FATCA Fallout: Mass Renunciations?

by Peter Spiro

The Foreign Accounts Tax Compliance Act (FATCA) continues to prompt intense opposition from Americans overseas.  In my post below, I suggested that some would simply take their citizenship underground, on the expectation of imperfect enforcement and the continuing value of holding a US passport — becoming, in effect, secret Americans.

Others are predicting that large numbers of Americans abroad will shed their citizenship. This isn’t entirely implausible. Many hold dual citizenship with their state of residence, so they wouldn’t go stateless. Their state of alternative nationality is often a quality citizenship (EU, Canada, AUS, NZ), in the sense of allowing visa-free travel through much of the globe (including to the United States).  If you have permanently relocated to, say, France, US citizenship doesn’t do you much good.  In the past, it didn’t do you much harm, either, but now it poses some significant costs.  There may be sentiment involved, but what is sentiment against thousands of dollars in annual accounting fees by way of FBAR and FATCA compliance?

So rational Americans abroad might just ditch the citizenship, through formal renunciation (official instructions here).  There’s a suggestion here that demand might require mass renunciation proceedings, a sort of anti-matter version of July 4 naturalization ceremonies.

I doubt it’ll come to that, but if renunciations happen in large enough numbers for the MSM to notice, what would the reaction stateside be?  One could imagine a “good riddance” response, as in, these people don’t live here any more, don’t have much continuing connection, and aren’t even willing to pay their taxes. See you later.  It might be a back door way to police dual citizenship, still unpopular with some folks.  It takes care of happenstance Americans — those born here but who left at a young age, for whom there won’t even be sentimental values in the balance.

On the other hand, the symbolism of nontrivial numbers renouncing their US citizenship would be pretty bad.  A lot of these people would look like real Americans (many of them native born), in the sense of socio-cultural identity.  It would drive home a point that US citizenship isn’t really that special any more — not worth the trouble of dealing with a lot of paperwork, much less actual additional tax liabilities.

It might also conceivably result in economic loss.  The tax revenue, for starters, enough to balance out any gains from FATCA enforcement.  An important reason that other countries have moved to accept dual citizenship (and not to tax their diasporas) is to cement economic connections to the homeland.  This may be less of a concern in the US context, but it can’t be a good thing to alienate (literally) your natural economic agents in the global economy.

http://opiniojuris.org/2012/01/08/fatca-fallout-mass-renunciations/

11 Responses

  1. Peter,

    Appreciate you raising the question and pointing out some of the serious concerns of FATCA and with it the burdens of the Citizenship taxation model in the US.  

    There is a good piece on the most recent Economist In Praise of a Second or Third Passport. which would see US citizens going against the trend because of the US method of taxing.

    Speaking to subject of this article,  Roger Cronklin, a founding director of American Citizens Abroad (ACA) who has posted a lot of thoughtful comments on the recent Wall Street Journal article “Washington’s Assault on American Expats”

    had these observations…

    “Dual citizenship in more than one country today is rarely a matter of choice, but a direct result of the citizenship laws of many different countries – including those of the United States of America.  So we had better get used to it and make the best of it.

    Also, please note the Economist author’s comments on the United States being the ONLY nation that taxes the income of its citizens who live and work in a different country, where they have already been taxed once by their host country on their world wide income.

    Is it any wonder that few US citizens live abroad selling job-creating exports and that the US has the largest trade deficit of any country in the world and a much higher unemployment rate then most of our international trade competitors???  We reap what our legislators and presidents have sown with this double taxation to destroy American jobs manufacturing for export.  We cannot expect foreigners to sell our exports any more than we can expect the Venezuelan Navy to protect our shores or our ships on the high seas.”

    As more US citizens renounce, the US will have even have less representatives overseas to promote the country and it’s products and create export jobs back home.  

    The other bad marketing impact, is the US is getting a lot more unhappy customers(citizens) giving out the same dire warning that I do… “Don’t immigrate to America. Don’t take any action that could trap you unwittingly into becoming a “US person” let alone actively seek out citizenship.  The cost is becoming too great!”  

    I can’t imagine that this is the marketing Campaign what Congress and IRS Commission Shulman really want, but that is the unintended consequences of their clueless legislative and enforcement actions.  That can’t be good!  

    I hate to say it, but with the sea change in offshore tax enforcement administration in the past 3 years plus the new FATCA requirements are also having negative impacts on immigrants in America in the same ways it is having profound impacts on Expats overseas.

    I fear a lot of talent will be leaving the USA homeland also, going silently without a lot of blog posts, or any advocacy group to represent them.  They will just walk down the jetway and leave their greencards on the seat of their flight. 

    This comment below from a recent post on January 6, 2012 4:11 AM here, that doesn’t bring me a lot of pleasure to point out…

    “Surely if aware of the events over the last 3 or four years along with all the complex regulations: FBAR, FATCA, Tax Code, Exit Tax and etc., they [immigrants] will choose a different country.”

    I certainly did.

    I hold two advanced engineering degrees and have more than twenty years experience in my field. Three years ago, after over ten years as a US permanent resident, I moved myself and my family out of the US in direct response to HEART and the exit tax, which threatened over $100k in additional unrecoverable tax on my retirement savings.

    I still do the same job as I did while in the US, just based outside the US and no longer a green card holder. I pay about the same tax annually as I did when in the US, but now to a different (and more appreciative) country. The cumulative tax lost by the US already dwarfs the amount it tried (and failed) to extract with the “exit tax”, and grows larger with each year that passes. ”

    America has lost the plot, I fear.

  2. Good article that summarizes the situation quite nicely. Two points I would add:

    1.  For those Americans married to foreign nationals, their spouses are likely to ask them to renounce.  The spouses are appalled at the idea that their account information will be shared with the US government and some worry that their shared assets are at risk.  This puts American spouses in a rather unpleasant situation: stay married or stay American.

    2.  Because of very generous jus soli laws in the US there are many “accidental Americans” (I call them “involuntary citizens”) – a simple byproduct of globalization.  Their parents were in the US as expatriate businessmen and women or as students.  Not for one moment do these people consider themselves to be Americans and they don’t see why they should have to go to the trouble of renouncing a citizenship they do not recognize, much less pay the US gov 450 USD for the privilege.  If the US gov tries to impose citizenship on them, it will lead to international incidents.  If the person concerned is an EU citizen, it will go to the ECJ. Regardless of the final decision, the publicity will make the situation known to Europeans and the outrage will be detrimental to the US image and interests abroad.  

    What is fascinating about all this is how much globalization has changed the game and brought issues that people and governments never thought of to light:  citizenship, international migration, taxation, sovereignty. Tell an American in the home country that there are 6 million Americans abroad and watch his or her jaw drop to the floor. I don’t think for one moment that the American people or Congress had any idea that by passing FATCA that they would open this Pandora’s Box.

  3. Dear Mr. Spiro:  Thanks for keeping this issue on the front burner.  One issue of great concern is the manner in which the US government has trapped reluctant Canadians into thinking that they are Canadians, when in accordance to the earlier policies and laws, they relinquished their citizenship.  Then they travel to or through the US and border officers harass them, insisting that they travel on their US passport.  I know of one person who is quite wealthy who was told he could not travel through New York from overseas (triangle itinerary including Toronto), even though he had relinquished his US citizenship in 1969 with the rest of his family.  Then, he promised he would get a US passport, they let him through.  He got it, and now he is laying low, because he didn’t know anything about the filing obligations.

    So not only has United States citizenship become toxic, the United STates government is using ex post facto rules to trap individuals who haven’t been consider US citizens, nor even wanted such consideration, for decades.  A number of the people we are in contact with at the Isaac Brock Society are in this situation.  And this is, as you can imagine, not funny.  The United States border guard told one such Canadian, “you are a U.S. citizen until we tell you you’re not.”

    I would suggest that the doctrine of dominant nationality under international law would solve the problem for folks who long ago relinquished their citizenship, dual citizens,  and border babys who have lived their whole lives in Canada.  Go ahead, make our day.  We are not going to pay your stinkin’ taxes and we are not going to file any FBARs.  Last year I relinquished my citizenship.  I’m done with the United States and these unreasonable requirements, if I never visit my remaining family again.  This is crazy.  I don’t want your citizenship, and you won’t let me go.  US border guards, the IRS, the Secretary of the Treasury and the President of the United States have all gone insane.  I see the problem very very clearly:  the United States government, with Obama’s 1.5 trillion deficits, is being run by teenagers having a party while the parents are on vacation, trashing the house and looking everywhere they can for more drug money.

    Finally, the only reason there isn’t thousands of renunciations:  Have you ever seen how long it takes?  First, may be you didn’t have the citizenship of your country of residence, well you should get that first.  Then, State likes it if you have a passport from your new country–ha, ha–more bureaucrats who don’t know squat–if you are renouncing in your country or residence, there usually isn’t a border station at the door of the US Consulate, so the requirement of a passport is ridiculous.  Second, try to get an appointment at a consulate to renounce and see how easy it is. In some consulates the wait is a year.  Then, if you are renouncing most consulates require two visits, when only one would suffice.  Everything is bottlenecking at the consulate itself.  So that’s one way to save face:  make sure that you only allow so many people to renounce every year.

    Then there are the unconstitutional demands of the HEART Act, which requires that we enumerate our assets for the IRS so they can determine whether we are a “covered expatriate”.  So that the final determination of whether you are allowed to expatriate depends on the IRS.  The United States is a joke.  The US seems to have thrown out (de facto) the Declaration of Independence, the United States Constitution and the 1868 Expatriation Act.

  4. I grew up as an American Patriot. Although I have lived outside the United States for most of my life, like many, I have been loyal to the idea of what America was in an earlier time. Since 2004 the U.S. has passed laws which threaten the very existence: health, wealth, social viability and security of U.S. citizens abroad.
     
    During all of my years living abroad I have lived with the rampant and vocal anti-Americanism that exists in EVERY part of the world (I challenge anybody reading this comment to identify a single country where the U.S. government is well liked.)
     
    The sad truth is that I now understand why. The U.S. is an “in your face government” that is based on the principle that:
    It is okay to destroy the lives of innocent people (collateral damage) as long as we catch the few guilty people. This is of course the exact opposite of the presumption of innocence that is in the U.S. constitution.
    The U.S. government has made it impossible for U.S. citizens to live abroad:
     
    The U.S. government has made U.S. citizens undesirable as employees:
     
    There was even a recent suggestion that (and this is logically true) that U.S. born babies will be undesirable for adoption.
     
    The simple fact is that U.S. citizenship is now the most dangerous thing for somebody to carry through life (unless they want to stay in the U.S.). This is a sad thing because U.S. citizens living abroad are the best export that the U.S. has.
    Interestingly FATCA is really a form of “capital control” that will make it harder and harder for U.S. citizens to leave anyway. In enacting FATCA, Congress has created it’s own virtual “Berlin Wall”. What would Presidents Kennedy and Reagan think?
     
    Never in my wildest dreams would I have imagined that I would need to shed the citizenship of the “Land of The Free” in order to be free!
     
     
     
     

  5. FATCA was a predictable (probably an inevitable) response to the UBS scandal and the data from the first two OVDIs.

    There is a conversation to be had about the jurisdictional basis of US international taxation. Our combination of residence and source-based taxation puts us badly out of step with nearly all of our major trading partners.

    That said, it is clear that it is currently impossible to have a rational dialogue about any aspect of US tax policy. For that, we have Grover Norquist to thank.

  6. Peter thank you for writing about such matters.

    I’m an U.S. citizen who will be giving up my U.S. citizenship this year as I want to invest in a business and my future business partners do not want me if I’m still a U.S. citizen.

    The business is in the financial sector and being a U.S. citizen this would open everyone up to IRS compliance as under FATCA and other U.S. compliance requirement I would have to disclose the value of my portion of the business, the account balances since I would own more than 10% of the company and basically allow the U.S.G. into our business which non of them want in their non-US business.

  7. Thanks to everyone for the very helpful and interesting comments. One thing that come under closer scrutiny in the wake of FATCA are barriers to renunciation.  There’s a tenable argument that such obstacles violate international law, under which there is a protected right to expatriate.  This would seem an especially promising argument with respect to Victoria’s accidental Americans.  

    In any case, it’s useful to hear how this is playing out on the ground.

  8. America’s Founders and Signers of the Declaration of Independence are rolling in their graves over the ignorant hypocrisy of the US Government.
     
    America would not exist if great men like George Washington, Thomas Jefferson, Benjamin Franklin, Patrick Henry, Thomas Paine, John Hancock, Paul Revere, John and Sam Adams and others had bowed to the tyranny of the British Empire.
     
    Today’s politicians in the city bearing Washington’s name are a disgrace in taxing Americans abroad who have no representation in US Congress and receive no benefits from the US Government. They are completely ignorant of their own country’s history.
     
    Americans abroad do not use US highways, bridges, dams, schools, hospitals, fire, police, courts etc. They do not ask for or receive unemployment benefits. They receive NOTHING from the US government other than a travel document, which they pay for.
     
    The battle cry of the American Revolution was NO TAXATION WITHOUT REPRESENTATION!
     
    Like the British Stamp Act and other Intolerable Acts, FATCA and all the other legislation coming out of US Congress targeting Americans abroad will inevitably result in tidal wave of Renunciations of US Citizenship.
     
    Americans abroad are awakening to the true nature of the US government. Like the colonialists in America, some will accept it, but many will not and make their own Declarations of Independence.
     
    The increase in Renunciations of US Citizenship will be ignored at first, but before long, it will become a major source of embarrassment. Former US Citizens are already comparing themselves to East Germans jumping over the Berlin Wall.
     
    The politicians in Washington need to study their own country’s history. As George Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”

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