A Proposed Pillar 3 for International Tax Reform: Individuals Should Be Tax Residents of Only One Country at a Time

Tax Sovereignty: All countries (including the United States) have the right to create their own domestic tax policy. The question is how to solve the problem of US citizenship-based taxation from an international perspective.

The problem: US citizenship-based taxation means that US citizens are tax residents of the United States even when they are tax residents of other countries. Interestingly US tax treaties contain a provision called the “saving clause” which denies US citizens the benefits of a tax treaties. See for example Article XXIX of the Canada US Tax Treaty. Tax treaties generally include a residence tie breaker (usually Article IV) which allocates the tax residency of dual tax residents to one country or another. See for example Article IV of the Canada/US Tax Treaty. The “saving clause” denies residency tie break provisions to US citizens.

A solution: The saving clause always contains provisions that specify circumstances where the saving clause would not apply (double taxation, pensions, etc.). If the Article 4 residency tie breaker were added to the list of exceptions to the saving clause, then under the treaty:

1. US citizens would be eligible to benefit from residency tie break provisions; and

2. The treaty would allocate tax residency to the country where the individual actually lived and would specifically mean that US citizens would NOT be tax residents of the United States.

Notice that this solves the problems for individuals in all countries without discussing the specific problems that citizenship-based taxation causes in any one country.

A new multilateral agreement?

In addition (or as an alternative) to amending existing tax treaties, it would make sense for there to be a new multilateral agreement which would establish the principle that individuals can be a tax resident of only one country at at time.

In this podcast listen to SEAT co-founders Karen Alpert, John Richardson and Laura Snyder discuss the problem and and this solution:

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Further reading …

Should Overseas Americans Be Required to Buy Their Freedom? Tax Notes, July 12, 2021

Mission Impossible: Extraterritorial Taxation and the IRS, Tax Notes, March 22, 2021.

Taxing the American Emigrant, The Tax Lawyer, Feb., 2021.

A Simple Regulatory Fix for Citizenship Taxation, Tax Notes, Oct. 12, 2020.

The Criminalization of the American Emigrant, Tax Notes June 29, 2020.

The Implications of Tax Residence for Human Rights (Paper prepared for the Accounting & Finance Association of Australia and New Zealand (AFAANZ) 2020 Annual Conference 1-11, July 5-7, 2020).

Callous Neglect: The Impact of United States Tax Reform on Nonresident Citizens, draft Jan. 8, 2019.

Investing with One Hand Tied Behind Your Back – An Australian Perspective on United States Tax Rules for Non-Resident Citizens, Jan. 8, 2018

SEAT‘s survey, May 4, 2021: http://seatnow.org/survey_report_intro_page/