Friday, May 4, 2012

American Citizens Abroad: Don't Tax Us as Residents

The US should tax on the basis of actual residence, and not citizenship, says Jack Bugnion of ACA.  This is a reprint of remarks he gave in a press release in February, covered here.  The major arguments are the standard three: efficiency, administrability, and fairness (discussed in that order).

The competitiveness argument is the standard "if you change the tax system companies will hire more people."  There is no empirical evidence in support; experience suggests this is unlikely.  I similarly have no way to judge whether FBAR really is FUBAR from an administrative point of view, but it's of course true that Congress perpetually underfunds IRS so we can expect uneven enforcement--that's as much a fairness argument as an administrative one, and probably could be made more compelling.

The fairness argument is that "Americans abroad would not only be freed from the unjust burden of double tax reporting and double taxation but would also enjoy expanded job opportunities overseas and the possibility to invest in local investment vehicles ... now out of reach due to the burdensome U.S. filing for PFICs (passive foreign investment corporations). They would also be relieved of foreign currency risks when purchasing a home."  I don't know that a double reporting burden is unjust.  It's certainly a pain and it's really unfortunate that it is also likely a jobs act for accountants.  But unjust seems like a strong word to use in the grand scheme of things.  Double taxation is relieved by credit and in some cases exemption on the US side though there are undoubtedly limitations and it's complex, no doubt about it, see previous point.  The PFIC and currency risks are more compelling, because now we are talking about investment traps for the uninformed.

The problem is that even if I agreed with every point, there is a fix, and it is revocation of U.S. citizenship or permanent residence.  The price of that citizenship and permanent residence status just went up, maybe remarkably so.  As a result it is hard to argue that the U.S. cannot do what it is doing from a normative perspective.


  1. Hi, Allison -

    Thanks for addressing this issue, which is something of a briar patch.

    Probably the best argument against cross-border citizenship-based taxation, at least for the United States, is that it's a ridiculously ineffective revenue device, as Nina Olson's report showed. I'd be curious to know the scale of IRS resources which are wasted dealing with nil returns filed from abroad, but it has to be substantial, and with increased compliance, growing. It's a lose-lose proposition both for the IRS and the overseas taxpayer (who will probably not owe any taxes.)

    For people with rooted lives outside the United States, US tax reporting is ridiculously complicated. Anything you could invest retirement savings in will probably be a PFIC. ("All Canadian mutual funds ... are now considered by the IRS to be PFICs for U.S. tax purposes," a Scotiabank newsletter said recently.) Self-incorporation, or owning a business however small, entangles you in Form 5471, which the IRS itself estimates takes dozens of hours to complete. The list of traps, dilemmas and problems goes on and on.

    As for renunciation - I *did* renounce, in Toronto earlier this year, because of the tax problems ACA has been describing. (And yes, I filed five years of returns, FBARs and all the rest of it.) But having a tax system that is so Byzantine, intrusive and demanding that renunciation of citizenship is a rational response to it has to be called a bug, not a feature.

  2. I think there are a couple of issues one is once countries start accepting dual nationality as the US now does it creates a certain conflict in a situation of a dual US citizens holding the nationality of a another country and living in the country of that other nationality. Most of the fundamental public policy conflicts with FATCA deal with this issue.

    One of the more interestings aspects I have heard that in general that MP's in Ottawa have not encouraged dual Canadian American citizens to renounce instead pledging to resolve the tax and FATCA situation. I don't know if its the fact they feel uncomfortable or are worried how it would be viewed in the US if they where seen to be giving that advice.

    The other story that hasn't been told is a significant number(although far short of the total number) of US Person Canadians that were pushed/influenced into going the offshore voluntary disclosure initiatives setup for mainly for people
    living who had stashed money in Switzerland. Under the penalty guidelines setup by the IRS US Person Canadian were basically assessed the same type of FBAR penalties on their Canadian bank account as people living in the US who hid money at UBS. Thus you have heard all sorts of stories about retirees and other people going to their MP's and breaking down in tears about all the penalties they have been assessed during the years the dutifully filed Canadian taxes at higher rates than Americans. As a consequence of these OVDI programs the position of many MPs is that FATCA is simply a mechanism to impose these same type of penalities on hundred of thousands of Canadians. As MP Elizabeth May leader and sole MP of the Green Party of Canada put it in her letter PM Stephen Harper the purpose of FATCA is to bankrupt a million Canadian citizens to fix the deficit problem of the US. The one issue of course is how exactly does the IRS collect these penalties in Canada especially on Canadian Citizens(She really said the that and copies of the letter are current heading to serveral people in involved with the FATCA legislation in the US.

    The whole FBAR/FATCA/OVDI thing in Canada at a political level reminds me in a weird way of Margaret Thatcher's poll tax fiasco. I always when I watch the video I linked to below find the current situation has weird similarity. Chris Patten talking about having constituency surgeries with the little old ladies having huge tax bills and the guy talking about Thatcher basically insisting the people would get Poll Tax(FATCA) whether they liked it or not.

  3. Elizabeth May's letter on FATCA(who under FATCA is a US Person

    Yes, that's really a letter from a elected Canadian MP.

  4. Thanks for these comments. The dual citizenship thing really does seem to be a major problem. It's also quite true that renouncing citizenship seems like a draconian requirement. Put them together and the state/citizen relationship becomes fairly intrusive on family dynamics. Consider the impact if a person is a Canadian citizen living in Canada but holding a green card, a US citizen spouse, and dual citizen kids as a result. Who should renounce what? And all in the service of a regime that you quite rightly point out is all but impossible to figure out without a significant investment of time & expertise and even then subject to major uncertainties, likely all but unenforceable in a consistent manner, and yet when enforced carries heavy penalties.

  5. I actually think the true progressive viewpoint(which is what the Canadian NDP is saying along with the Greens)is actually the taxation of non resident citizens is actually a trampling of the "tax sovereignty" of their country of residence(This is further amplified in the relatively new case of dual nationality). This is essentially doing in a different way the same thing to country of residency "tax sovereignty" as practices such as banking secrecy and non transparency(Most literature against banking secrecy always invokes tax sovereignty of country of residency never citizenship). I suspect many American progressive wouldn't want to admit this for purely domestic political reasons but I suspect they in their hearts they know there is some truth to that argument. Even if members of parliament in Canada can negotiate modifications to the US Canada Tax Treaty to change the net taxation status of US Persons residing in Canada its a cumbersome way of doing so that limits the ability of Canadian MPs to put into place taxation policies as they see fitting the public interest.

    There is also an exception to US tax law many don't want to discuss in DC and that is the ability of US citizens in Puerto Rico to not have to pay tax on their Puerto Rican source income. This is a very old rule but I suspect one that is not going to change any time soon.

    At least in terms of US citizens living in Canada the price of US citizenship may have already become too high. Given sole Canadian citizens are given quite generous immigration treatment(only nationality in the world fully exempt from needing a visa) in traveling to the US and accessing US employment opportunities(TN Visas) it simply may not be worth it to hold on to US citizenship in the present circumstances. (I wonder though what the political implications will be if the number of people renouncing starts rising sharply). I also happen to think the so called "FBAR" filing requirement might be a violation of NAFTA even for US residents with financial accounts in Canada but that's another story dealing with trade law.