FATCA (Foreign Account Tax Compliance Act) is a law intended (at least ostensibly) to target non-compliance by US taxpayers who hold foreign bank accounts. FATCA requires foreign financial institutions to report to the IRS information about financial accounts held by US persons and by foreign entities (companies, notably) in which US persons hold ownership interest (over 10%, if I’m not mistaken).
Citizenship-based taxation (CBT) is the principle by which US citizens are taxable upon their worldwide income, regardless of where they live in the world. This means that US citizens residing outside the US are liable to pay income taxes both in the country where they live as well as to the United States. (Green card holders are also taxable on their worldwide income, even those green card holders who reside outside the United States). CBT is a very old law – it was enacted during the Civil War to punish men who left the country in order to avoid being drafted. However, before the implementation of FATCA in 2010/2011, it was only sporadically enforced (and it was pretty much never enforced against “Accidental Americans,” a special category of US citizens I explain below).
Many people read what I’ve just written and they instinctively (if in some cases not entirely consciously) think one or more of the following:
- Americans who live overseas necessarily are rich because only rich people can actually go overseas. Since they are rich, who cares if US banking and tax laws complicate their lives? They have plenty of money to deal with it.
- America is the greatest country in the world. Any American who voluntarily chooses to live outside the US is stupid and/or unpatriotic and deserves whatever bad things happen to them. “You made your bed by choosing to live outside the US, now lie in it.”
- Just because a US citizen lives overseas doesn’t mean he/she shouldn’t have to pay taxes in the US, just like US residents have to do. If US citizens who live overseas don’t pay taxes in the US, then they are tax cheats. The fact that they are paying taxes in the country where they live is not relevant.
- Who cares what happens outside the US? It’s neither interesting for nor relevant to those who live in the US. Those who live in the US should give their time, attention, efforts and sympathy only to those who live in the US. What happens outside the US doesn’t matter to us, doesn’t concern us, and isn’t our problem.
It is my sincere hope that these instinctive reactions can be overcome. It is my sincere hope that anyone reading this is able and willing to take the time and effort to fully understand the issues and all of their economic as well as political implications for ALL Americans, inside and outside the US.
In a nutshell, this is the situation:
The problems go far far beyond the simple fact that US citizens are liable for income tax in the US even when they don’t reside there and even when they already pay taxes in the country where they reside. Here are just some of the problems:
- Because of the burdensome FATCA reporting requirements and the draconian penalties for banks that fail to comply, many banks and financial institutions outside the US either refuse US citizens as clients or heavily restrict the accounts they may hold. This makes US citizens financial pariahs. It makes it difficult for them make certain investments and carry out effective financial planning and makes them ineligible to hold certain jobs which would require them to have signature power on their employer’s bank accounts. It also makes them ineligible for certain employer compensation plans that involve investment accounts.
- Even when no tax is ultimately owed, US citizens are required to prepare and file highly complex tax declarations. The penalties for mistakes are draconian. As a result, many Americans living overseas have no choice but to pay a professional tax preparer anything from $1500 to as much as $3000 per year to prepare their tax declarations. This is true even when no tax is owed and even when the person’s income is very low. And those professional fees are doubled if the US citizen is a small business owner as the US tax returns for foreign companies owned by US citizens are also highly complex. They also have to be filed, even if the company has little to no income (such as when it’s just getting started). The businesses that these American-owned companies are competing with do not bear this extra expense.
- Many countries offer favorable tax treatment to certain kinds of investments, and notably (but not by any means only) those for retirement investment (the sale of certain kinds of real estate is another example). For the most part, US tax laws operate to penalize US citizens for making those kinds of “foreign” investments, with the result that the US citizen is not able to save and plan for retirement under the same conditions as the other residents of the country where they live. In fact, it makes it difficult for US citizens living overseas to engage in most kinds of retirement planning and investing. When they try to do so, the end result is that money that their country of residence intended for them to have for retirement instead ends up siphoned out of that country and to the US in the form of income taxation.
- Those referred to as “Accidental Americans” are suffering special hardship. “Accidental Americans” are people who just happened to have been born in the US but who left the country when they were very young (in many cases not even two years old) and who otherwise have no connection to the country. They don’t have social security numbers, they’ve never asked for a US passport, they’ve never heard of CBT and, in many cases, they don’t even know the US considers them to be citizens. Many of them don’t speak English. They live in an impossible situation: their banks, charged with enforcing FATCA, see that they were born in the US and on that basis simply close their accounts, or, if not, then require them to provide social security numbers and prove they comply with their US tax obligations. But they don’t have social security numbers and they can’t afford to pay the professional fees to bring them into compliance with US tax obligations that they understandably feel are entirely unjust (and in many cases they can’t pay anyway). And renouncing US citizenship is possible, but carries its own complications and huge expenses.
- Because of the problems described above, more and more people are renouncing their US citizenship, managing to overcome the financial as well as, for many, emotional hurdles in doing so. You would think that their stories would end there. But they don’t. An increasing number of these persons, when they try to visit the US as tourists on a foreign passport (notably in order to see family members living in the US) are finding that immigration officials will not allow them to enter. In some cases their ETSA application is refused. In other cases, they arrive at immigration control and the immigration official sees that the person was born in the US. This leads them to ask why the person is not traveling with a US passport. When they are told that the person has renounced US citizenship, some immigration officials have simply refused entry, solely on those grounds, or without offering any reason at all. This has also happened to some green card holders residing outside the US who allowed their green cards to expire. In sum, those who renounce their US citizenship take the real risk of never being able to enter the US again. Some people can take that risk. Some cannot.
Why should people who live in the US care about what is happening to US citizens (and green card holders) living outside the US? More generally, why should they care about how the US is enforcing FATCA and CBT outside of its borders? Those are fair questions.
Assuming that mere sympathy for the plight of other fellow human beings – fellow Americans – is not a sufficient reason, here are other reasons:
- There is significant irony in contrasting the situation of DACA recipients (and other foreign citizens seeking to remain in the US) to the situation of US citizens living overseas. The former would, presumably, very much like to have US citizenship (or at least the right to remain in the country indefinitely). The latter consider their US citizenship to be a burden – they would gladly give it up if they could afford (be it financially or emotionally) to do so. There is also significant irony in numbers involved: there are about 800,000 DACA recipients as compared to an estimated 8 to 9 million Americans living overseas (not including military personnel). (As a means of reference: 8 to 9 million people is three times the population of Chicago).
- Many economic and political commentators often speak about the stark differences between the way the United States taxes corporations as compared to the way it taxes individuals, and notably individuals who are not wealthy (and especially those who live from wages rather than investment income). Many have also often spoken about how the new tax law adopted in December accentuated those differences. This has notably included a discussion of a more favorable tax treatment for the foreign income of US CORPORATIONS. Such a discussion is incomplete without contrasting that favorable treatment to the continued highly unfavorable treatment of INDIVIDUALS, and notably of individuals who reside outside the US, many of whom are not wealthy by any means. They are just ordinary people trying to live ordinary lives in the places where they live.
- The United States is often referred to as an “empire.” The manner by which the US has gone about using foreign banks to enforce a US law outside of the borders of the US speaks directly to this. Also the manner by which CBT operates to siphon money out of other countries into the US – money in the form of professional fees for the preparation of highly complex tax (and FBAR) declarations, in the form of penalties in the event a declaration contains a mistake, and, finally, in the form of the taxes themselves – taxes based upon income earned outside the US by persons living outside the US. Imagine if another country, such as Canada or Mexico (or Russia or Cuba!), tried to implement CBT and enforce it against their citizens living in the US. For the time being, Eritrea is the only other country to impose CBT, and it has been widely and soundly criticized for doing so.
- To date, the US has refused to enforce FATCA in a reciprocal manner. That is, the US has refused to provide to foreign governments comparable information about the bank accounts that the residents of foreign countries have in the US. This lack of reciprocity is an important reason why the US is becoming an important tax haven.
- Many people in the US today comfort themselves with the idea that if things get too bad, they can always leave for another country. Most of those people have some sort of awareness of the difficulty they might have to gain the right to live legally in another country. What they are likely entirely unaware of is that they can never totally leave the US– that banks will consider them to be financial pariahs and that heavy filing and tax obligations will follow them wherever they go, unless they are willing and able to take the irreversible step of renouncing their US citizenship.
- Finally, there is a human interest element to these issues: Meghan Markle’s engagement to Prince Harry sparked many discussions on social media about how long it would take for her to get British citizenship, and notably whether her application would receive expedited treatment. But Americans living outside the US immediately recognized that the much more interesting and important question is just how fast she’ll renounce her US citizenship and, in the unlikely event she doesn’t, just what steps the royal family will take to shield their income and assets from the IRS. This is because as a member of the British royal family, FATCA and CBT will make Markle’s US citizenship untenable, unless she is willing to live without any significant income to her name and without having title to Prince Harry’s assets, and notably to any of his bank accounts – unless the British royal family is willing both to give the IRS information about its income, assets, and bank accounts, and for the IRS to tax them, a scenario that is very difficult to imagine.
If Markle doesn’t renounce her US citizenship before she has children, they will automatically be considered US citizens also. She wouldn’t have any say in the matter, but once they became adults they could choose for themselves to renounce.
In all probability Markle has an army of tax advisors trying to come up with a way for her to have her cake and eat it too (that is, a way for her to keep her US citizenship and have income and assets of her own yet shield royal family income and assets from the IRS). If they succeed, then what will that say about the disparate tax treatment between the wealthy and everyone else?
One thing that is sure: If Markle renounces her US citizenship, she will not have to fear not being able to visit the US. Her profile is too high and any denial of entry would of course get instant and widespread publicity. That is certainly one benefit her position of privilege would bring her.
Regardless of her privilege, Markle’s case is susceptible of gaining public sympathy that is denied to ordinary Americans. This is because, going back to my list of instinctive reactions above, no one is going to think that Markle is stupid or unpatriotic for choosing to live outside the United States, given her reasons for doing so (what American woman wouldn’t, given the opportunity, move to England to marry a member of the British royal family?). It’s also unlikely that the public will think that Markle is a tax cheat or is seeking to become one. For these reasons her marriage seems to be a good opportunity to attract attention to and, hopefully, sympathy for, the issues ALL Americans overseas face with FATCA and CBT.
Below is a listing of links that I have collected over the course of the past few months that in my opinion best expose the problems of FATCA and CBT.
LINKS ABOUT FATCA AND CBT
Explains the problems of FATCA and CBT generally:
Explains in detail the problems and complications of US citizens and green card holders living outside the US:
https://www.taxconnections.com/taxblog/how-to-live-outside-the-united-states-in-an-fbar-and-fatca-world/#.WkvlU8anGUm. “it would be prudent for a U.S. citizen abroad to NOT marry, not have an income, not create businesses or engage in self-employment.”
Details the problems and complications of US citizens and green card holders living outside the US, notably as regards filing requirements, taxation of investments and discriminatory treatment of non-US citizen spouses: https://www.quora.com/If-I-have-an-American-citizenship-am-I-stuck-paying-taxes-to-them-for-life-unless-I-get-rid-of-the-citizenship-How-do-you-get-rid-of-the-citizenship/answer/John-Richardson-269?srid=5rTMz
Explains the relationship of place of birth and US taxation: http://www.citizenshipsolutions.ca/2017/07/24/why-is-the-united-states-imposing-full-u-s-taxation-on-the-canadian-incomes-of-canadian-citizens-living-in-canada/ “The United States is the ONLY country in the world that imposes full taxation, on WORLDWIDE income, based ONLY on the “place of birth”!
Explains why FATCA is causing widespread damage for Americans and financial institutions everywhere – Part 1: http://www.internationalman.com/articles/fatca-the-worst-law-nobody-has-ever-heard-of-part-i “The United States has adopted the policy that anyone who leaves the United States must be doing so for some nefarious purpose.”
Part 2: http://www.internationalman.com/articles/fatca-the-worst-law-nobody-has-ever-heard-of-part-ii “One of the things that make a nation sovereign is its right to determine its own laws within its own borders. FATCA rides roughshod over Canada’s Charter of Rights and Freedoms.”
Tells the story of Ruth Freeborn, an American resident in Canada who renounced her US citizenship due to FATCA and CBT: https://www.bibliotecapleyades.net/sociopolitica/esp_sociopol_nwo190.htm
Outlines reasons why the repeal of citizenship-based taxation is unlikely: https://www.quora.com/Do-you-it%E2%80%99s-fair-for-Americans-to-be-obligated-to-pay-U-S-taxes-even-after-leaving-the-U-S-for-good/answer/David-S-Lesperance?srid=ufVU
Argues that not just Americans living overseas but everyone should be horrified by FATCA: https://www.youtube.com/watch?v=VhxtpFBZ2tE
Exposes the misconceptions of FATCA on the part of Americans and notably on part of the “architect” of FATCA: https://www.youtube.com/watch?v=FKrbvau42Ok
Explains the consequences of the new (Dec 2017) tax law for Americans residing overseas: http://www.internationalinvestment.net/products/tax/donald-trumps-tax-cuts-jobs-act-expat-americans-perspective/
Argues that FATCA has not reduced tax evasion and that the burden of FATCA falls on persons who would be tax compliant regardless: http://www.ifcreview.com/restricted.aspx?articleId=12552
Discusses “tax traps” for people who are thinking about becoming “US persons:” https://www.youtube.com/watch?v=dAwMrGG9EbE&feature=youtu.be
Listing of denials of financial services to US citizens because of FATCA:
http://citizenshiptaxation.ca/fatca-denial-of-service-library-permanent-record/ (scroll to the bottom to see a description of the experience I had in Paris on Feb. 8, 2018)
Enumerates and explains the legislative and other changes that have taken place since 2001 which, collectively, have rendered the position of the US citizen living outside the US untenable: http://isaacbrocksociety.ca/2013/07/04/happy-independence-day/comment-page-1/#comment-419534 “This stream of legislation and proposals categorizes Americans abroad as suspected criminals seeking to escape U.S. taxes. Congress has outdone George III and has turned the United States into a fiscal prison, including legislation which is deemed anti-constitutional under the Fifth Amendment1 and is contrary to Articles of the Universal Declaration of Human Rights. The foundation of the U.S. fiscal prison is citizenship-based taxation. Americans working and living abroad carry a ball and chain of dual taxation throughout their entire lives up to and including death.”
Focused on taxation of foreign company’s retained earnings:
Explains how and why previous efforts to repeal FATCA and CBT have failed and describes the new approach that needs to be adopted in order to succeed: http://citizenshiptaxation.ca/comment-on-think-you-can-leave-u-s-think-again/
Websites focused entirely on the problems caused by FATCA and CBT for ordinary Americans living overseas:
http://isaacbrocksociety.ca/2011/12/14/about-the-isaac-brock-society/ (including human rights complaint filed with the United Nations: https://isaacbrocksociety.ca/2017/12/15/un-human-rights-complaint-quadruples-its-signatures/)
Facebook groups focused on FATCA and CBT:
American Expatriates: https://www.facebook.com/groups/AmericanExpatriates/
Citizenship Taxation: https://www.facebook.com/groups/citizenshiptaxation/
US Expat Tax Questions: https://www.facebook.com/groups/952367774780623/
Accidental Americans: https://www.facebook.com/groups/accidental.americans/
Explaining why CBT makes investment and financial planning difficult for Americans living overseas:
Americans living in Australia: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931
Congressional hearing on FATCA and CBT:
Former US citizens, Rand Paul and others commenting on FATCA and CBT in Congressional hearing: https://www.youtube.com/watch?v=eHjTEsWI2ao
Support of Democratic Party/Democratic Representatives of Residency-Based Taxation:
About Democratic Representative Jamie Raskin’s support for the repeal of FATCA and tax reform for Americans living abroad: https://www.democratsabroad.org/rep_jamie_raskin_supports_americans_abroad_tax_reform
About Democratic Representative Dina Titus’s support for the repeal of FATCA and tax reform for Americans living abroad: https://www.democratsabroad.org/rep_dina_titus_supports_american_abroad_tax_reform
About Democrats Abroad campaign for residency-based taxation: https://www.democratsabroad.org/alexpm/residency_based_taxation_campaign
Residency-based taxation “campaign in a box:” https://d3n8a8pro7vhmx.cloudfront.net/democratsabroad/pages/11684/attachments/original/1506083107/RBT_Campaign_In_A_Box.pdf?1506083107
Support of Republican Party for residency-based taxation and repeal of FATCA:
Explain how FATCA has turned the US into a tax haven:
Scholarship/law review articles:
Examines the connection between FATCA and increased renunciations of US citizenship. Argues that FATCA violates the 4th Amendment of the Constitution: http://scholarship.shu.edu/cgi/viewcontent.cgi?article=1947&context=student_scholarship
Explains the origins of CBT in the US and the heavy burdens it places on US citizens living overseas: http://www.pennstatelawreview.org/wp-content/uploads/2016/10/ARTICLE-3-CABEZAS.pdf
Heartbreaking stories of people who renounced their US citizenship due to FATCA and CBT:
Reaction of other countries to Eritrea’s imposition CBT:
Dutch expel Eritrea’s top diplomat in Netherlands over issue of CBT: https://citizen.co.za/news/news-africa/1786362/netherlands-eritrea-politics-diplomacy/
Eritrean embassy in London investigated by Metropolitan Police in relation to CBT: https://www.theguardian.com/global-development/2015/jun/09/eritrea-diaspora-tax-uk-investigated-metropolitan-police
Canada threatens Eritrea in relation to its imposition of CBT: https://1040abroad.com/blog/canada-standing-up-against-eritrea-citizenship-based-taxation/
Highlights the problems of Accidental Americans and argues that US citizenship is being imposed on people who don’t want it and in doing so citizenship is being used as a weapon to achieve governmental objectives: http://citizenshiptaxation.ca/the-ownership-and-use-of-the-us-person-which-includes-a-citizen-as-an-instrument-of-foreign-policy-part-i/
Testimony before European Parliament by an Accidental American, focused on his experiences with FATCA. His testimony starts at 00:32. Be sure to also listen to reaction of Sophie In’t Veld from 16:30: https://www.youtube.com/watch?v=t_Il-rL5TiI&feature=youtu.be
Accidental Americans in French media:
These are articles that expose to a French-speaking audience the problems faced by French Accidental Americans:
Accidental Americans in British media:
Petition to Boris Johnson to withdraw the UK Government’s consent to cooperate with the US on FATCA implementation. Explains in detail the problems of FATCA for UK citizens and residents: https://you.38degrees.org.uk/petitions/united-states-foreign-account-compliance-act
Highlights the problems of Accidental Americans for a British readership: http://www.telegraph.co.uk/tax/income-tax/i-had-to-pay-8200-to-escape-draconian-us-tax-system/
Accidental Americans in Dutch media:
Accidental Americans in Estonian media:
Former US citizens denied entry into US after renouncing citizenship (these are higher profile persons. Lower profile persons denied entry don’t make the news but they tell us about their experiences on social media):
Explains the diversity among US citizens living outside the US: https://web.archive.org/web/20130323042731/http://americansabroad.org/files/8613/5972/6757/acapiecejan2013.pdf “While there are certainly very wealthy individuals living overseas, the majority of overseas Americans are not. One-third of my survey respondents had an after-tax annual household income of under $50,000.”
Last but not least, I posted a prior version of this paper on Thom Hartmann’s website. It sparked a number of comments, which can be viewed here: https://www.thomhartmann.com/users/laurainparis/blog/2018/02/think-you-can-leave-us-think-again#comment-382063