Is FATCA About Protecting the US Tax Base or Expanding It?
Here's the full transcript for our webinar titled: Is FATCA About Protecting the US Tax Base or Expanding It?
Our panelists were:
- John Richardson, Lawyer, Citizenship Solutions, Canada
- Dr. Karen Alpert, Finance Lecturer, University of Queensland Business School, Australia
Mateo Jarrin Cuvi: Welcome everyone to Taxlinked’s latest webinar. Today we have, once again, two of our favourite panellists talking about US tax issues. Before we get started with the session, let me get some admin issues out of the way. This session is being recorded. You will have the video recording and a transcript available probably within the next two weeks. Also, if you have any questions for either John or Karen as you listen to what's being said, make sure you use the GoToWebinar control panel. Submit your questions there and I'll make sure to pass them on to John who will be moderating the discussion, it will be more a chat between good friends, between John and Karen. So we’ve followed this model in the past and it works great, so we're going to stick to it. Besides that, also, a reminder that if you want CPD credits, you're eligible as a Taxlinked member to receive CPD credits for attending this webinar. But make sure that you are paying attention, the system keeps track of whether or not you're paying attention. So if you want the CPD credits, then make sure that you are actually engaged and participating and whatnot. So with that said, I am going to make myself scarce and pass on the reins to John who will lead the discussion. Thanks and have a great chat.
John Richardson: Well, thank you very much for the introduction. And, Mateo, they will be paying attention because FATCA is one of the most important issues of our age, as you know. Yes, Karen and I have done a number of these together and, yes, hello friend. How are you today, Karen? Maybe we can begin actually with two things. First of all, there is a cartoon on the screen. And I'm not going to take credit for that, although I’m the proud owner of the original signed by the author. This comes from Helen Burggraf, publisher of American Expat Finance, but what I think it does, it’s really a great visual representation of exactly what the problem here is. That FATCA is—I’m not even going to call it information exchange—it's the US forcing other countries to provide information about people who are primarily their own tax residents for the ultimate purpose of the United States obviously imposing direct taxation on them because the United States taxes people based on citizenship with no connection to the country other than place of birth. And look at the vacuum cleaner. How cool is that? So FATCA is an enabler and it's there to suck up money that is properly the tax base of other countries.
Anyway, introductions. My name is John Richardson. I'm based in Toronto, Canada. I run a boutique law practice designed to help people with FATCA and other US citizenship-related problems. And, Karen, do you want to take a moment introduce yourself?
Karen Alpert: I'm Karen Alpert. I'm a finance lecture at the University of Queensland in Brisbane, Australia. And I've been doing a lot of research into tax and especially looking at extra-territorial taxation by the United States of its citizens.
John: Actually, I think that perhaps she’s being a little bit modest. So she runs a tremendous blog Fix the Tax Treaty.
Karen: Where we're basically aimed at trying to get the Australian government to stick up for its own citizens.
John: Because of this US territorial overreach and, because this is Taxlinked, I think it’s worth noting also that Karen either is or was a CPA and was a manager in one of the Big Four firms, I think.
Anyway, today we are here not only to talk about FATCA, I mean, anybody can do that. Today we are here to talk about the effect of FATCA on tax residents of other countries. And to introduce the idea and have some discussion about what the effect of FATCA is actually to the US tax base.
In 2008, Professor Richard Harvey said, “Look, the United States has the right to tax its tax base.” Remember that's any US citizen anywhere in the world. Or rather whether the effect of this is to actually expand the US tax base into other countries by saying, “Hey, oh my God, you got people born in the United States in your country and therefore we're going to subject them to worldwide taxation.” So that's the general context. I think we're going to have the discussion today and there have been questions submitted. And for those of you who’ve been on these with me before I tend to not go through questions in order, we incorporate them by reference. And, Karen, what would you like to add about the purpose of today and where we're going with this?
Question #1: How effective has FATCA been?
Karen: Well, so I think what a lot of the questions that we got were about how effective has FATCA been and do we have any hard numbers. So I'd like to discuss the numbers or lack of numbers on how effective FATCA has been for the US Treasury because, really, they haven't collected much and the main effect has been on citizens of living overseas. And I don't think they really understood the implications of citizenship-based taxation until all the banks started enforcing it for them with FATCA.
John: You make a very important point there. You say, “Well, it's the banks, meaning non-US banks enforcing FATCA.” So if we put this in the context of costs to the US Treasury, I mean, actually, they’re getting other people to do their dirty work for free, right?
Karen: Yeah, they’ve spent a little bit of money but it's been very little compared to what the financial industry and the rest of the world have spent. And it's pretty clear that the compliance costs for foreign financial institutions have so far exceeded any revenue that the US has gotten.
John: Well, I think it's also pretty clear that the costs incurred by foreign financial institutions—and, by the way, foreign is not a bad word, it just means financial institutions outside the United States—have certainly been higher than what it’s cost US Treasury. And they continue to have these costs on an ongoing basis.
Karen: Yeah. Although it's really hard not to disentangle the cost of FATCA from the cost of the Common Reporting Standard (CRS).
John: Well, that's true. I mean, maybe the banks were happy to see CRS because it would have made the cost of FATCA a little bit less because they can do two things at once, right?
Karen: I think without FATCA, CRS would never have happened.
Question #2: What are some of the differences between FATCA and CRS?
John: Well, that may be true. Why don't we talk about the differences between FATCA and CRS? So let me make a couple intro comments and I would like you to add to this. But the overall discussion on FATCA and CRS, “Well, this is just automatic information exchange, this is what tax administration in the 21st century means and, hey, so the Americans have FATCA and the rest of the world has the CRS.” But it seems to me that it obscures a very important difference between FATCA and CRS. With FATCA, what's happening is that banks are sending information about their own tax residents who live in their country, say, Switzerland or Canada or Australia, people who live in Australia, tax residents of Australia, they’re sending that information to a country where they do not live, the United States. With the CRS, what's happening is, let's say, Australia is sending information about accounts held in Australia, the account holder doesn't live in Australia, they’re sending that information back to a country where he or she does live and that seems to me a very fundamental difference between FATCA and CRS.
Karen: That difference arises only because of citizenship-based taxation. Because the US has decided that they want the information of their citizens, not just their residents. But what's the other thing is, if you think about the interest that the countries have in getting the data that they get from CRS and FATCA, the interest that a country has in getting the data of its own residents that have investments overseas seems to me to be much higher than the interest of a country in getting citizens, the US in getting Australian residents who live in Australia, because the US tax liability of somebody living in Australia who’s a US citizen is going to be minimal because it’s all going to be offset by foreign tax credits.
John: Now, this is a really important point you make, and I think it's so important, I would ask you to make it again.
Karen: Yes, a lot of the arguments that were made in the European Parliament in the last week when they had that hearing, a lot of the arguments are about proportionality. And is there a reasonable reason to actually be collecting this information? And for a Canadian resident who's a US citizen, what interest does the US have in knowing what their Canadian source income is? Because Canada is going to tax that, Canada has first taxing rights on that income. So when the person reports on their US tax return, they're going to get a credit for the Canadian tax, which is higher than the US tax anyways. And so the US isn't really going to get any tax from that income anyways. So there's no real reason for Canada to be reporting to the US on Canadian source income earned by Canadian residents.
John: You put that very well. In that context last week, a very well known and highly respected CBC reporter Elizabeth Thompson wrote an article where she described that something like 900,000 accounts held by—listen to me carefully—residents of Canada.
Karen: Alright, so where all those by residents of Canada or was that just the total number of accounts that were reported? Because, in 2016, Australia reported 860,000 accounts, or they sent 860,000 records to the IRS. And now that’s not all individual accounts, some of those were entity accounts, and they were jointly held by two US taxpayers, two records would have gone over. So it's hard to tell exactly how many accounts and stuff, but it was 860,000 records that Australia sent in 2016. So Canada is only sending 900,000 records now.
John: Boy, there's a lot of room for Canada to improve, isn't there? Obviously, I don't know of the 900,000, what percentage of those would have been held by non-residents of Canada. But it is overwhelmingly accounts held by residents of Canada. There’s not doubt about that. And the other thing about the article is that it made the point that the numbers have increased quite significantly.
Karen: The Australian numbers increased quite significantly between 2014 and 2016.
John: Interesting. Now, I'm not sure why the 2014 to 2016. But, I will tell you this, what I noticed in my own life was that in 2018, when the rule of CRS began, I started getting a lot of calls from US people who had not been picked up in the first FATCA sweep. So there is no doubt that FATCA and CRS have had the effect of making large numbers of people aware that the US considers them to be tax residents, even though they have nothing whatsoever to do with the country, perhaps a lingering place of birth or a dormant US citizen. These are people who do not identify as Americans. And, so really, you notice that what's happening is that the first effect of FATCA and CRS, I actually see CRS as a FATCA enabler, okay, partly because, at least with FATCA, we've had the de minimis reporting standard of 50,000. CRS has no de minimis whatsoever.
Karen: CRS has no de minimis and it doesn't have an exception for local client base institutions.
John: So, I think in many ways it’s a lot worse.
Karen: But there’s so much reporting on tax residents of other countries, so you're not going to have nearly as many records. And I'm really waiting because the Australian CRS implementing legislation said that the ATO had to report to Parliament how many records they were sending on a country-by-country basis. And that first report is due to Parliament by the end of January.
John: Well, that will be very interesting because, as you point out, there are going to be far fewer records. But why is that? It's because with the CRS the reporting is on people who don't live in the country, right? Where they do live. And, again, I come back to this thing with FATCA, FATCA is about reporting on people who do live in Australia or Canada to a country where they don't live.
Karen: Exactly. I'm really looking forward to being able to compare those numbers.
Question #3: The US has been very good about creating fictitious tax events to essentially front run the taxes of other countries. Do you want to add something to that?
John: And, as you pointed out, in most cases there's going to be limited tax liability. But just for the record for the video today and to link back to other things we've talked about, the US has been very good about creating fictitious tax events to essentially—to use your word—front run the taxes of other countries, like for example, the transition tax, etc. Do you want to add something to that?
Karen: Yeah. So pulling in these residents of other countries into the US tax base is pulling in foreign source income or income sourced where these people live to the extent that that foreign source income is punitively taxed by the US.
So what would that be? That'd be things like both Canada and Australia give you a full exemption for the capital gain on your principal residence. In the US it's not a full exemption and certainly anyone living in Sydney will have a huge gain on their house because the prices have been skyrocketing in some of our major capital cities. So there's that, principal residence.
There's punitive tax treatment on passive foreign investment companies and most of the tax compliance industry is reading that as saying any managed fund or mutual fund or pooled investment vehicle that is registered or organized outside of the US is a passport investment company, which we can argue.
John: So, I mean, to show you the absurdity of this, right. So I live in Toronto, Canada, as you know, and I'm about an hour and a half from Buffalo, for example. So, let's take some something like Templeton mutual fund. If you buy it in Buffalo, it's not taxed. But if you buy the same fund with the same investments, if you buy it in Toronto, it's subject to these PFIC or passive foreign investment company rules. And, frankly, the longer you hold it, I think Warren Buffett would say, “Well, my favourite holding period is forever.” Well, that might apply to him as a home lander American. But if you're American abroad, you don't want to hold anything too long, at least in the mutual fund area. Or to avoid the capital gains thing on the house. So, yeah, this is amazing. It demonstrates that it's for no purpose other than punishment.
Karen: Well, the whole purpose of the PFIC rules is to encourage investment in US mutual funds. And those rules were enacted in 1986 and the world has moved on. So back in 1986, yeah, they were mutual funds, there weren't that many. Now you go to a financial advisor, and they're going to be telling you buy an index fund. Passive investing is the way to go. It's low fees, it's in the currency that you're working in daily so you don't have foreign exchange issues. And as an Australian taxpayer, investing in US ETF or mutual fund has tax consequences as well. Because it's not Australian, they don't recognize that the capital gains pulled out of the fund are capital gains, they tax all the distributions as ordinary income.
John: Well, I mean, when we're in this area tax broadly means what tax would be normally plus the interest charge on the deferral.
Karen: On the passive foreign investment company. You can't look at just the US tax in isolation because these people are tax residents where they live. US tax law is telling you that you should be investing in the US, that might be punitively taxed by your home government.
John: Well, that's exactly right. And this is also another interesting thing, when the transition tax fiasco came out a couple of years ago, a number of people would say, “Well, the solution is to create a US corporation,” but then it becomes a foreign corporation relative to the country you live in, certainly Canada has rather robust CFC rules, the UK has robust CFC rules, as does Australia. So essentially what it means it seems to me is that if you're an American citizen living outside the United States, you're living in a fiscal prison.
Karen: It becomes very hard to effectively save for retirement.
John: Okay, it becomes very hard to effectively save. We'll tone it down a little bit. Nobody would disagree with that, Karen. We look at the whole FATCA thing, the vacuum cleaner that FATCA is, which, really, if the US is imposing, citizenship taxation is, I think, not a good way to describe what's happening, even though technically that's what it is. What US citizenship taxation is really this: the United States imposing worldwide taxation according to US tax rules and the Internal Revenue Code on people who live in other countries, are tax resident of those other countries and don't live in the United States. And that's why get back to the topic: Is FATCA about protecting the US tax base or expanding it? Well, to the extent that FATCA facilitates the US imposing worldwide taxation on people who are tax residents of other countries, that would suggest that it's actually about expanding the US tax base. What do you think?
Question #4: Is FATCA about protecting the US tax base or expanding it?
Karen: It's interesting because you just don't see it in the data. So if you look at US returns filed from abroad, this is still tiny relative to the number of US citizens living outside the US. Yeah, a lot of them just aren't filing. And then the target of FATCA was US residents investing overseas. So if you look at all US 1040s and see how many of them claimed a foreign tax credit, that's gone up. But in 2007 it was 5.35% of US returns claimed foreign tax credit. So that's pre-FATCA, that was 5.35%. In 2017, it had risen to 5.66%.
John: Good God. What a huge increase.
Karen: Yeah, there was a big dip in between because when you look at the number of returns with foreign tax credit, you've got the recession that happened in 2008-2009, really cut into the numbers of returns with foreign tax credits in them and the amount of foreign tax credit per return, both of those dipped during the recession, and are just now getting to where they're above the pre-recession levels. So you've got that happening. There's no evidence that they're really collecting more tax.
So the other thing that that's been happening in the last 10 years or since the recession is, I think, there are more opportunities now for investing in something that's going to generate foreign tax credits if you're a US resident. There's more exchange-traded funds, those have really taken off and a lot of them will have foreign income in them. So the IRS does a more detailed report of a foreign income but only every five years. And the last one was for 2011. So that lists all the forms 1116, all the foreign tax credit forms. And if you've got just portfolio, like dividends in a managed fund or mutual funds that are throwing off some foreign tax credits and it's a minimal amount, you can claim a foreign tax credit without filing the form 1116.
John: I think that's generally an important point for people. Again, could you comment on how much foreign tax you need to be required to file the form 1116?
Karen: I don't know the exact threshold.
John: Okay, but the point is an important one.
Karen: $1,000 or so but maybe but I don't know for sure. But, yeah, if you just have some foreign dividends that are being thrown out of a mutual fund, you're going to have a couple hundred dollars of foreign tax credits. So you're going to be included in this number of returns that have something on that foreign tax credit line. But you're not going to file one of the forms 1116. And so in 2011, that was only about 57% of taxpayers that had something on that FTC line that actually filed the form 1116. So it's above half but less than 60%. So the fact that we've got increasing numbers of returns with foreign tax credits may just mean that we've got increasing numbers of people investing in managed funds, in ETFs, mutual funds that have foreign tax.
John: In other words, it's not a persuasive indicator of increased US tax compliance from abroad.
Karen: It's certainly not an indicator of increased tax compliance from abroad. But it's also not an indicator that people who were hiding money before FATCA had decided all of a sudden to start reporting it. Even US residents.
John: Of course, let's I think it's worth reminding everybody at this point that the failure to report this stuff is not, in many cases, evidence of any wrongdoing, because the people just tend to not know about this stuff. There are all kinds of people in the United States who think that, well, if it's income from outside the country and I’m paying taxes there, it’s not a US thing. And of course, more of the point, I think it's a very, very small percentage of Americans abroad who know that their current US law require to file US taxes. Where I think FATCA is important is that I think it has been a very, very good educator of that because these banks have been going around saying, “Oh, my God, you were born in the US, you need to be filing a US tax return.”
Karen: There are banks that know nothing about US citizenship law or really US tax law, telling people that they are US citizens and they need to file a US tax return.
John: Well, and this is a very, very serious problem for a lot of people who obviously are arranging their financial affairs around the tax systems where they live. It's also a terrible moment in people's lives where they are trying to cope with this. In many cases, many may be strong, but I got a call yesterday from some accountant in western Canada who said, “So what's the right thing to do here? File five years to return?” and I said “No God no, you start off with trying to determine whether the person really still is a US citizen.” Because, I mean, there’s all kinds of people born in the United States who have relinquished US citizenship. So, the banks and the tax compliance industry, particularly the accountants, are really the enablers of what I would call citizenship taxation awareness. They get people aware of this and where they go from there, I mean, it's difficult to tell. But, in that sense, it seems to me that if you're converting somebody who had no idea they were a US tax resident, somebody is all of a sudden worried about it, I would say that that's, along with the possibility they may file, I think that does expand the US tax base. But what often happens with these people is they get so afraid that they renounce US citizenship, sometimes they didn't even know they had it. And in that context, they may file five years of returns.
Question #5: In view of the growing number of renunciations, should we be asking whether it contracts the US tax base?
John: One of the questions for here was quite interesting was: Does FATCA expand the US tax base or simply protect it? In view of the growing number of renunciations, should we be asking whether it contracts the US tax base?
No, I don't think so. Because I think the US tax base sort of includes people who are aware that they’re US tax residents.
Karen: But I also think a lot of these people who are renouncing, some of them may have been compliant before, some of them may have done the five years compliance, and then got out. I don't think they're necessarily paying a lot of US tax. Certainly some of them may be, but some of them are just doing it so that they can open a bank account.
John: I mean we can't have a discussion about FATCA without getting into the tremendous problems of retaining and opening bank accounts that FATCA has inflicted on European residents. And perhaps other parts of the world, I think less so in Australia, Canada, but I mean, this was what the hearing on November 12 was about, right? Do you have any comments on what took place there?
Karen: So I think the big points are that FATCA is requiring countries to report their own citizens and they need to step up and protect their own citizens. And it's a huge data issue. You don't know what's been reported about you, first of all. And second of all, you don't know if it's accurate. And the US really has no real interest in that data because you're not going to owe very much US tax anyways. Because it's locally sourced income in the country where you're a resident.
Question #6: What about the reportable accounts in the $50,000 threshold?
So, there's another question here about reportable accounts in the $50,000 threshold, which I think we've covered, but let's just do this a bit again. Yes, FATCA has a $50,000 threshold that makes a lot of sense. CRS doesn't. A lot of the banks have decided, why have two separate systems, we're going to run one system, one task, lowest common denominator, there is no problem for the bank if they over report, and I think that should be an issue, because I think if they're over reporting, I think that's a violation of privacy. If you've got a report on an account under $50,000 that's not required to be reported under FATCA, I don't think that the bank or the local tax authority can go under the usual privacy law carve out for transferring data pursuant to an international agreement when the international agreement doesn't require you to report accounts under $50,000. It’s clear that they're now just recording everything. They run one report, it works for both CRS and FATCA.
John: It costs less. Well, by way of background, the way FATCA, a US domestic law with extraterritorial implications, has been inflicted on the rest of the world has really been the result of a two-step process. The first step was to get countries to enter into these intergovernmental agreements.
Karen: The first step was to threaten the banks so much that the banks begged their governments to enter into these international agreements.
John: Okay, so step one, the threat of sanctions. Sure, absolutely. Let's create the terror. The banks interestingly, one of the things that becomes clear from this is the banks are not citizens of countries and don’t owe obligations to countries, they just see themselves as moving around the world and doing what they best think to do. So the banks wanted to protect themselves from a threat of FATCA sanctions found in Chapter Four of the Internal Revenue Code. So then what happened was, largely as a result of at least the acquiescence of the banks, the governments of which Canada should be proud, not, okay, to be a leader in FATCA implementation, entered into an agreement, the model one FATCA IGA, which basically did two things: it said, “Well, we accept FATCA on principle, but what we're going to do is, first of all, the information gets reported at the Canada Revenue Agency and then gets sent to the IRS. But also we are absolutely going to change Canadian law to override all the so-called frivolous privacy and human rights issues that the banks might violate.”
For example, in certain provincial human rights codes, it would be against the law for a bank to discriminate based on citizenship or national origin. Clearly, by hunting for people with US national origin, they're doing just that, right? And it also overrides various privacy implications. Now, the way the agreement, the IGA, and the subsequent implementation of the law was drafted, was very interesting because we see the bank's fingerprints on us again. It made a distinction between what they were required to report, the $50,000 over, and what they were allowed to report, which was anything. And that is the problem. So, one wonders, and I think this is a very interesting point on the whole proportionality argument, whether they're not refraining from reporting information they are allowed to not report opens up different set of problems as well, but this is absolutely huge.
Another interesting thing about it is this: It's very clear that this applies to people who are tax residents of other countries. That it doesn't really have a lot to do with taxation for the reasons that you give. So, this means that the only possible use of the information would be for some other purpose, which could only be nefarious, I think.
Karen: Yeah, I think they would tell you, I don't think I agree, but they would tell you that it's anti money laundering, avoiding terrorist financing. Like any of those apply to my bank account in Australia.
John: Karen, have you ever met a terrorist? You're sure? Nobody on your Fix the Tax Treaty blog is a terrorist? Can you be sure of it? Shouldn't you just ban everyone from your blog? Maybe you should ban everybody from your blog because somebody might be a terrorist or money launder. The world is full of a lot of evil people. And, Karen, it is absolutely the view of US Treasury that the whole world outside the United States is involved in a conspiracy 24-7 to cheat US Treasury of legitimate tax revenue. Did you know that?
Karen: That's a little over the top. I want to give them the benefit of the doubt but they've known about these problems since day one. And what have they done to alleviate the banking problems in Europe? Oh, well, we've got a new procedure so you can renounce without having a social security. Better than nothing but you still have to comply or at least make an attempt at compliance.
Question #7: What sort of legislative changes have been pushed to make things better vis-à-vis FATCA?
John: Well, on this whole general issue, you’re right, they have done nothing. And one of the questions here has to do with legislative change. Perhaps we could address that a little bit. I think there have been broadly two categories of proposed legislative change. One is the whole FATCA same country exception thing, meaning that it shouldn’t apply to people who actually are tax residents of the other country. And the second is the holding bill, which absolutely is not a move for residence-based taxation. Yeah, it's modifying the rules of citizenship taxation.
Now, I want to get your comments on two things. First of all, I'd like you to give me your thoughts on those two things, generally, from the point of view Congress, but then I'd like to talk with you a little bit about what kinds of changes Treasury could make to these kinds of problems independently in Congress. They could be quick fixes. But let's start with the whole Congress thing. Why do you think they're hostile to the same country exemption for FATCA?
Karen: I think there are a couple of things going on there. First of all, FATCA was sold as stopping the fat cat from evading US taxes. And anything that “weakens” it, must be pro-tax evaders. And I think that's faulty logic. But I think that's how some of those supporters think. So I think that's one reason. And I think the other reason is that the same country exception, while it is useful for some, it doesn't help everyone and so I think you get a lot of expats out there saying, “Oh, well, that doesn't help me. I'm not in favour of it.” So there's not a united front from the US expat community in favour of the same country exception. And I don't think it goes far enough, but it's better than nothing.
John: Well, at a minimum, it's recognition that FATCA has created problems for Americans abroad trying to live their lives. And the problem is that they're not willing to accept any recognition of that on the whole FATCA thing. Maybe this is because nobody in the United States even knows what FATCA is. But that is a problem.
Now, what is your view of the problems? I mean, we agree that the root cause of this is what someone calls citizenship taxation, what I call non-resident taxation of worldwide income, but what is your thought on why this has been such a hard road to get what really is a simple change? I do not buy into any of the complexity of this at all. You just redefine US tax resident. That's it.
Karen: I think that it's changed. Getting Congress to agree on anything is really difficult right now. So that's part of the problem. Congress is to some extent a bit dysfunctional at the moment.
John: How does partisanship factor into that?
Karen: Well, I mean, it should be a non-partisan issue. But the minute you're talking about exempting people from tax, which is how they see it, they’re going, “Wait a minute, you're citizens, why don't you pay?” So they've bought into this whole idea that citizenship is a reasonable basis for taxation without understanding the difficulties that it causes. And there's a real problem when you are a tax resident of two countries at the same time, because how do you plan, how do you do anything because what one country's laws give the other countries laws are going to take away?
John: Well, the answer for most people is the tax treaty tiebreaker.
Karen: For most people, they can avoid being tax residents in two countries because of tax treaties but not everyone. And for most countries, because most countries tax based on residence, while they might be sticky, there is a way out. You can break tax residence for most countries. For the US, the only way to break tax residence is to get rid of citizenship.
John: I think there's a little more than that. Isn't part of the problem that needs to be included in this discussion, the savings clause in the treaties?
Karen: Certainly, certainly. The savings clause is what keeps US citizens from being able to use those tiebreakers.
John: And a lot of other things. I mean, the reality is that, and I think this is absolutely accurate, the effect of US tax treaties actually reinforces citizenship taxation, not alleviate it because of the savings cause. And, interestingly, what it also does is gets other countries by agreeing to this type of stuff to allow the United States to impose worldwide taxation on their own tax residents.
Karen: I don't think other countries realize this. And I think it’s historical because the US started putting those savings clauses into their treaties back in the 1930s. Back then, if you move to another country and took up citizenship in that other country, you lost your US citizenship. Dual citizenship was very hard to come by pre-1965, 1970. Now, everybody's a dual citizen. Ask the Australian Parliament. So the world has changed in terms of how they view citizenship, it used to be you’re a citizen of one place and one place alone. And if you immigrated to another country from the US, you lost your US citizenship, so you were no longer subject to US taxation. And I think when countries were ratifying treaties that have a savings clause in it; they thought they were in that same world still. They didn't realize that Australia’s got over well over 100,000 people who are born in the US of whom almost 55% are Australian citizens.
John: And expected to manage their finances with Australian superannuation and things like that, which are clearly subject to US taxation in some form or another. The debate is not whether they're relevant for US taxation purposes but in what way they are.
So we've got another interesting question because we got the issue of Congress making laws, we got the issue of the treaties. Let's talk a little bit about the Treasury and IRS in a broader sense.
Question #8: What can Treasury and the IRS do to make things better for Accidental Americans?
Karen: Treasury has the discretion to do an awful lot more than they're doing. They have the discretion to exempt citizens or residents of other countries from FBARs, from 8938s. They can do that.
John: That's right. And another thing, which has been very topical lately and some of you may have seen this, if you read Tax Connections particularly, is the whole issue of these penalties for these 3520-A things, which is absolutely absurd on so many levels. First of all, most of these things that we're getting penalties for were because they filed 3520s they never should have filed in the first place. But my point is simple. There is no reason in the world why Treasury can't exempt from 3520 reporting, anything that’s sort of a tax deferred, savings plan in another country if you’re a resident, no reason they can't do that at all. Why do they not do that?
Karen: Optics. Because people in the US see that as allowing people to evade taxes. Even though the Treasury is not collecting hardly anything for these people.
John: Karen, you must understand every US-born person Australia who has a superannuation is in the business of tax evasion. Every American citizen in Australia who marries an Australian-only citizen, this kind of marriage is only for the purpose of tax evasion.
I think this is a vitally important point, we talk about the whole campaign to get laws changed, which I think is very important, and that is sort of, well, this is Congress, it's hard to do, blah, blah, blah, but Treasury is a different story altogether. Treasury could change these things with a stroke of a pen. Most of these problems arose during the Obama presidency. He could have changed with the stroke of a pen. He did not. I think that, frankly, to the extent that Americans have anger at the US government, I think more of it needs to be directed at Treasury because most of these things can be fixed, really, with the stroke of a pen.
Karen: Treasury can all of a sudden come up with this procedure to file without a social security number if you’d renounced.
John: And forgive US taxes. Where does the authorization for this come from? Yeah, I don't believe there's any authorization at all for Treasury to somehow just forgive tax. Oh, but they've done that. So, it's pretty clear that we know that Treasury can make these changes. But it seems pretty clear that's also their view that they can do anything they want. And I think that a lot of the lobbying, I think Americans abroad have got to get a unified message. And I think they need to have packages for Congress. I'm reading about it, for example, Democrats Abroad and other groups lobbying Congress every year; I think they need a division that goes after Treasury relentlessly. Because, believe me, Treasury can change these things. And by the way on something like FBAR, a few years ago, they did address the question and said, “No, we're not going to change.” And the reasoning was why should it matter where somebody lives, whether they have reported a foreign bank account? Obviously, it's not a foreign bank account, now is it? It was your bank down the street.
Karen: Which brings up this question that we've got here about if the US really wanted to make it easier to monitor finances of US non-resident citizen, they'd make it easier to actually use US financial institutions. Which I think is a good point. It's near next to impossible to open a US investment account if you're living outside the US, and that's because of the securities laws. The securities laws and the tax laws are not compatible.
John: Or the immigration laws. This is a very interesting problem when you get over this renunciation thing. You can renounce US citizenship without filing US taxes if you want. In other words, the immigration law is independent of the tax law. It doesn't mean there aren’t tax consequences to renouncing. There are tax consequences to anything in the United States, including renouncing. But renunciation of citizenship, it's not per se dependent on tax filing.
Also, we go back to that September 6th tax forgiveness thing from IRS. I've seen a lot written and discussed about the program itself, but I think the most significant aspect of it actually was that the State Department—that is nationality, immigration—Treasury, IRS and the Social Security Division, all three of these groups signed off on that. That’s the most significant thing because that suggests to me that we may be seeing a more coordinated approach to this problem down the road. So for people who understand that all roads lead to renunciation, maybe we should add that all roads might lead to renunciation sooner rather than later. Because when we get all of these people more involved, I think it…
Karen: Another significant thing about that procedure for Accidental Americans, I think that came about because of lobbying from European governments.
John: There’s no doubt about it. Because you look at the date, it’s people who renounced after March 18th 2010 and that was the date FATCA was enacted.
Karen: But I think without pressure from the Netherlands and France that never would have happened, which means that it's important for the people who want something to change to be talking to their own governments and trying to get their own governments to put pressure on the US to fix this, to stop stealing from the tax base of other countries.
John: I agree with you totally on that. But we look at pressure. I think this might be a good moment to talk about two lawsuits that are going on presently against these host governments for not doing what they should. I’m going to do a plug here for a minute because we do need funding. Actually, I'm going to do two plugs for two FATCA-based lawsuits.
One is the FATCA Canada-based lawsuit brought by the Alliance for the Defense of Canadian Sovereignty, which I am co-chair and you'll see we do need funding. Now, our lawsuit is based on violation of Canada’s charter of rights. There's also a lawsuit in the UK, Support Jenny lawsuit, which is based on different grounds. Conflicts with the GDPR, the General Data Protection Regulation.
So FATCA is a big problem and it raises so many different issues. It's actually in many ways intellectually fascinating. As it was recognized as early as 2010, the tax compliance industry recognized that FATCA is actually it's the gift to them that just keeps on giving. And, on that note, let's talk a little bit, this one is one of the questions that came in: What is the role of the tax compliance industry in this whole FATCA citizenship-based taxation compliance model?
Karen: I wanted to make one more comment about the lawsuits that you mentioned, because I think it's really important that everybody get behind these lawsuits. If you're not Canadian, the Canadian lawsuit is still going to benefit you because all of these model one IGAs are written so that if the US has to give a concession to one country, they have to give it to all of them. Number one. But also the broader the support that both of these lawsuits show, the more action we're going to get from governments who basically think that, well, there's 200 people that have contributed to Jenny's lawsuit, so there’s only 200 people that that are affected. So even if it's a tiny amount, the more people the better. And if everybody gave 5 pounds to Jenny now, $10 Canadian to the Canadian lawsuit, they’d be funded right now.
John: That is absolutely right. Another way to view this is that there's a large community of people affected by this and the problem here is that people generally think short term and obviously they think in terms of their own interests. And they think this doesn't affect me, particularly, so I'm going to ignore it. But people must understand that this stuff is so far reaching that it's a problem that is far greater than the interest or problems of any one individual. It's far greater. My view is that the citizenship taxation is a sanction against other countries. Think of it, you claim the right to impose worldwide taxation on citizens in other countries. I mean, that is the ultimate sanction, I think, enforced by FATCA. This is a big general problem. And although it may not affect you, you've got to see this as possibly affecting your neighbours, your country, and certainly the next generation, and I urge you to take this stuff seriously and support these things.
Karen: Definitely. Yeah, the stories I hear from people in Australia who have lost reasonably large portions of their retirement savings trying to comply with US law and who's going to pay for that? I'm going to pay for that as an Australian taxpayer because Australia has a means-tested pension for retirees, and so someone spends down their assets to comply with US taxes, it’s the Australian government that's going to pick up the tab.
John: Well, maybe these countries respond by recognizing the significant danger of having US citizens living in their countries.
Karen: I don't see that happening, John, I just don't see it happening.
Question #9: What roles do tax compliance experts play in all of this?
John: What are your thoughts on the whole tax compliance? They do play a role in this. There's no question about it.
Karen: Yeah, I think they do. And I think that there's obviously a wide variance in how they behave, but there are several out there whose main modus operandi is to scare people into compliance. This penalty for $10,000 and this penalty for $10,000 and this penalty for $10,000, so you really better file now. Take advantage of the streamline while it's still here, we don't know when they're going to cancel it. I don't think they will.
John: Of course they’re not going to cancel it or if they do, they're going to replace it with something else. How in the world if the US wants compliance, can they not have a mechanism for people to come into compliance? What kind of foolishness is that?
Karen: Well, the IRS is going to do what the IRS has been doing. The longer you wait, the lower the penalty.
John: That is extraordinary, isn't it? I know somebody in Canada, for example, and this is just absolutely unbelievable. You can't make this stuff up. In 2011 or 12 or something enters the Offshore Voluntary Disclosure program, paid a significant amount. Then, a few years later, gets hit with the whole transition tax thing. And now would have qualified for this new program coming out in September where she would have paid nothing. It is absolutely amazing.
Karen: The longer you wait, the better they treat you.
John: That would be, I think, a reasonable inference for what has happened since 2011. Where in 2011, the IRS Commissioner is saying this is your last best chance to come into compliance, those who wait will pay more. Wow. That isn't exactly how it turned out?
So what would be your message to the tax compliance community, Karen, as a former and reformed tax compliance person?
Karen: I know that they have certain legal obligations. They can't advocate non-compliance, really.
John: Neither can lawyers. Nobody can advocate non-compliance.
Karen: But I do think there are grey areas where you can interpret the law in a way that’s more advantageous to your client. May be riskier. But if the clients informed of the risks, I don't see…and there's a reasonable basis for the position. A lot of them are more worried about making sure there are no penalties ever and that there's no risk of any penalties. Of course, that means maximizing what you pay. And it's not all of them. I don't want to tear the whole industry because I think that some people are doing the right thing by their clients. But they're not the first person you should see when you find out that you've got a problem here. You call up your local tax accountant to ask about your US tax compliance issue, they're going to tell you how to comply.
John: File, that's right. And to be clear, I think that there are many cases where it is in the interests of people to come in.
Karen: Absolutely. There are lots of people who should file and are going to have problems if they don’t.
John: Yeah, I think there's no question about that. It's definitely not a one-size-fits-all.
Karen: And there are a lot of people who the US has no business knowing anything about their finances because they have no connection to the US.
John: You don't think a place of birth is good enough?
Karen: No, I don’t.
John: Such an unusual thought, you can't be a real American. Oh, of course, you're not an American anymore.
Karen: I’m not an American anymore, John. You know that okay.
John: Whether you think that FATCA protects the US tax base or expands it, what is very, very clear here is that FATCA is generating an awareness of the position the United States of America has the right and, I suspect indeed for their point of view, the obligation to impose worldwide taxation on people who are tax residents of other countries and don't live in the United States.
By the way, final point on the FATCA IGAs is that, this is always discussed in terms of US citizens and that sort of stuff, but in their plain terms, these IGAs allow the United States unilaterally at any time to define the group of people who they want to target. And this is very clear right in the first section of the IGA is where the countries have agreed that the determination of who is a US person is governed by and only by the Internal Revenue Code in the United States. And we have seen since 2004, where the US divorced the definition of citizenship for immigration nationality purposes from the definition of citizenship for tax purposes. We have seen them through the Internal Revenue Code dramatically change the definition of US citizen for tax purposes. There's absolutely nothing to stop them from doing that on an ongoing basis. I mean, let's say they're running out of money. So, why don't we just broaden our definition of US citizenship for tax purposes? Some people say that's far fetched; it's not far fetched, it has already happened from 2004 on.
Countries who sign these IGAs have—this is inexplicable to me—have not even frozen the definition in terms of who they're looking for on this, they've actually allowed for what I would call an expansion of the definition of who they can target. Theoretically, somebody could be at a dinner, listening to the US citizenship woes, and they could say, “Oh, I'm so glad I'm not a US citizen.” And go home, sleep in a warm bed, comforted by the thought that they're not a US citizen and wake up the next morning, “Good morning, this is your first day of US citizenship.” This is entirely possible and it has happened. And this is one more reason why I think that people need to recognize this as a problem, get behind it and, now that I see Mateo, on why at the present time all roads lead to renunciation.