The Tax Treaty Saving Clause - 2021 Edition: How the USA exports @CitizenshipTax throughout the world

February 9, 2021 - Participants Include:

Dr. Karen Alpert - @FixTheTaxTreaty

Tim Smyth - @Tpsmyth01

John Richardson - @Expatriationlaw

All US tax treaties include a "saving clause". With respect to individual US citizens, the effect of the "saving clause" is to:

1. First, guarantee that US citizens abroad who are dual tax residents will be subject to double taxation; and

2. Second, relax that double taxation in certain specific areas.

For example, Article XXIX of the Canada US Tax Treaty includes:

"2. Except as provided in paragraph 3, nothing in the Convention shall be construed as preventing a Contracting State from taxing its residents (as determined under Article IV (Residence)) and, in the case of the United States, its citizens (including a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of ten years following such loss) and companies electing to be treated as domestic corporations, as if there were no convention between the United States and Canada with respect to taxes on income and on capital.

3. The provisions of paragraph 2 shall not affect the obligations undertaken by a Contracting State:

• (a) under paragraphs 3 and 4 of Article IX (Related Persons), paragraphs 6 and 7 of Article XIII (Gains), paragraphs 1, 3, 4, 5, 6(b) and 7 of Article XVIII (Pensions and Annuities), paragraph 5 of Article XXIX (Miscellaneous Rules), paragraphs 1, 5 and 6 of Article XXIX B (Taxes Imposed by Reason of Death), paragraphs 2, 3, 4 and 7 of Article XXIX B (Taxes Imposed by Reason of Death) as applied to the estates of persons other than former citizens referred to in paragraph 2 of this Article, paragraphs 3 and 5 of Article XXX (Entry into Force), and Articles XIX (Government Service), XXI (Exempt Organizations), XXIV (Elimination of Double Taxation), XXV (Non-Discrimination) and XXVI (Mutual Agreement Procedure);
• (b) under Article XX (Students), toward individuals who are neither citizens of, nor have immigrant status in, that State."

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As citizenship and taxation have changed the "mission creep" of the "saving clause" has expanded. We suspect that treaty partner countries are only beginning to realize that the United States is using the "saving clause" to impose US worldwide taxation on the citizens and residents of other countries.

 

After all, US citizenship-based taxation is a system where the US imposes worldwide taxation, on non-US source income, according to US tax rules, on the tax residents of other countries.

 

Those wishing to understand more about the "saving clause" are invited to read the following three part series of posts written by Dr. Karen Alpert.

 

http://fixthetaxtreaty.org/2017/01/12/explaining-the-saving-clause-i/

http://fixthetaxtreaty.org/2017/01/19/explaining-the-saving-clause-ii/

http://fixthetaxtreaty.org/2017/01/29/explaining-the-saving-clause-iii/