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: