Issues in Citizenship-Based Taxation in the US & Beyond: The Transcript
Did you miss Part I of our webinar on citizenship-based taxation in the US and beyond?
Well, here’s your opportunity to catch up.
Just in time for the weekend, we’ve released the full transcript for your reading pleasure.
A special thank you to our panelists John Richardson, Dr. Karen Alpert and Leonard Tuber for leading this discussion and providing us with plenty of food for thought on this controversial topic.
For now, here are some of the event’s main highlights.
What these rules do is make up income a person never receives that are sourced to another country and simply steal that money out of the country?
Leonard Tuber: “I don’t know if it’s stealing income. I do think that one does have to have a legal right to income. You definitely have to be the shareholder of the CFC, you have to be the beneficial owner of that income…Once you agree with the general principle of citizenship-based taxation, then the question becomes whether income recognition can be deferred, and I certainly think the US has gone to extremes in that respect as far as when they have the right to tax income. In the US, for instance, under the normal corporate structure, someone owns a corporation and the individual is not taxed until there’s a distribution, until that income has been constructively received, distributed out of the company and into the individual taxpayer’s pocket. Today, that is not the case.”
Could you discuss the foreign earned income exclusion, emphasizing the perception in the US that the foreign earned income exclusion allows American citizens to simply exclude $100 thousand of income per year? What’s the problem exactly?
Karen Alpert: “The problem is that not all of your income is earned. The foreign earned income exclusion is only good for earned income. So, if you’re living in Australia or wherever while you’re employed, no problem, you have a foreign earned income exclusion. But, at some point, you’re going to retire and, when you retire, your income is going to be not earned because you’re not earning anything anymore. So the foreign earned income exclusion completely evaporates for unearned income.”
“In Australia, I think very few people use the foreign earned income exclusion because, unless your income is between 12 and 20 thousand, you might find the foreign earned income exclusion useful because you’re hardly paying any Australian tax at that level. But once you get above 20 or 25 thousand, you’d be paying more in Australian tax than you’d be paying in US tax, so the foreign tax credit works better because with that you’re allowed to carry the credits forward for ten years. And, specially if you’re nearing retirement, those credits might possibly—depending on how your retirement income comes out, what FTC category it’s in—allow you to offset some of the US tax on your retirement income after you retire. The foreign earned income exclusion does not fix everything because not all income is earned.”
Would you like to tell us what the savings clause is and why it’s a problem? And how perhaps changes in the tax treaty can be of help?
Karen Alpert: “The savings clause says—the US inserts this in every treaty it writes—that if you’re a US citizen the treaty doesn’t count except for these really small lists of enumerated sections in the treaty that you can use as a US citizen.”
“I think also, when they first put the savings clauses into the treaties, that would have been around the 1930s and citizenship was completely different. You were a citizen of one country and one country only. Dual citizenship was very rare back then. And so maybe Australia or whoever, when they put it in said, “Well, if you come over here and live here but don’t take up our citizenship, let the US do whatever they want with you, you’re still a US citizen.” But the world is not that way anymore; more and more people are dual citizens and the treaties haven’t moved on with the times.”
John Richardson: “I do not believe when these treaties were negotiated that these other countries understood that, by agreeing to the savings clause, what they were really doing was agreeing to allow the US to impose worldwide taxation on their own residents.”
“What is really exacerbating this problem is the whole FATCA thing, where the IRS has deputized non-US banks to essentially hunt people with US indicia and then I guess they are free to decide what to do after they are identified.”
Why would anyone not renounce US citizenship in this environment?
John Richardson: “In the years I’ve been working on this problem, I think that unless—US citizenship is a disability if you live outside the US—you want to live your life with a disability, I think people need to get out of it…I would have to think that the people who are not renouncing are the people who can use things like the foreign earned income exclusion to shield all their income. I don’t know; it baffles me. There are a lot of people from my perspective in Canada, and I’ve been seeing a lot of this lately, who I think have to renounce to protect their ability to survive in their old age.”
“Here’s an example. Let’s say you have a US citizen married to a non-citizen. You have these people in their sixties and they’re married to a non-citizen. If that non-citizen were to die, they’d inherit all this stuff and they would become a covered expatriate. They cannot renounce then without paying an exit tax and they may have to renounce because, let’s say, you have somebody living in a big expensive house and one spouse dies, without the income of that spouse, they no longer have the money to pay for the upkeep of the house, so they have to sell the house, but then the house is subject to a massive capital gains tax. I think these people have to get out just to protect themselves, I really do.”
Would you support the end of this citizenship-based taxation regime? Do you think the world would be better?
Leonard Tuber: “Yes, I think that a more equitable tax system would be residency-based taxation and, of course, being taxed if you live in Israel but you have income-producing assets in the US, then of course the US or any country would have the right to tax income that is generated within its borders such as with real estate. But, yes, I would support moving away from simply citizenship-based taxation that simply your citizenship is enough to bring you into the tax jurisdiction.”