Welcome to 2021 and the chaotic world of US Extraterritorial Taxation
SEAT correctly (by focusing on how the taxation of residents abroad applies) characterizes the US imposition of US worldwide taxation on nonresidents as “American Extraterritorial Taxation”.
The tax compliance community and academics, in a misleading way, characterize these same rules (by adopting a vague, abstract label which is not descriptive) as “citizenship-based taxation“.
A proponent of citizenship-based taxation is a person who occasionally thinks about citizenship-taxation.
An opponent of citizenship-based taxation is somebody who understands citizenship-based taxation.
What the United States proudly calls “citizenship-based taxation”, is a system where:
The United States imposes taxation on:
(1) people who live outside the United States;
(2) on their income earned outside the United States.
In some cases (Exit Tax, Transition Tax, GILTI, PFIC and Phantom Capital Gains) there is no income actually earned! In these instances the United States imposes real tax on pretend income.
Why SEAT? SEAT is an acronym that stands for: “Stop Extraterritorial American Taxation”.
Our name focuses on our objective. Our singular objective is to stop the imposition of U.S. worldwide taxation, on non-U.S. income, earned by those who live outside the United States. Our name was chosen to focus on our objective. Our name deliberately does not focus on the specific groups we are trying to assist. Our name focuses on the problem we are trying to solve. U.S. extraterritorial taxation is the cause of FATCA and other related problems. Solving FATCA related problems will not solve the problem of extra-territorial taxation.
Our objective to – “Stop American Extraterritorial Taxation” – will benefit all individuals including: Americans Citizens Abroad/Overseas, Green Card Holders abroad, Accidental Americans. Included in these groups we will find the richest of the rich, the middle class and the poorest of the poor. It will also benefit the sovereign nations who are having their economies directly attacked by U.S. tax policy.
Few things that are important and worth doing can be achieved quickly. It will take time to achieve this objective. We believe that this objective will be achieved through persistence, patience and the education of individuals and governments about the intent and impact of U.S. extraterritorial tax policies.
That said, a necessary condition to effect change is that:
Individuals must understand that this is a bigger problem than the problem experienced by any one individual. The fact that a problem doesn’t affect you today does not mean that it won’t affect you tomorrow! An injustice perpetrated against any one group of individuals is an injustice against ALL individuals potentially impacted by these laws. For example imposing the PFIC regime on non U.S. mutual funds is an injustice perpetrated against ALL individuals trying to plan for retirement. The imposition of GILTI and the 965 Transition Tax on small business owners is an injustice perpetrated against all individuals who want the freedom to start their own businesses.
Or as Benjamin Franklin famously said:
If we don’t hang together we will hang separately.
So what exactly is “American Extraterritorial Taxation?” Extra-territorial taxation is the American policy of imposing worldwide taxation on income earned OUTSIDE the United States. But this taxation is imposed on people who are tax residents of other countries, who do NOT live in the United States! Should a person who was born in France, who lives in France and earns all his income in France be required to pay tax on that income to the United States? Does the United States have a moral claim to impose worldwide taxation on people simply because they were born in the United States? Does the United States have a moral claim to impose worldwide taxation on an individual because he was born outside the United States to a U.S. citizen parent? Should a change in the citizenship law of the United States automatically make residents of other countries subject to U.S. worldwide taxation?
In the world of taxation and politics, this tax policy, which is unique to the United States, is referred to as “citizenship-based taxation”. The phrase “citizenship-based taxation” is an abstraction that obscures its true effect and implies that it is a normal obligation of citizenship. The words “citizenship-based taxation” also obscure the horrible effects this policy has on both individuals living outside the United States and the countries they live in. The phrase “citizenship-based taxation”, by ignoring its extraterritorial reach, does not even hint at the scope and range of people affected by it.
The problems of American extraterritorial (citizenship-based) taxation are experienced by different people in different ways.
Examples of the effects on individuals include (but are not limited to):
Accidental Americans in Europe and other countries, because of U.S. tax rules, are unable to maintain bank accounts. Why? Because the individual was either born in the United States or was born outside the United States to a U.S. parent. Sound crazy? Last week a court in the Netherlands ruled that a bank in the Netherlands, was entitled to close the bank account of a resident of the Netherlands, because of U.S. tax rules. This week a bank in Germany announced that it planned to close the accounts of U.S. citizens. Why? Because of U.S. tax rules that require a tax identification number.
(Some claim that the bank account problems are because of FATCA. FATCA is part of the U.S. Internal Revenue Code. FATCA exists for one reason only: to enforce U.S. citizenship-based taxation. My next post will explore this in more detail.)
American emigrants and expatriates all around the world, are unable to engage in the normal financial and retirement planning practices that are encouraged by their country of residence and expected by their friends and family. Think of the Superannuation problems in Australia. Think of the treatment of non-US mutual funds as PFICs (“Passive Foreign Investment Companies”). Think of the fear of investing in an ISA in the U.K. Imagine being disabled from investing in an RESP or RDSP in Canada? Think of the double Social Security taxes on self-employed people in Israel. Think of Canadians who used Canadian Controlled Private Corporations as private pension plans, who had a good part of the retained earnings confiscated by the S. 965 Transition Tax. Imagine a French resident with a capital LOSS on the sale of French stock being required to pay a U.S. capital gains tax – on fake/phantom capital gains – because of currency exchange rate fluctuations. Homeland Americans don’t have these problems.
A separate and more punitive tax system applied to individuals living in other countries
It’s far worse than the United States imposing worldwide taxation on (1)people who do not live in the United States and (2) on their income sourced outside the United States.
This is because, the system of worldwide taxation that the United States imposes on individuals living outside of the United States, is a separate and more punitive version than the system imposed on U.S. residents. In earlier posts I have identified a number of specific examples. Of interest is a discussion I had with three very highly regarded U.S. tax professionals who agreed with the proposition that: “The United States is imposing a separate and more punitive tax system on individuals who live outside the United States”. You can view some of the discussion here. Imagine, never having even lived in the United States and being subjected to a U.S. tax system that is more harsh than the system imposed on U.S. residents!
With the exception of the United States and Eritrea, other countries stop imposing worldwide taxation on citizens who move to another country. But, with respect to U.S. citizens who move from the United States to integrate into another country: The United States imposes a more punitive form of taxation. Homeland Americans have never heard of FBAR, FATCA, PFIC, Phantom Gains, Subpart F, Transition Tax or GILTI. For Americans abroad these terms are part of their daily vocabulary.
As a result …
People living outside the United States, who are subject to U.S. worldwide taxation, are disadvantaged relative to their friends and neighbours. American citizens living outside the United States will incur the direct cost of excessive U.S. taxation. They will also incur the opportunity cost which comes from the constraints on their ability to plan for their retirements.
When counselling Americans abroad, I have noticed that many people have simply given up on retirement and financial planning. Their view is that as U.S. citizens they cannot both comply with U.S. tax laws and plan for their retirements. They are largely correct.
These are the reasons why people are renouncing U.S. citizenship. People are NOT renouncing U.S. citizenship because they want to. They are renouncing U.S. citizenship because they have to.
If you are a dual national and wish to keep your U.S. citizenship you are encouraged to join the movement to:
Stop the United States from imposing worldwide taxation on the non-U.S. income earned by people who live in and are tax residents of other countries.
Q. Won’t ending FATCA be a solution to the problem?
A. Absolutely, positively not.
The U.S. policy of imposing worldwide taxation on residents of other countries has existed for a century. It is forced on other countries via the “saving clause” in the U.S. tax treaties. Foreign banks and members of the U.S. tax compliance industry have been conscripted into the enforcement of FATCA related tax issues.
Although tax policies are the reason for FATCA, ending FATCA will NOT end U.S. tax policies.
Ending FATCA will not end citizenship-based taxation. Although contextually related, they are not the same thing. Those who advocate for ending FATCA are NOT advocating for the end of citizenship-based taxation.
Although we at SEAT fully support those who are attempting to end FATCA, we also recognize that an end to FATCA will leave citizenship-based taxation completely intact. At best, ending FATCA is a personal solution for people who are experiencing banking problems because of U.S. citizenship.That said, we believe that:
Ending citizenship-based taxation will end the FATCA related problems experienced by residents of other countries!
Subsequent posts will explore FATCA as part of citizenship-based taxation and explain why the end of FATCA will at best mitigate some of the effects of citizenship-based taxation and at worst divert attention from the real problem. The real problem is ending U.S. citizenship-based taxation. Or to put it more precisely, to:
“Stop American Extraterritorial Taxation!”
7 thoughts on “Part 1 – Why SEAT? Why Now? Why @SEATNOW_org? About U.S. Extra-territorial taxation”
To what extent do you think being “pro American” in the way say someone like Jimmy Sexton is in effect causes one to either be outright pro FATCA and pro CBT or dismissive of it’s consequences? I have talked for example to several Americans in Europe that are very pro American but at the some level do criticize FATCA. On the other hand they all claim to be themselves fully compliant which I personally believe and would bet big money not being true. The thing is I actually think they do truly “believe” they are fully compliant and really don’t want to look to closely because they are afraid of anything that might cause them to question there long held “pro American” beliefs and there own personal beliefs they are law abiding citizens. A part of me wants to ask them to show me their returns to prove they are fully compliant but I am old enough to know that is kind of inappropriate to ask and probably won’t change there minds however, I ask “SEAT” how do I get these type of people to realize what is going on.
Thanks for your comment, Tim. Those who believe that they are fully compliant and that compliance is easy are a real problem for our cause. Full compliance is basically impossible, not least because the rules are unclear and not well understood. My approach would be to focus on either the general principle that the US shouldn’t be taxing income earned in other countries by residents of those countries and/or to talk about some of the more egregious inequities of the US treatment of those who are fully integrated into the economies of the country where they live such as the treatment of non-US retirement savings and non-US small businesses.
The vast majority of US citizens abroad are not compliant with their US tax obligations, definitely those who are taking part in a full local life with all that entails because if they were compliant they would be screaming from the rooftops about it.
I know some that think as long as they don’t earn more than the FEIE then they have no need to file a damned thing, therefore compliant.
I met one the other day that accused me of exaggeration and assured me it was not a problem, he then went on to tell me that nothing needed to be reported unless it came back to the USA and that he had large sums in banks all over the world from his international contracting career.
“Filed your FBAR”?
Unfortunately if the IRS ever get their claws into these people they are going to be in a world of hurt they never thought possible.
Even Accidental Americans?
As far as I know, for the most part, the IRS has no way of finding out about peoples’ retirement accounts as many of these accounts are currently shielded from FATCA reporting obligations by the relevant fund managers.
This is quite probably true – but that doesn’t mean it is right. Americans living outside the US shouldn’t have to choose between living a normal life and being compliant with US tax laws.
Re: Tim Smyth. You might use the story of British PM Boris Johnson, having only lived in the U.S. for years 1-5, being pursued by the IRS for a five figure sum on the sale of his first home in the U.S.;and he famously labeling American Extraterritorial Taxation as “outrageous.” [articles on the internet]. Or, this article from Forbes: Dear Son, Why You Should Leave America Now: https://www.forbes.com/sites/robertwood/2014/09/12/dear-son-why-you-should-leave-america-now/?sh=5efbbb244b3a
Bravo SEAT for the initiative.
I have been attentive to the battle for a few years and of course can’t help myself and will now share some thoughts:
IMO, a good approach to change CBT is to first gain agreement on when taxation is justified. This may be done completely separate/prior to mentioning “citizenship-based taxation.” I think a good way is by comparison with living in one U.S. state, then moving to another state and the injustice of your former state still wanting to tax you as if you were still a resident of that state and as if you were still receiving services from that state. PurpleExpat provides some articulation here: https://purpleexpat.org/wp/about/
Generally, taxation is considered justified if a government provides in exchange: protection of property and persons, resident services, and protection of individual rights. The U.S. provides none of these especially for most Americans overseas who live in first world countries. The U.S. provides $0 resident services for Americans living in other countries.
Counters to this line of argument is right of return to the U.S. and right to work, and counter against that is then when one returns and re-establishes residency then they may be taxed as residents.
John Richardson has pointed out the inequity that because of differing tax laws between different countries that the cost of U.S. over-regulation/claim of double tax jurisdiction may vary widely between countries for identical incomes. John Richardson once mentioned that perhaps a more equitable way was a fixed passport tax to replace American Extraterritorial Taxation.
On the announcement of the now defunct The Alliance for the Defeat of Citizenship Based Taxation (announced on The Isaac Brock Society – with first goal to get an opinion on a lawsuit against CBT), I commented that it was best to keep the words “citizenship-based taxation” combined with “American” out of it.
From engaging in numerous comment sections on articles involving CBT, it is clear that those words and the idea that one was against those often evoke reaction that you were out to request the equivalent to burning the American flag – of which there is no higher act of un-Americanism. It is best not to go there or put up such obstacle. I found it best to “grab the flag” first and call the practice un-American. I urge caution to SEAT on the use of such words, and to recognise that lawyers may be uncomfortable using the word “un-American” as that is not legally defined in precedent yet which would be effective, IMO, in the argument for change.
My comment to SEAT: It appears the path of least resistance for change is to get the definition of “resident” changed in the tax code.
Heitor David Pinto has a proposal for such change here: https://drive.google.com/file/d/0B7VqDyDIAgW2SVZPSE1aX0xoZzg/view?fbclid=IwAR0cIV3UsHq7NUWBxpuMaJEqAVCsM0YlfIDTe9nXqa-UpS3JnNj5pe7cwH8
The Treasury may change the definition of resident in the tax code (Heitor David Pinto has an idea of getting rid of “Citizen”), or Treasury may be ordered to do so by Executive Order.
May I suggest that over time such solution be presented on this website, including text for an Executive Order. I imagine presenting a plan detailing the change may be more effective than just asking for such change.
“Worldwide taxation” implies an extra taxation, yet often what is objectionable is the extra forms and regulation of “foreign” assets and “foreign” earned and unearned income. As has been said most don’t pay extra tax yet experience what has been called “formageddon”, to prove they don’t owe any extra U.S. tax and often at considerable compliance time and expense to do so. That is why I have used “over-regulation” as well as “double taxation” as what I consider objectionable.
Double Taxation needs to be redefined separate from the Treasury Department Definition – no higher than the highest tax rate between two countries, yet not considered in aggregate but as different types of taxes; TO include this situation: if an American lives in another country and has zero U.S. income and zero U.S. assets that they should have zero tax and zero compliance to the U.S. throughout their lives.
I like the SEAT direction for pursuing a new category in the tax code of “qualified nonresidents.”
General lament about it all: that the laws treat all U.S. persons overseas as if they live in the U.S. and have accounts/income in tax havens with intent to evade taxation.
“Stop American Extraterritorial Taxation” If that is the articulated objective then may I suggest for consistency that the tag line under the logo changed to that.
SEAT may consider asking contribution to this website like Brock does, to help fund activities. If you will ask for for e-mail addresses perhaps best to then go https.
We should get the People’s Party to support the Americans abroad fight for Residency Based Taxation