From the Economist we read: LARS was born in the United States to Swedish parents. Last year he renounced his American citizenship. Not because he hates America, but because he hates dealing with the Internal Revenue Service (IRS). Lars (not his real name) has not lived in the land of his birth since the mid-1990s. Yet each year the IRS would require him to fill out a 65-page tax return, foreign-account declarations and an extra 30-page form because he was a director of a company (in Europe). By contrast, the paperwork in the Nordic country where he lives is just 12 pages. He was sad to give up his passport, he says, but keeping the IRS happy grew ever more time-consuming and costly, until it became intolerable.
With a tax system based on citizenship rather than residence, America is the only advanced country that chases its nationals—even those who have long had no links to their homeland—for a slice of their worldwide earnings. Many of the 7.2m living abroad end up owing nothing, because they get credit for payments to foreign exchequers, which are often higher. But they still have to fill out the forms—or, more likely, pay someone to help. Even in simple cases this can cost $2,000 or more, says Marylouise Serrato of American Citizens Abroad (ACA), an advocacy group.
Filing requirements have grown stricter since 2008. The “tipping point”, says Ms Serrato, was the Foreign Account Tax Compliance Act (FATCA) of 2010, which will take effect next year. This imposes an array of new reporting obligations, especially on foreign financial institutions that serve Americans. The sheer hassle of dealing with all this is prompting more Americans to renounce their citizenship. In 2012 around 900 gave up their passports or green cards. Twice as many did so in the first half of 2013 alone.
Designed to catch tax dodgers, FATCA has made foreign financial firms wary of serving even honest Americans. David Kuenzi of Thun Financial Advisors says he speaks almost daily with ordinary Americans who are having trouble setting up foreign bank accounts or investments, or who have had existing accounts closed.
“FATCA is strangling us economically,” says Genevieve Besser, an American who has lived in Germany for 25 years. Last year her youngest daughter, a dual citizen, had her local brokerage account closed by Deutsche Bank because her mother had signing authority over it. German arms of American fund-management firms are just as unwelcoming, says Mrs Besser. Americans are even being forced out of products that are not subject to FATCA reporting: some have been forced to pay off mortgage balances with Swiss banks, for instance. “When you’re locked out of basic financial services, renouncing citizenship can be a matter of survival,” says Ms Serrato.
Some predict that things will get easier as foreign banks grow more familiar with the new law. But a foreign bank with only a few American expat clients may decide that they are not worth the bother. American banks and brokerages are growing frostier too. Some are closing the accounts of citizens who no longer have an American address because of FATCA. Ellen Lebelle, who has lived in France for 43 years, was recently told by her broker, Fidelity, that although she can keep her account she can no longer use it to buy securities.
Mr Kuenzi says his clients’ biggest worry is being clobbered for inadvertently failing to comply. An American in Europe may have investments there, on which he has long been paying local tax, which he never realised should technically have been declared to the IRS as “passive” foreign investments. Even greater numbers, including Americans studying abroad, may have innocently failed to fill out “FBAR” forms, on which foreign accounts holding $10,000 or more must be declared.
FATCA will expose such unintentional sins. Penalties for non-filing can be up to 50% of the account balance. The IRS may go easy if the mistake was innocent or the taxpayer has entered the agency’s voluntary disclosure programme. But sorting out the mess can still take 18 months and cost $20,000 in legal fees, plus a similar amount in penalties. Mr Kuenzi says this deters some non-American companies from promoting Americans to the executive suite, where their tax affairs will be even more complicated. If they are caught accidentally breaking an unintelligible rule, that would embarrass their employer.
The ACA tries to raise awareness of its members’ plight. But politicians are unsympathetic, since voters assume that the complainers are tax-dodging high-rollers rather than honest students or small-business owners. So for many Americans abroad writing a cheque for $450, the standard expatriation fee, may increasingly seem like a bargain.
The biggest threat to American citizens abroad is the US Government.
In September 2013 the US Treasury Department apparently felt compelled to publish a blog article called "Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion" in light of the ongoing blowback to this US extra-territorial law. Two of the alleged myths are:
1) Myth No. 2: Some claim that U.S. citizens living overseas will become outcasts in the international financial world.
2) Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.
1) Myth No. 2: Some claim that U.S. citizens living overseas will become outcasts in the international financial world.
2) Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.
The Economist's article rightly strikes back that these two myths are indeed facts. The "Myth vs. FATCA" piece is propaganda on the part of US Treasury and its Deputy Assistant Secretary, responsible for the FATCA roll-out, Robert Stack.
I renounced US citizenship when banks began denying Americans services, since I need a local checking account to make mortgage payments. Later on, my bank published that it had gotten rid of all but 30 Americans who had not yet responded to the cancellation letters.
America is a beautiful nation with many nice people, but my life and family is here. Thus, there is no point in being burdened, harassed, threatened by a distant nation for all the wrong reasons, simply because one hasn't renounced yet.
The tax jihad against so-called offshore tax cheats, and the corresponding implementation of FATCA, are prime examples of the US shooting itself in the foot. Collateral damage in this war are more than 7 million expatriates who were sympathetic supporters of their homeland.
Now they are adversaries, flocking in large numbers to consulates and embassies to ditch what has become an expensive liability -- US citizenship. Because the US (and Eritrea) tax based on citizenship rather than residence, their expatriates are forced to try and comply with two often contradictory tax codes. The US makes sure that any compliance conflict works for the IRS, not the taxpayer.
If the fools in Congress don't open their eyes, soon there will be no US expatriates anywhere in the world. They will all have either moved home, or renounced their citizenship, because life for an American abroad has become untenable.
Is that what they had in mind?
Now they are adversaries, flocking in large numbers to consulates and embassies to ditch what has become an expensive liability -- US citizenship. Because the US (and Eritrea) tax based on citizenship rather than residence, their expatriates are forced to try and comply with two often contradictory tax codes. The US makes sure that any compliance conflict works for the IRS, not the taxpayer.
If the fools in Congress don't open their eyes, soon there will be no US expatriates anywhere in the world. They will all have either moved home, or renounced their citizenship, because life for an American abroad has become untenable.
Is that what they had in mind?
Thank you so much for presenting a fair and accurate article about the casualties of FATCA. As an expat living overseas, I find it hard to convince my friends and family back home that US expats are being targeted by the IRS/Treasury Department as the new government meal ticket. Most people simply don't believe that the US government could treat their own citizens in such a manner. Is it any wonder that US expats are giving up their citizenship in droves?
It will be interesting to see how FATCA unfolds over time. At the moment, the Treasury Dept and IRS are striking inter-governmental agreements with many countries with promises of reciprocity - they are promising that the US will supply information on US foreign account holders in the US in exchange for data on US account holders overseas. However, there are no laws allowing or requiring US financial institutions to turn such data over to foreign countries, and it is unlikely there ever will be, as the US is the biggest tax haven in the world. If there is ever a true reciprocal exchange of tax data, foreign investment will leave the US quicker for save havens. In fact, the states of Florida and Texas (who have a large proportion of foreign account holders) have already filed suit against the government regarding reciprocity.
I would very much enjoy further analysis by the Economist on the 'the worst law most Americans have never heard of'. FATCA will never do what it was meant to do - stop tax evasion. The word on the street is that those with high wealth are already devising ways around FATCA, while the punishment will be born by US expats and the poor/middle class immigrants living in the US.
It will be interesting to see how FATCA unfolds over time. At the moment, the Treasury Dept and IRS are striking inter-governmental agreements with many countries with promises of reciprocity - they are promising that the US will supply information on US foreign account holders in the US in exchange for data on US account holders overseas. However, there are no laws allowing or requiring US financial institutions to turn such data over to foreign countries, and it is unlikely there ever will be, as the US is the biggest tax haven in the world. If there is ever a true reciprocal exchange of tax data, foreign investment will leave the US quicker for save havens. In fact, the states of Florida and Texas (who have a large proportion of foreign account holders) have already filed suit against the government regarding reciprocity.
I would very much enjoy further analysis by the Economist on the 'the worst law most Americans have never heard of'. FATCA will never do what it was meant to do - stop tax evasion. The word on the street is that those with high wealth are already devising ways around FATCA, while the punishment will be born by US expats and the poor/middle class immigrants living in the US.
I relinquished my citizenship this year. I waited to find out if some of the more punitive difficulties for low income expats would be addressed. I waited as Nina Olsen made her report to congress and told them of the horrendous situations they were causing for innocent expat families. Most of those most harmed owed no taxes and were in their late fifties and sixties. I waited as ACA submitted the horror stories of innocent expats to the Ways and Means committee and no response came.
I could wait no more. It is clear to me now that this is a penalty fund raiser on FBARs. FBARS were forms that not even the IRS was telling anyone even existed. They know that.
I make zero income. My Canadian spouse makes all of our income here in Canada. He absolutely was not going to turn over his banking information *or have it turned over for him by our bank* to a foreign country, the U.S. There is no good reason why he should need to do this except we both have our names on our checking account, mortgage and savings. I make zero of the dollars in those accounts but, he had the misfortune to be married to an American. Had he married a citizen of any other modern nation in the world he would have have all of this coming down on him. The cost to comply, the personal violation of even foreign citizen spouses and children is just too much.
The U.S. would have been far better served to go to residency based taxation then concentrate on those living there who are actual "tax cheats" Instead it has treated expats who were formerly supportive of the U.S. as criminals until proven otherwise. This is from the lowest of the low, stay at home mom's and the elderly to those more well off. It matters not to them that we pay taxes most of us much higher in our home countries. They have threatened us with big stick punishment, they have demeaned us in the press and when harm has come to our families because of their actions we have been called a "myth"
The renouncing figures given by the FBI are 4600 for 2012 not the low numbers that state has. It's a LOT more than they want you to know because we cannot do anything else. When the cost to your family is so high that the U.S. person in the family becomes a liability then you have to get out whether you want to or not. Who wouldn't want to after the way this has been handled?
State dept. knows what is driving this and were very,very kind to me when I went in to relinquish. They fully understand that many of us will have no other option. What kind of country does this to innocent expat families all over the world? CBT is wrong and that is why most countries do not do it.
This post fails to address the basic problem all of us face. We are trying to balance two tax systems, make financial investment decisions based on what may fall out of two pairs of tax hands. My company pension is an example. I claim it on my Canadian taxes but the IRS won't allow it because it is not American. How stupid is that? I live abroad, work abroad, but cannot take advantage of retirement instruments? There are some allowances such as the foreign income exclusion and RRSP recognition. But how long will it be before congress wipes these out? Bills are already lined up. The income exclusion goes, it becomes a clear cash grab and I go too. Then idiots like Tierney force my hand.
Meanwhile, the ability of multinational corporations to manipulate overseas tax shelters is unabated, and it's still possible to set up shell companies in Delaware and Nevada at a faster pace than the IRS can ever hope to wade through them one by one. So indeed, the innocent suffer and the guilty go free.
It's excellent that the Economist has highlighted the problem FATCA is causing US citizens abroad -- a problem the Treasury problem denies. In fact, financial institutions' dumping of US clients doesn't protect them one iota from FATCA's crushing compliance costs, which apply even without a single American account. Meanwhile resistance to FATCA is building both internationally (a pending referendum in Switzerland, the Opposition taking the Government to task in Canada), and perhaps more importantly in the US. Instead of finding a way to live with FATCA, it's time to work for its repeal.
Good to see a mainstream article reporting the truth, rather than the rhetoric spewed from the US Treasury department. In the not too distant future I (and my non US born children) will join the ranks of former US Citizens by formally renouncing an unwanted citizenship.
According to Robert Stack of the US Treasury Department, we are "myths". Wrong Mr Stack - you might want to try contacting the State department to find out the real number of former US Citizens.
Thank you so much for reporting on this issue. It's highly unlikely for anything to change given the small number of American expats and the "bigger" issues facing the U.S.
Also amazing that the U.S. is on record for criticizing Eritrea for having a similar citizen-based tax system.
Unfortunately I will either have to renounce as well or move back.
Another great example of why we should switch to the Fair Tax. If you spend money in the US you would be taxed on it, if you spend it outside you wouldn't. Easy as pie, no more hundreds of billion of dollars (and manhours) wasted on compliance costs.
I'm US citizen still, but have contacted US consulate about ceasing to be one. Due to my 19 years as permanent resident of Brazil, (with no criminal record) it is very easy to become a Brazilian citizen instead.
My Brazilian wife was a full professor at best university in all of S. America and as her spouse I get free medical care in their very good clinic. I have had two major operations at zero cost, so if I am forced to pay for not taking out "obamacare" medical insurance I don't need, that will probably force me to become Brazilian not US citizen.
I don't want to do this; I have Ph.D. in physic from Ivy League school, gained on 100% scholarships and grew quite wealth in 30 year career in US with it and good / lucky investments, so feel a great debt to US / gladly pay my taxes, but there is a limit on how much abuse I will take as an ExPat.
The Economist deserves credit for this article. Americans abroad most choose between moving to the U.S. or renouncing U.S. citizenship. It's that simple. For those who do not intend to move to the U.S., renouncing is a defensive measure - the best investment you can make in your future.
Not necessarily. If they managed to obtain a second citizenship (in their country of residence or elsewhere), they can just ignore FATCA altogether and continue to pay their local taxes only. What is IRS going to do?
No, it does not work that way. Obtaining a 2nd citizenship does not terminate your US citizenship. And US law requires tax filing for all US citizens no matter where they live. FATCA is going to force banks all over the world to report on the financial holdings of all 'US persons' (citizens, green card holder, joint account holders who may not be US citizens, etc.) The only way out from under FATCA and citizenship-based taxation is to formally renounce your US citizenship.
I am pleased that the Economist has published an article on what is, for many U.S. expats, a never ending escalating list of horrors inflicted solely as a result of the American government's insistance of continuing citizenship based taxation (vs the world standard of residence based taxation). In what can only be called insanity, American companies (not individuals) can hold profits overseas tax free until (if ever) repatriated (e.g. Apple, Starbucks et al), but individual U.S. citizens are tracked, traced, fined and taxed on every Pound, Mark, Ringgit, Baht, earned and invested overseas with no connection to any U.S. source income whatsoever. Logically, in a functioning government you would expect the IRS/Treasury to step back, recognize the system is not working and is unfair and ask Congress to fix it. Instead the IRS just continues to try to fit a round peg in a square hole with horrible collateral damage to U.S. expats and their international families worldwide. The U.K. approach to taxation of expats (residence based taxation) is rational, fair and humane. The U.S. needs to come into compliance with the world standard.
I am an expat that came home as a result of the Tax Reform Act of 1976, shutting down a business in Brazil selling US made telecommunications products; having opened that market myself. When I came home a French company with no previous presence in Brazil established a subsidiary there; took over the market I had opened, hiring our former employees. Eight years later that company accounted for $1 billion in French exports to Brazil, while US exports to this specific market dropped to almost zero
Hundreds of thousands of Americans around the world came home as a result of the TRA of 1976, handing over foreign markets to competitors from other countries. In 1975 the US recorded the largest trade surplus in US history, but the very next year the US trade balance became negative. There has not been even one US trade surplus since. The cumulative 1976to date US trade deficit new exceeds $7 trillion. The current US 12-month trade deficit is $715.6 billion. Tiny Germany, which never taxes its overseas citizens but encourages them to go abroad, considering those who do as patriots. has a $249.7 trade surplus, balanced trade with China and the lowest unemployment rate in 21 years.
Exports create jobs. Trade deficits destroy jobs. It takes feet on the ground to capture foreign markets which the US, thanks to our unique citizenship-based taxation, no longer has. Americans are punished with double taxation if they go abroad to sell exports or for any other purpose, so they stay home or renounce citizenship to survive abroad.
Just 715 cases like mine (and there were thousands more)clearly explain why we have the job-destroying $715 billion trade deficit we now have. Territorial taxation is the international norm. Only Eritrea and the US are UN Security Council Resolution 2023 (2011) in December 2011 condemned citizenship based taxation as a violation of the UN Declaration of Universal Rights because it violates the right to freely leave and return to one's country. Unbelievable the US, the principal violator, voted imposing sanctions on Eritrea without even looking in the mirror.
Right you are, RegerioC. But U.S. citizens abroad are neither a unified lobbying force nor are many of them fighting back individually. What can we do?
Even though I was born, raised, educated, employed and am currently retired in Canada, FATCA affects me. At least I became aware of its existence a year or so ago but there are millions of US "persons" who do not know about "the worst law most Americans have never heard of", as James Jatras at http://repealfatca.com/ calls it. Many thanks to The Economist for publishing this article which features "loopy tax rules" instead of the all too prevalent "tax cheats" that less informed publications seem to highlight.
Canada is a battleground state for FATCA. That’s because Canada is estimated to have > 600,000 people who fit FATCA's definition of "US person". Many have "indicia of a US place of birth". However, the majority of these are also Canadian citizens, many of whom have only tenuous ties to the US. Many are long term Canadians who relinquished their US citizenship by becoming Canadian citizens, only to see it re-instated after the fact by FATCA. There are also many border babies: Canadian citizens who by happenstance or medical referral were born in the US to Canadian parents temporally there. And there are also Canadians who were not born in the US, but are considered so-called “US persons” because their Canadian parents were US citizens.
The coming train wreck is when FATCA runs into this vast population of affected Canadians; about 3% of Canada’s population, plus spouses, partners, family and business associates all dragged along for the ride. However Canada is an advanced human rights state and they have recourse to law. Canada’s Charter of Rights and Freedoms and Human Rights laws (both Federal and Provincial.) One of Canada’s top constitutional experts, Peter Hogg, wrote a very thoughtful opinion letter spelling out how discrimination against certain Canadians because of a US place of birth (as opposed to economic activity or residence) would certainly violate the Charter. (to read Hogg’s letter simply Google “Peter Hogg + FATCA + Green Party Canada) Canada’s official opposition have stepped up their scrutiny of FATCA, and there is no doubt that any attempt for the current government to enter into a FATCA Intergovernmental Agreement will meet political and legal opposition.
Meanwhile, the sad procession of Canadians visiting US Consulates to renounce or document their relinquishment of US citizenship continues unabated. It has become routine; there are on-line guides where renunciants share experiences and peer support.
The fear, anger, angst and ill-will caused by FATCA among the people of Canada is a vast tragedy and also a diplomatic error of irreparable long-term consequence. I wonder if anyone at the US Department of State is making any note of the demographics of Canadians lining up to renounce their US connection. Does anyone question– or care – why so many educated, successful, articulate and law-abiding Canadians are doing this?
Good article. I've been in Canada since I was 13 years old. It took me $35K to get free. I'm glad I did because it's nice to say I'm 'just' a Canadian. It also means that my Home, RRSP, Tax Free Saving Account, Canadian Pension Plan, Employers Pension Plan and children's education funds are now safe. The millstone is gone!
What I do not understand is how do they intend to enforce that law against those expats or accidental citizens who simply decide to ignore it and who have no arrestable accounts/property in the US? I am such a person. I have not filed a single tax return since I left the US and I most certainly do not plan on starting to do it now. What in the world are they going to do to me for that? Even if they do sign some agreement with my current country of residence and find out that I have bank accounts and income here, so what? Sure, they can track and arrest me next time I enter the US, but short of that I am not really all that worried.
Under FATCA, if your 'foreign' bank finds out you have US citizenship, you and any joint account holders (regardless of citizenship) will be required to file a W9, effectively signing away your rights to any sort of financial privacy. Failure to sign the forms could result in the closing of your accounts. Once you have given your financial institution permission to share your data, your name, account number, account balances, and financial transactions will be forwarded to the IRS on an annual basis.
It's great that you have nothing to hide - most of us don't. However, personally for me, it is more the intrusion on my (and my non-US spouse's) personal privacy without any due process that will make me renounce.
It's great that you have nothing to hide - most of us don't. However, personally for me, it is more the intrusion on my (and my non-US spouse's) personal privacy without any due process that will make me renounce.