Tag Archives: double taxation

Does Article 22 the U.S. Australia Tax Treaty require the United States to allow U.S. citizens a foreign tax credit against the 3.8% Obamacare Surtax?

Introduction

The above tweet references a post which I wrote on August 7, 2016 which discussed the (August 5, 2016) decision of the United States Court of Appeals – District of Columbia Circuits in the Esher case. In this case, Justice Millet ruled that:

That extreme reading of the Totalization Agreement rests on nothing more than the Commissioner’s own say-so. It lacks any grounding in the Agreement’s text or in any principle governing the interpretation of international agreements. The tax court’s corresponding disregard of the Totalization Agreement’s textual direction concerning the role of French law in resolving undefined terms and in determining the content of the laws enumerated in Article 2(1)(b) was error and requires reversal.

The complete decision is here:

FRENCH TAXES US COURT REVERSAL 5 AUG 2016 (1)

 

The general point is this:

When interpreting international tax treaties the United States is not permitted to consider ONLY U.S. law when interpreting the treaty. The United States (and the treaty partner country) is required to consider each country’s expectations of what the treaty meant and how it might be interpreted with respect to laws that did not exist at the time the treaty was signed.

I concluded that post with my thought that:

The court ruled that international tax treaties must be interpreted in the context of what were the expectations of the country when the treaty was signed. This may open up the possibility of reconsidering how various U.S. tax laws may affect the residents and citizens of other nations.

For example: To what extent was or is it the expectation of a country that it can be interpreted to allow the U.S. to impose punitive taxation on those who are primarily citizens of and factually residents of other nations?

Time will tell.

The 3.8% Obamacare surtax and Americans abroad …

As the articles in the above tweets demonstrate, the 3.8% Obamacare surtax (assuming it’s applicability to Americans abroad) is considered to be:

– a form of pure double taxation when applied to Americans abroad

– more likely to be paid by Americans abroad than by Homeland Americans

– a way to force Americans abroad to pay for the medical care of Homeland Americans

– a costly compliance nightmare

– an example of “Boldly Go, where no regime of citizenship taxation has ever gone before

#YouCantMakeThisUp!
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Tax Haven or Tax Heaven 3: Why the USA is an attractive place to lure “foreign capital” and keep that “foreign capital” secret

The United States as a “poacher” (AKA Tax Haven) of the capital of other nations

The above tweet references the following article which includes:

Leaving income-producing assets in the US may be advantageous for foreigners. If you are a foreigner who owns financial assets in the United States, you are not subject to the capital gains tax and interest on bank accounts is also tax free. You will, however, be charged at a rate of up to 30% for dividends. If there is a treaty between your home country and the US, then this tax rate could be reduced to 10% to 15%. You may also recover this tax as a credit in your country of residence.

This is found in Title 26, Subtitle A, Chapter 1, Subchapter N, Part II, Subpart A of the Internal Revenue Code.

IRC871

The following section of the Internal Revenue Code applies to “NON-RESIDENT ALIENS AND FOREIGN CORPORATIONS”. Interestingly this part of the Internal Revenue Code also includes the S. 877A and S. 877 Expatriation Tax provisions. Interestingly both S. 871 and S. 877 were enacted in 1966 as part of the Foreign Investors Tax Act of 1966, Public Law 89-809. It is reasonable to infer that that the enactment of both S. 871 and S. 877 as part of the 1966 Foreign Investors Tax Act, eventually evolved into the S. 877A Exit Tax of today.

For a pdf of the 1966 Foreign Investors Tax Act …

Foreign Investors Tax Act 1966 809

IRC8712

The text of S. 871 of the Internal Revenue Code is here. The IRS interpretation of S. 871 along with the requirements for when the non-resident alien is required to file a 1040-NR return are here.

The definition of “Non-resident alien” is found in S. 7701(b) of the Internal Revenue Code.

What does this mean from the perspective of a “non-resident alien”?

Very interesting. Rather than invest his capital at home (where he is certain to be taxed), he might consider investing in the United States where:

A. His interest and capital gains are NOT subject to U.S. taxation (this is how the U.S. attracts the capital of other nations to the United States); and

B. The U.S. will not (in the absence of a specific treaty) report your investment account information to the tax authority of your country (making it easier to escape any taxation on the investments).

Not bad at all!! It would appear that (1) this is a mechanism to “poach” capital from other nations and (2) make tax evasion (assuming the non-resident alien fails to report the income to his country of residence) much easier!

The United States certainly complained that Switzerland was doing the same thing.

It’s easy to understand why:

But, “Not all Tax Havens are the same!”

Some countries are more “TaxHavenly” (or is that more “Tax Heavenly” than others!

Hmmm …

Voluntary “poaching” of capital – The Tax Haven

Because the United States encourages and facilitates the “poaching” of capital, the United States is most certainly a major “Tax Haven”. Note that “Tax Havens” lure capital to the Tax Haven in question. The “transfer of capital” to the “Tax Haven” is voluntary.

The United States of America:

1. Is a “Public Tax Haven” because, by NOT taxing certain forms of investment income it “lures” capital to the United States.

2. Is a “Private Tax Haven” because it will NOT (with the exception of certain treaties) disclose the identity of depositors to the tax authorities of other nations. This is one of the many problems of FATCA. Although other countries are required to disclose “U.S. Accounts”, the United States is NOT obligated to disclose the accounts of tax residents of other nations.

Involuntary “poaching” of capital – “citizenship-based taxation”

U.S. citizenship-based taxation ALSO results in the direct “poaching of capital” from other nations! A thoughtful post describing the cost of U.S. “poaching” to Canada is here. This topic of – how “U.S. citizenship-based taxation” steals the capital of other nations – is deserving of a separate post!

#YouCantMakeThisUp

John Richardson