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Dr. Laura Snyder Explains The US Extraterritorial Tax Regime And How It Applies To Americans Abroad: Let The Senate Finance Committee Know How It Affects You!

April 2, 2021 - Dr. Laura Snyder - @TAPInternation

 

About “citizenship-based taxation”- The US extraterritorial tax regime

 

The United States has the following three distinct tax regimes:

1. Source – like all countries: All income sourced to the United States is subject to U.S. taxation on U.S. source income (regardless of the “tax residence” or citizenship of the taxpayer);

2. Residence – like all countries: All individuals who are resident in the United States are subject to U.S. tax on their worldwide income; and

3. Extra-territorial tax regime – unique to the United States: The United States imposes worldwide taxation on the non-U.S. source income of certain individuals, who are tax residents of other countries and do NOT reside in the United States. This includes U.S. citizens living outside the United States.

Americans abroad are generally in the third category and are subject to the extraterritorial tax regime. They are subject to worldwide taxation by both the United States and their country of residence. Americans abroad do NOT as a general principle benefit significantly from tax treaties. This is because, all U.S. tax treaties contain a “saving clause” designed to ensure that Americans abroad are in effect subject to double taxation.

Who Are Americans Abroad?

The short answer is that Americans abroad are U.S. citizens living outside the United States in other countries. They run the whole circumstantial and economic spectrum of humanity. They include the poorest of the poor. They include some wealthy people. They include a large number of middle-class people. They include the employed, the self-employed and they include the unemployed. They include individuals who run small businesses in their country of residence. Some of these small businesses are run through corporate structures in the country where they reside and are tax residents.

Although Americans abroad are Americans who live in other countries, they are NOT and do NOT view themselves as “living offshore”!

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In order to let the US Senate Finance Committee know how the US Extraterritorial Tax Regime affects you, go here and select your template!

 

Coach Coutts: If you want to stay healthy, don't sit too long

March 31, 2021 - The Return Of Coach Coutts

John Richardson and David ("Coach") Coutts discuss the essentials of staying healthy.

"Somebody's Gotta Care!"

 

 

The Senate Finance Committee Holds Hearings Affecting Mini-MultiNationals AKA #AmericansAbroad

March 29, 2021 - Participants include:

Dr. Karen Alpert - @FixTheTaxTreaty

Dr. Laura Snyder - @TapInternation

John Richardson - @Expatriationlaw

"Activism Is NOT A Spectator Sport!" - To learn how to make your personal submission to the Senate Finance Committee read the SEAT blog post here.

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On March 25, 2021 the Senate Finance Committee held one (of what I assume will be) of a number of hearings on International Taxation. Interestingly the title of the hearing was:

"How US International Tax Policy Impacts Americans Workers Jobs And Investment"

Interestingly and significantly the hearing did NOT discuss individual American workers, jobs or investment. The hearing was primarily focussed on the GILTI provisions found in S. 951A of the Internal Revenue Code. The hearing also discussed whether the US corporate tax rate should be increased. It's important to understand that:

Any change in the GILTI rules and/or an increase in the US corporate tax rate will have an impact on Americans abroad generally and those Americans abroad running small businesses particularly.

I have previously written about how an increase in the GILTI tax would impact Americans abroad here. I have written about how a general increase in the US corporate tax rate might impact Americans abroad here.

You can read about the hearing and watch the video of the hearing here:

https://www.finance.senate.gov/hearings/how-us-international-tax-policy-impacts-american-workers-jobs-and-investment

Helen Burggraf of American Expat Finance wrote an excellent article about the hearing which appeared here.

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These International Tax Hearings are a very big deal. They will impact you as individuals. SEAT has prepared a submission.  It's important that the Senate Finance Committee receive a large of number of submissions from individual Americans abroad.

We ask that you make a submission. We encourage you to watch the hearing and send your own submission. But, given the time it takes and the technical content, we have prepared some "submission templates" for you.

SEAT is working very hard to help you! Please take the time to send your submission. It's important that Senate Finance hears from individuals - individuals just like you!

"Activism Is NOT A Spectator Sport!" - To learn how to make your personal submission to the Senate Finance Committee read the SEAT blog post here.

 

 

 

Residency As An Investment Asset: Why Paying To Sever Tax Residency Can Be An Investment - Canada Edition

March 10, 2021 - Participants Include:

Wayne Bewick - Partner at Trowbridge International Tax

John Richardson - Tax Residency Solutions

In the 21st Century your most important asset may be your tax residency!

Volatile times mean instability. Instability  causes individuals and families to reconsider their life circumstances. Covid-19 has caused many people to reconsider those circumstances. The threat of Wealth taxes in the United States (including California and New York) is making people nervous. The US extraterritorial tax regime is wreaking havoc in the lives of American citizens living in Canada and other countries outside the United States.

Life comes with responsibilities. Those responsibilities include the necessity of seeking opportunities for security and growth. Often the search for opportunities and growth results in a decision to sever tax residency with one country and to acquire tax residency in another. 

 But, severing tax residency comes at a cost. More and more countries are requiring individuals severing tax residency to pay a "departure tax". Canada has a departure tax. The United States has it's 877A Expatriation tax. Australia has a departure tax.

Although Canada's Departure Tax applies to a wider range of people than the US 877A exit tax, Canada's  tax is payable on fewer things. Departure taxes are the cost of severing tax residency. As such they should be viewed as in investment. More and more people view the payment of Departure taxes as a sound investment (possibly prepaying taxes at lower rates) in their financial futures.

In this episode John Richardson and Wayne Bewick discuss the reasons for severing tax residency, the price of severing tax residency and why departure/exit taxes should be viewed as the price of investing in a different future.

Canada continues to be a very attractive country for immigration.

But, there is a growing group of people who see severing Canadian tax residency and paying the departure tax as an investment in their futures.

 

 

 

 

 

The Impact Of The Proposed Warren Wealth Tax (and How It Ineracts With FATCA) On Americans Abroad

March 7, 2021 - Participants Include:

Virginia La Torre Jeker - @VLJeker

John Richardson - @Expatriationlaw

 

In the 21st Century the single  most interesting thing about a person is her/her tax residency. The United States makes US citizenship sufficient for tax residency. The effect of US "citizenship-based taxation" is that the United States, imposes worldwide extraterritorial  taxation, on the non-US income of individuals who are tax residents of other countries and do not live in the United States. (The rules of the US extraterritorial tax regime are far more punitive than the tax regime imposed on Homeland Americans.) That's on the income tax side.

In early March of 2021, Senator Elizabeth Warren proposed a US Wealth tax that would apply to the non-US assets (among other things) of US citizens living in other countries. Furthermore, it is drafted in a way that brings the assets of the non-US citizen spouse into the wealth tax net.

In this episode John Richardson and Virginia La Torre Jeker discuss how this is intended to work. Americans abroad considering expatriation should take note of the provision that (in addition to the 877A Exit Tax) the Warren wealth tax, would impose an ADDITIONAL 40% (that's not  a typo)  on "covered expatriates" who renounce US citizenship.

Virginia has supplied the following example in her blog post here, to illustrate the severity of this:

 

"Here’s a very realistic example: Let’s say Joseph was born in the US because his parents, who were Italian citizens, were employed in the US at the time. Assume Joseph lived in the US until the age of 5 and then returned to Italy with his parents. Assume he attended 4 years of college in the US as well.  Assume Joseph moved to England and Joseph gives up his US citizenship. Assume Joseph  is a “covered expatriate” with  a net worth of US$53 million on the expatriation date. This significant wealth leaves him in the cross-hairs of the wealth tax.

For the sake of simplicity, let us say his exit tax amounts to $1 million and that he cannot use the exit tax to reduce net worth for purposes of the wealth tax.  In addition to the exit tax of  $1 million, Joseph will owe $21.2 million in wealth tax in order to escape Uncle Sam’s clutches ($53 million x 40%). Total US tax bill so far is $22.2 million.  But Uncle Sam is not done yet!  At Joseph’s death, let’s assume he leaves $25 million to his children and they are US persons.   Uncle Sam will take another $10 million from them simply because they must be punished since their father was a covered expatriate. So, while Joseph and his heirs started off with $53 million, once Uncle Sam got through with them, Uncle Sam got $32.2 million and Joseph and his family got only $20.8 million.  That’s right. Uncle Sam took 60% of their wealth, all because Joseph simply gave up his citizenship (or green card held for at least 8 tax years)."

Those considering renouncing US citizenship should expatriate at the earliest possible moment!

The proposed legislation (in two places) requires the use of FATCA to assist in the identification of assets outside the United States. John and Virginia discuss the  evolution of FATCA and how it is being used to incrementally expand the US tax base outside of the United States.

Further details may be found at John Richardson's  post here.

You can read the actual  text of Senator Warren's proposal here. You will be shocked!

 

 

 

 

 

 

 

 

Mobility Consultant David Lesperance - Citizenship through lineage and through marriage

January 17, 2021 - Participants include:

 

John Richardson

 

David Lesperance

 

In a world where "second citizenships" have become an insurance policy, there is lots of attention paid to "Migration Investment" AKA "Citizenship By Investment". But, sometimes there is an easier, less expensive and less politically charged way of acquiring a second citizenship.

Look in the mirror! You might have a claim to citizenship through lineage or through marriage.

For some people, as the Scotia Bank Tagline says:

"You are richer then you think.!"

 

 

US Treasury publishes list suggesting record numbers relinquishing US citizenship in 2020 - but what can be inferred from the list?

February 9, 2021 - Participants Include:

Dr. Karen Alpert - @FixTheTaxTreaty

Tim Smyth - @Tpsmyth01

John Richardson - @Expatriationlaw

Internal Revenue Code 6039G requires US Treasury to publish the names of US citizens who relinquish US citizenship. Some refer to the list as the "Name and Shame" list, while others call it the "Liberty List".

6039G in relevant part includes:

"Notwithstanding any other provision of law, not later than 30 days after the close of each calendar quarter, the Secretary shall publish in the Federal Register the name of each individual losing United States citizenship (within the meaning of section 877(a) or 877A) with respect to whom the Secretary receives information under the preceding sentence during such quarter."

Surprisingly there is wide disagreement about:

- exactly which individuals are required to be named on the list (all relinquishers, "covered expatriates" only, Green Card holders?)

- the accuracy of the list (how well does it correlate with the actual numbers of relinquishers)

- the reasons individuals relinquish US citizenship (political or to escape the US tax an/or regulatory net)

In this podcast we discuss: What does the list purport to represent and how accurate is the list?

 

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/

 

Members of @SEATNow_org: American Extraterritorial Taxation Affects Different Groups in Different Ways - Learn How

January 20, 2021 - Participants Include:

 

John Richardson - @Expatriationlaw

Dr. Karen Alpert - @FixTheTaxTreaty

Dr. Laura Snyder - @TAPInternation

Suzanne Herman - @SuzanneHerman1

Keith Redmond - @Keith__Redmond

The core mission of SEAT is to "Stop Extraterritorial American Taxation". 

Extraterritorial American taxation is system that imposes worldwide taxation, on the non-US income of people who live in other countries. That said, there are different groups impacted.

These groups include:

American expatriates - short term Americans abroad who are returning to the USA and engage in financial planning in the US system. 

American emigrants - people who moved permanently from the United States and engage in financial planning in tax system of the country of residence (example Canada). 

Accidental Americans - people who moved from the United States as small children and not think of themselves as US citizens. Their financial planning revolves ONLY around their country of residence.

American Retirees abroad - people who have moved abroad to retire and live off U.S. source income (example Social Security). They are likely to file ONLY U.S. tax returns.

Additional victims of Extraterritorial Taxation include:

The sovereign countries where U.S. citizens reside; and

Homeland Americans who are effectively prevented from leaving the United States and living a normal life outside the United States.

Why it's important to distinguish the various groups impacted

US citizenship-based taxation AKA (the US imposition of US worldwide taxation on the tax residents of other countries) is a problem bigger than any one individual or one specific group. Different provisions of the Internal Revenue Code affect different groups differently.

Those varying and disparate effects have made it hard to unify the various groups of Americans abroad in the fight to end US citizenship-based taxation.

This podcast discusses the reason for this and provides examples.

 

 

 

The Tax Treaty Saving Clause: How it works to export US worldwide taxation offshore to other countries

January 13, 2019 - Participants Include:

 

John Richardson - @Expatriationlaw

 

Tim Smyth - @Tpsmyth01

 

My last podcast featured a discussion with David Lesperance where we discussed how tax treaties impact the global mobility decision. That podcast included some discussion about the "saving clause".

 

This is an excerpt from a 2019 podcast which features an interesting discussion of the standard tax treaty "saving clause". This podcast was extracted from  a longer discussion about  Representative Holding's 2018 Tax Fairness For Americans Abroad act.

The "saving clause" is a standard feature of U.S. tax treaties which denies US citizen individuals the benefit of U.S. tax treaties except in very limited and specific circumstances. Notably, the "saving clause" prevents  US citizens from using tax treaties to sever tax residency with the United States. Green Card holders ARE (although it may trigger the S. 877A Expatriation Tax) use the tax treaty tie break  provisions to sever tax residency with the United States.

Interestingly: US citizenship-based taxation could be ended by simply either:

1. Eliminating the saving clause from the Standard US tax treaty; and/or

2. Including some kind of "citizenship-based  tie breaker" that could be used by dual citizens.

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To better understand the saving clause see the following three blog posts ...

 

Why U.S. citizens cannot use a tax treaty tie break to sever tax residency:

 

http://citizenshipsolutions.ca/2016/05/26/savings-clause-in-us-tax-treaties-guarantees-us-right-of-taxation-on-residents-and-citizens-of-other-nations/

 

A bit of commentary on this issue - particularly the saving clause - in relation to the 2016 Model Tax Treaty:

 

http://citizenshipsolutions.ca/2016/07/13/analyze-the-new-2016-us-treasury-model-tax-treaty-what-does-it-mean-for-your-country/

 

Why Green Card holders can use a tax treaty tie break to sever tax residency (see the very last part) - but note that NOT all treaties are the same with respect to Green Card Holders (compare for example the treaties that the US has with Canada and the UK).

 

http://citizenshipsolutions.ca/2018/07/30/non-citizenship-has-its-privileges-an-overlooked-reason-why-a-green-card-holder-may-not-want-to-become-a-u-s-citizen/