the citizen/residents of other countries) for over 100 years. During this period, there has been no serious discussion about ending this unfair and destructive practice. See the following article in the New York Times (from the Titanic era) – March 7, 1914.

NYT March 1914

The United States has “gotten away with this” for so long because there was no attempt to inform about or enforce it until the election of Barack Obama. The Obama era will be remembered for FATCA and the attempt to enforce “citizenship-based taxation”. U.S. “citizenship-based taxation” is now being used to attack the sovereignty of other countries and transfer capital from those countries to the United States.

Because few knew about “citizenship-based” taxation, there was historically very low compliance and little or no attempt at IRS enforcement, on “nonresident Americans”.

Anecdotal evidence suggest that there is still low compliance and few attempts at IRS enforcement on “nonresident Americans”.

Why is it so difficult to get this horrible law (that is damaging to everybody except members of the “tax compliance” industry) repealed?

The wisdom of “The Three Monkeys” explains why.

“See no evil”: Few people even know about U.S. “citizenship-based taxation”. What you can’t see you can’t know.

1. Almost NOBODY (including – some but not all – U.S. based tax professionals) even knows that the U.S. imposes taxation based U.S. citizenship (which is conferred by a U.S. place of birth”). It is simply unknown to the overwhelmingly majority of Americans (how could their country do something as stupid as this?). For a country where citizens are defined primarily as taxpayers (“taxation-based citizenship”), there is little attempt to educate the masses.

2. Citizenship-based taxation is NOT explicitly required anywhere in the Internal Revenue Code. It’s true. The Internal Revenue Code mandates taxing “individuals” and taxing “nonresident aliens” (“nonresident aliens on U.S. source income only). (This suggests that “nonresidents” are NOT required to pay tax to the USA.) It is ONLY through “Treasury regulation”, that “individual” is defined as “citizen or resident”. I kid you not. Read the Internal Revenue Code yourself.

3. Those who do know that the U.S. imposes taxation based on “citizenship” often, equate “citizenship” with “residency”. They think that:

“citizens are residents” and that “residents are citizens”

On April 26, 2017 at the FATCA hearings in Washington, D.C., Representative Connolly said:

“All countries tax their citizens” when he really meant “All countries tax their residents”.

In other words, the U.S. population and Congress actually believe the United States has “residence-based taxation”! Well, everybody knows that “U.S. residents” are subject to U.S. taxation. But few know (and it would never occur to them), that U.S. citizens who establish residence in another country, are still required to pay taxes to the United States!

“Hear no evil”: Those who know about “citizenship-based taxation” don’t know how CBT actually operates – by subjecting people who live in a “foreign country” to the Internal Revenue Code – as though they live in the United States.

4. “Citizenship-based taxation” is discussed ONLY by academics. I have yet to see A SINGLE paper written by a U.S. based “academic” who understands or even mentions the “Alphabet Soup” list of problems faced by Americans abroad which include: FBAR, FATCA, CBT, PFIC, CFC and Forms 5471, 8621, 8938, 3520/3520A, etc. At most they have some “vague idea” that “citizenship” should include the requirement to pay U.S. taxes. They do NOT discuss this issue in practical terms that hint at what it really means.

In other words: Those who know of or advocate citizenship-based taxation simply do not understand the problems that it causes.

5. Those who support or tolerate “citizenship-based taxation”, see the problem in terms of Americans leaving the United States (if they have the “wherewithall”) and NOT as Americans leaving the United States and then having becoming subject to BOTH the U.S. tax system and the tax system of their country of residence. In many cases they don’t even seem to understand that all countries require you to pay tax if you live there! In other words, they see this as a “mobility issue” and NOT as “trying to live your life issue outside the USA issue”.

(This is why it is ESSENTIAL that this deplorable state of affairs NOT be described as “citizenship-based, taxation” but be described as “taxing the residents of other countries!)

6. “Expatriate taxation” is a narrow and highly specialized area of practice. It has complex and has a long “learning curve”. It is therefore not surprising that many U.S. based tax professionals do NOT understand its practical implications. Many of them do not have the skills to inform and advise Americans abroad.

“Speak no evil”: It is almost impossible to get anybody to “listen to” and “speak about” the problem. It is hard to get the attention of Congress

7. Those impacted by CBT (“Homelanders abroad” and the “citizen/residents” of other nations) do not have political representation in the United States. (Of course it is questionable whether Homeland Americans have political representation either. Such is the reality of a two-party system that dominates the political process.) For the most part, legislative change in the USA is accomplished ONLY through “lobbying” and “money”.

Bottom line – U.S. legislators fall into two categories:

First, those who don’t know what CBT is – that the U.S. is imposing taxation on “Homelanders abroad” and the “citizen/residents of other countries”; and

Second, those who are not “paid to care” whether the U.S. is imposing taxation on “Homelanders abroad” and the “citizen/residents of other countries”.

8. The U.S. political system makes it difficult to pass any law. This means that it is both hard to pass new laws and hard to get rid of old bad laws.

9. Congress and Treasury are completely indifferent to “Homelanders abroad” and the “citizen/residents” of other countries. (Indifference being one of the worst forms of abuse.) Therefore, when Congress makes a law or Treasury makes a regulation there is NO consideration given to the effects on persons outside the United States. This indifference would be reasonable if U.S. tax laws did NOT have “extra-territorial application”. But, the indifference is unreasonable when U.S. tax laws do have “extra-territorial application”.

10. The “tax compliance community” is uniquely positioned to advocate for the repeal of “citizenship-based taxation”. Yet it does not do so. (The repeal of “citizenship-based taxation” would hurt their business interests.) I am not aware of any tax professionals who have or are actively lobbying for (not even letters to House Ways and Means in 2013 and Senate Finance in 2015) for a move to “residence-based taxation”.

Perhaps “clients” should pressure their “tax professionals” to lobby (either individually and/or through their professional associations) for the repeal of U.S. “extra-territorial taxation”.

Is a Congressional change in the law really needed?

11. The Internal Revenue Code authorizes and requires a large number of Treasury Regulations. I believe it is possible for Treasury to end “citizenship-based taxation” by simple regulation.

Meanwhile the only rational response to this deplorable state of affairs is captured in the thought that:

“All roads lead to renunciation!”

Have a tax question? Contact John Richardson

 

 

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.

10 thoughts on “Wisdom Of “Three Monkeys” Explains: Little Support For “Citizenship-Based Taxation” Makes Repeal Difficult

  1. Ken Owens says:

    John
    I hope this helps you get more clients, because this is another piece of garbage. Laws are followed in the US and they don’t evolve (change) with the whims of you or people’s mobility. Tax professionals (non-lobbyists) follow the rules and don’t make or change them (only Congress does that here, and a few wayward judges that think they know better and believe that they have the constitutional powers given to the legislative body). Professionals and academics do understand the rules (you’re not the only observant or capable tax professional). The liberal thought process that you have just does not fly in this country, as much as you want to complain.
    But hey, if it gets you more clients, I guess you will keep spewing commentary as fact.
    Ken

    • Nononymous says:

      Actually I hope he doesn’t get many new clients. I hope that more dual citizens and accidental Americans learn how powerless the IRS is to touch them, because once you understand that it very quickly becomes clear that continued non-compliance is the best course of action.

      If you live in a country with lax FATCA rules like Australia or Canada, just say “no” when asked if you have US citizenship – problem solved. If you live in a stricter country like Switzerland you may need to renounce, to provide banks with a CLN to end discrimination. But you certainly don’t need to waste time and money becoming compliant with US taxes, before or after giving up the unwanted citizenship, or even if you’ve been reported under FATCA.

      For anyone with a second citizenship who doesn’t have significant family or financial ties to the US, it really doesn’t matter whether the US does or does not change its idiotic tax laws. You can safely ignore the whole ridiculous business. The IRS has no power to collect outside its borders and no power to harm you (with a few limited exceptions if you are not a citizen in your country of residence).

    • Don Heater says:

      Yes John you better be quiet, your scaring the prey away??

    • Tom C says:

      Ken Owens,

      What has “liberal thought process” have to do with Citizenship Based Taxation? The CBT system is neither liberal or conservative – its simply unjust.

      With your surname, you sound like you have British heritage. Maybe one of your parents were British, or perhaps you were born in the UK but moved to the US as child?

      I would love your thoughts if with those circumstances, how you would feel about paying tax to the UK on top of your US tax obligations – if the UK had the US policy of “Citizenship” Based Taxation.

  2. Nononymous says:

    “All roads lead to renunciation or continued non-compliance!” is my preferred formulation.

  3. Maurice Berman says:

    Kevin sounds like a brain washed usa-er. Corporate stooge or some us person who can not or will not critically examine FATCA and/or the extremely unique us doctrine of tax non residents in company with Eritrea.

  4. FEAR to MAKE MONEY says:

    have you ever tried to live on a no USA country? It is impossible for anyone to be compliant of USA tax code. Specially how USA is taxing PFIC and you end up being double tax on your mutual fund gains. Income which is non-taxable in your country of residence now gets tax because you are a US citizen. USA citizenship is a burden and no point keeping it if you never ever want to live/work in USA. I hope you try to live for few year outside and go through the pain before you decide to write such garbage articles to generate fear and get more business.

  5. Diaspora against CBT says:

    Is Mr Owen even trying to make a point? Through his comments he comes across as little more than a drivelling troll. Mr Richardson’s article is thoroughly factual, documented and easily verfiable if one cares to make the effort to educate oneself. The article is not politically motivated as the issue of citizenship-based taxation (CBT) affects all members of the US diaspora irrespective of political affiliation or preference. It is the consequences of the blind, dogmatic enforcement of this quasi-feudal taxation standard that is driving the US diaspora to renunciation of US citizenship; systematic and widespread denial of access to essential financial services, job discrimination (particularly executive positions) actual punishing tax liabilities despite existing tax deductions, cost and complexity of compliance, etc. Let us not forget that the US diaspora is taxed as a distinct group of people yet are not represented as such in Congress. In comparison, the French diaspora is offically represented in French parliament yet is not taxed as non-resident citizens. Besides the hapless US and rogue Eritrea the entire world without exception practices residence-based taxation, an affirmation that taxation is a matter of citizenry, not citizenship.

  6. Generally tax jurisdiction is considered justified when resident services and protection of local property and rights are provided in exchange for taxation.

    In the case of U.S. taxation of residents of other countries, the U.S. provides zero resident services to them. Local resident services are provided by the countries in which they live in exchange for a fair share of tax paid to those countries.

    Thus, in my opinion, the U.S. government is tax cheating those they tax overseas. The U.S. should provide $95-$113 billion a year to them for resident services – in line with US resident, not $0 for resident services. OR the U.S. should drop the double taxation claim.

  7. cameron says:

    Everyone needs to contact their congressional representative now and make their voice heard! If we stay silent nothing will ever change! A bill for Territorial Tax for Individuals (TTFI) is being drafted by Representative George Holding (R-SC) by late august / early September. I encourage everyone to contact him and thank him for this effort!

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