Category Archives: citizenship taxation

Part 2: The problem is NOT “worldwide taxation”. The problem is imposing “worldwide taxation” on people who don’t live in the South Africa or the USA and are “tax residents’ of other countries.

As goes taxation, so goes civilization.

This is Part 2 of my post discussing the South Africa tax situation. Part 1 is here.

This is a follow up to my post exploring whether South Africa is moving to a tax system that is based on “citizenship-based taxation” or (in the case of the United States of America) “taxation-based citizenship”. That post was the result of a “special request”. The response from that first post included:

I now understand the difference between the SA system and the US. I believe that the similarity that caused the consternation when this first came up was the issue of “tax residency”. CBT mandates that those declared US citizens by the US are simultaneously declared US tax residents. In a similar fashion SA has a concept of tax residency that *does* include some people who do not physically reside in SA but NOT just because they’re citizens. I get it. Thanks again for clarifying this!

That being said, I think the term “tax residency” is crazy. I wish that someone with the power to influence terminology in the general usage of language could come up with something that accurately describes the basis on which a person can be taxed by a country in which that person does not live. Taxes don’t reside; people do, and they can only live one place at a time. Any ideas? 🙂

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Part 1: South Africa is NOT attempting to compete with USA by challenging the US monopoly on citizenship-based taxation

As goes taxation, so goes civilizations

This is Part 1 of my posts discussing the South Africa situation. Part 2 is here.

There have been a number of suggestions in various blogs that South Africa is somehow taxing on the basis of citizenship. American citizens (whether by accident or design) are most sensitive to any discussion of “citizenship-based taxation”. After all, U.S. tax policies combined with FATCA (which is part of the Internal Revenue Code) are destroying the lives of those who have entered the U.S. tax system.

I recently received an email that asked:

They’re talking about SA expats, people who no longer live in SA, being taxed by SA. Like us, these people are residents and earners in countries other than their country of origin (and, I would assume, citizenship). http://www.internationalinvestment.net/regions/south-african-expats-hit-tax-exemption-removal-plans/ If this is not CBT, on what basis are they being taxed? If SA is just wanting to expand its definition of tax residency on what basis do they feel they can apply this to someone who no longer lives in their country?

The short answer …

South Africa imposes “worldwide taxation” on those who are “tax residents” of South Africa. The rules for an individual to qualify as a “tax resident” of South Africa are here. South African “tax residency” is irrelevant to citizenship.

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Dewees 3: Lessons about the “Oh My God Moment” and dealing with the problems of U.S. citizenship

As I write this post, my mind goes back to one of my very first posts about U.S. compliance issues. This post was called “What you should consider before contacting a lawyer“. Since that time I have written hundreds of post describing the problems faced by Americans abroad.

More recently …

In Dewees 1, I explained the importance of the Canada U.S. tax treaty and how it provides “some protection” to Canadian citizens from U.S. tax debts.

In Dewees 2, I explained some of the characteristics of the OVDP program and how Mr. Dewees got caught in it.

In Dewees 3 (this post), I am suggesting some possible lessons that can be learned from the story of Donald Dewees.

Ten thoughts on U.S. taxation, non-compliance, Americans Abroad and the U.S. taxation of Americans abroad

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The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians

The reality of being a “DUAL” Canada U.S. tax filer is that you are a “DUEL” tax filer

“It’s not the taxes they take from you. It’s that the U.S. tax system leaves you with few opportunities for financial planning”.

I was recently asked “what exactly are the issues facing “Canada U.S. dual tax filers?” This is my attempt to condense this topic into a short answer. There are a number of “obvious issues facing U.S. citizens living in Canada.” There are a number of issues that are less obvious. Here goes …

There are (at least) five obvious issues facing “dual Canada U.S. tax filers in Canada”.

At the very least the issues include:
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Wisdom of “Three Monkeys” explains why: Although there is little support for “citizenship-based taxation” repeal is difficult

The uniquely American practice of “imposing direct taxation on the citizen/residents of other nations” (“citizenship-based taxation”) has NO identifiable group of supporters (with the exception of a few academics who have never experienced it and do not understand it).

The Uniquely American practice of imposing direct taxation on the citizen/residents of other nations has large numbers of opponents (every person and/or entity affected by it). In addition to the submissions of Jackie Bugnion, “American Citizens Abroad“, “Democrats Abroad“, Bernard Schneider there is significant opposition found in the submissions of a large number of individuals. It is highly probable that the submissions come from those who are attempting compliance with the U.S. tax system.

The “imposition of direct taxation” on the “citizen/residents of other nations” evolved from “citizenship-based taxation”. “Citizenship-based taxation” was originally conceived as a “punishment” for those who attempted to leave the United States and avoid the Civil War. I repeat, it’s origins are rooted in PUNISHMENT and PENALTY and not as sound tax policy.

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Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?

This is post is “based on” (not identical to)  one of two submissions that I submitted in response to Senator Hatch’s request for submissions regarding tax reform.

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Why is the United States imposing full U.S. taxation on the Canadian incomes of Canadian citizens living in Canada?

The Internal Revenue Code mandates that ALL “individuals” , EXCEPT “non-resident aliens”, are subject to full taxation, on their WORLDWIDE income, under the Internal Revenue Code. The word “individuals” includes U.S. citizens regardless of where they live and regardless of whether they are citizens and residents of other countries where they also pay tax. This means that, by its plain terms, the United States imposes full taxation on the citizens and residents of other nations, because they are also (according to U.S. definitions) U.S. citizens. The United States is the only country in the world that has a definition of “tax residency that mandates full taxation based ONLY on citizenship.

How “U.S. citizenship” and U.S. “taxation” interact

Principle 1: The United States is one of the few countries in the world that confers citizenship based SOLELY on birth on its soil.

Principle 2: The United States is the ONLY country in the world that imposes full taxation ON THE WORLD INCOME of its citizens, REGARDLESS OF WHERE THE U.S. CITIZEN LIVES IN THE WORLD.

Bottom line: The United States is the ONLY country in the world that imposes full taxation, on WORLDWIDE income, based ONLY on the “place of birth”!

A practical example: A person whose only connection to the United States is that he was born in the United States, who lives in Canada (and may have never lived in the United States and whose only income is earned in Canada), is required to pay U.S. tax on that income. This resident of Canada is treated AS THOUGH HE WAS A U.S. RESIDENT. NOTE ALSO THAT THIS INDIVIDUAL IS REQUIRED TO PAY TAX TO CANADA! He is subject to “double taxation”. (This “double taxation” is only partially mitigated through “foreign tax credits”, tax treaties and the “foreign earned income exclusion”.)

Therefore: What academics and government officials refer to as “citizenship-based taxation” (they really don’t understand its practical effects) is PRIMARILY  “place of birth taxation” and therefore a convenient way to impose U.S. taxation on the citizens and residents of other countries. As a blog devoted to “citizenship taxation” (noting the difference between the theory and reality) points out:

“A supporter of citizenship taxation is someone who THINKS about “citizenship taxation”. An opponent of citizenship taxation is anybody who has tried to LIVE under citizenship taxation.”

How did this happen? It certainly didn’t start this way!

The evolution of “U.S. citizenship”

The result of legislative change and various U.S. Supreme Court decisions (primarily Afroyim ) has meant that “U.S. citizenship” is far easier to obtain and far harder to lose. 

Furthermore, as people become more and more mobile, it is not unusual for somebody to have been “Born In The USA” but live outside the USA. Global mobility is now the rule, rather than the exception.

The evolution of U.S. taxation and the Internal Revenue Code

The Internal Revenue Code has become more and more complex and impacts more and more activities of daily life. Because “U.S. citizens” (even though they are citizen/residents of other countries) are subject to U.S. taxation, they have been tremendously impacted by the “creeping complexity” of the Internal Revenue Code (which applies equally to ALL Americans wherever they may live).

This “creeping complexity” has evolved slowly through the years. The problems have been exacerbated because Congress does NOT consider that when amending the Internal Revenue Code they are impacting the lives of tax paying residents of other nations (who happen to be U.S. citizens). Congress is “indifferent” to the plight of Americans abroad (indifference being one of the worst forms of abuse).

Through the years, slowly and consistently …

The evolution of the Internal Revenue Code combined with ease of retaining U.S. citizenship has built a “fiscal prison” (legislative brick by legislative brick), in which  to keep the tax paying residents of “OTHER NATIONS”, who just happen to have been born in the United States.

Tax Reform 2017

The United States is “making noises” about “tax reform”. Senator Orrin Hatch requested submissions from “steak stake holders” on what should be included in tax reform. He has clearly received (as did the Ways and Means Committee in 2013 and the Senate Finance Committee in 2015) many suggestions advocating the repeal of “citizenship-based taxation”.

As noted at a site compiling the submissions of those affected by U.S. extra-territorial taxation:
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U.S. Citizenship clarification: Time between your actual renunciation and the date your CLN is issued

Two questions that I frequently receive from people who have renounced U.S. citizenship are:

I. An immigration question: What if I attempt to travel to the United States during the period of time between my actual renunciation of U.S. citizenship and actually receiving my CLN (which is my proof of having renounced U.S. citizenship)?

II. A tax question: At what point after I renounce U.S. citizenship do I cease to be treated as a U.S. citizen for U.S. tax purposes? For example, when am I free to sell my house (located outside the USA) and NOT be subject to U.S. capital gains taxes?

Two kinds of U.S. citizenship: How the issuance of a CLN affects (1) U.S. citizenship for Immigration purposes and (2) U.S. citizenship for tax purposes

1. How the issuance of a CLN affects U.S. citizenship for immigration and nationality purposes:

Immigration and Nationality Act S. 349(a) (U.S. Code 1481(a)) make it clear that the issuance of a CLN is completely irrelevant to your status as a U.S. citizen for immigration purposes. A CLN is of value ONLY for the purposes of PROVING that you are not a U.S. citizen.

Therefore, one ceases to a U.S. citizen for immigration purposes on the date of the relinquishing (renunciation) act.

2. How the issuance of a CLN affects U.S. citizenship for U.S. tax purposes

Internal Revenue Code 877A(g)(4) mandates that those relinquishing/renouncing U.S. citizenship after June 16, 2008:

– will continue to be treated as U.S. citizens for U.S. tax purposes until the CLN is actually issued; and

– the date of ceasing to be a U.S. citizen for U.S. tax purposes will be the actual date of the relinquishing act (date of renunciation).

Therefore, (assuming a relinquishing act after June 16, 2008) one continues to be a U.S. citizen for tax purposes until the CLN is issued.

These distinctions are discussed in an earlier post:

Renunciation is one form of relinquishment – It’s not the form of relinquishment but the time of relinquishment

Bottom line: One ceases to be a U.S. citizen for immigration purpose before one ceases to be a U.S. citizen for tax purposes.

Generally people are more concerned with travelling to the USA during the time gap between renouncing U.S. citizenship and before receiving a CLN. Fortunately, we have a “guest post” written by someone who has just experienced this issue from the Immigration perspective. He has shared his thoughts as follows:

Travel Limbo? Keep calm and CLN on.

Recently, I found myself in a potentially sticky situation enroute to a holiday in the U.S while at a Canadian airport. My Canadian passport showed a U.S. birthplace and before allowing me
through, the U.S. Border Officer wanted me to show my Certificate of Loss of Nationality (CLN) or an American passport.

Although I had renounced my U.S. citizenship several months earlier, the U.S. Department of State had not yet issued my CLN. Before this experience, I had always been able to cross the border to the U.S. with my Canadian passport (the only passport I’d ever had).

Fortunately, the situation didn’t escalate. I attempted to give the officer a simple explanation that I had renounced at a U.S. Embassy many months before but the approved CLN had not been couriered in time for my trip. If he would permit me, I would show him my email correspondence with the U.S. embassy.

The officer accepted my explanation. Before he waived me through, I asked if he had any advice to share with anyone caught in travel limbo without their CLN.

Hopefully, his comments will help others to navigate a soft landing:

Keep calm

There is a line-up of people behind you. This is not the time to be outraged or to educate agents about the plight of Accidental Americans or dual citizens.

Show proof

Travel with a copy of your CLN. If you’re still waiting for it, carry a copy of Form DS-4080 (the form you sign when you renounce and swear an oath at a U.S. Embassy). Keep copies on your phone.

Provide a reasonable explanation

If you accidentally forget your documents or booked a trip before your CLN arrives, a simple description of the renunciation process and the long wait times for the approved CLN to arrive will hopefully be reasonable enough to a reasonable officer.

Thanks to our guest blogger for the relaying the above experience!

John Richardson

Determining Tax Residency In the United States: Citizenship and other forms of deemed tax residence

Introduction

The advent of the OECD Common Reporting Standard (“CRS”) has illuminated the issue of “tax residency” and the desire of people to become “tax residents of  more “tax favourable” jurisdictions. It has become critically important for people to understand what is meant by “tax residency”. It is important that people understand how “tax residency” is determined and the questions that must be asked in determining “tax residency”. “Tax residency” is NOT necessarily determined by physical presence.

What is meant by tax residence? Different rules for different countries

All countries have rules for determining who is a “tax resident” of their country. Some countries have rules that “deem” people to be tax residents. Other countries have rules that base “tax residency” on  “facts and circumstances”. Canada is a country that bases “tax residency” on either “deemed” tax residency OR tax residency based on “factual circumstances”.

What if a person qualifies as “tax resident” of two countries?

When an individual (who is NOT a U.S. citizen) is a “tax resident” of two countries, it is common to consider any tax treaty between those two countries. Often the tax treaty will contain a “treaty tie breaker” provision which will allocate “tax residence” to one of the two countries. (Note that the “savings clause” which is found in standard U.S. tax treaties prevents U.S. citizens from having most tax treaty benefits. Note “treaty tie breaker” provisions are available to Green Card Holders.)

In summary: for the purposes of the “CRS”, tax residence is determined by BOTH a country’s domestic laws AND tax treaty provisions that assign “tax residence” to one country.

Even though the United States has chosen to NOT participate in the OECD “Common Reporting Standard” (CRS), and is NOT a “reportable jurisdiction, the OECD reminds us of the rules for determining “U.S. tax residency”.

Deemed tax residency in the United States …

The IRS discussion of “U.S. Tax Residency” includes:
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