Citizenship-Based Taxation and Taxpayer Rights Don't Mix

In this brief analysis, Taxpayer Rights, On and Offshore: the 2013 Taxpayer Advocate's Report to Congress, I looked at the problem created when an under-resourced tax agency is charged with implementing an over-expansive tax jurisdiction. Abstract:

In the 2013 National Taxpayer Advocate's Report to Congress, two concerns take center stage: the need for greater protection of taxpayer rights, and the increasing pressure on the system created by the U.S. tax regime’s extraterritorial reach. Neither of these issues is new; indeed, the NTA has repeatedly attempted to raise awareness of each over several years. But the Report demonstrates that these two concerns are on a collision course, and impact looks imminent for 2014 as the US doubles down on long under-enforced jurisdictional claims over nonresidents with US nationality or legal status. The basic impracticality of finding and claiming nonresidents with US ties is compounded by the violation of internationally recognized tax jurisdiction norms, creating an unsustainable enforcement rift that directly challenges the voluntarism theme that Olsen views as key to the fiscal system as a whole.

Further in, I argued that the NTA Report illustrates that taxing people on the basis of their nationality or legal status rather than their actual residence poses a serious problem for tax administration and violates international norms.

As a practical matter, globally rounding people up based on one government's ideas about their legal status is quite obviously unenforceable without assistance from other governments. This assistance fundamentally conflicts with a universally recognized (and far more just) jurisdictional claim based on actual residence. It is one thing for the US to say to individuals: if you have status under our law you must follow all of our laws no matter where you are. It is another to say to other countries--and much less individuals in other countries--if people who live in your country have US status as we define it, you are harboring potential criminals and you must help us find them and enforce our claim over them even if your government also claims them and even if our claim conflicts with your government's own law.

Thus status-based taxation is no less a poaching of other countries’ internationally recognized jurisdictional claims over taxpayers than the kind of poaching FATCA was ostensibly designed to attack (namely, that of the US tax base by other countries via bank secrecy). The basic unenforceability of status-based taxation coupled with its poaching of other jurisdictional claims would make it a total non-starter were nations to get together and discuss a multilateral adoption of status-based taxation as a policy everyone could get behind.

 But FATCA is a big stick that is bypassing any such conversation, going straight to the technical problem of compliance and enforcement under the banner of stopping tax evasion. There might be no remedy in international law for tax jurisdictional overreach but that only confirms that it must be challenged from both within and without the nation engaging in the bad behavior.