This July 4th, Exploring Paths Away From Citizenship

by Peter Spiro

As July 4th approaches, get ready for stock-in-trade accounts of uplifting naturalization ceremonies conducted in dignified settings and presided over by distinguished persons. That’s a nice thing for those who see citizenship through a traditional lens and who should be getting better value for an $800 naturalization fee (never mind that most naturalization ceremonies occur in DMV-like conditions in local Homeland Security offices).

What’s new this Independence Day is the growing number of US citizens who are looking to shed their citizenship. Until recently there hadn’t been much incentive to lose US citizenship (the burdens being negligible) and some reason to keep it (mostly, a passport and the right of entry into the US). But that has changed as non-resident citizens are hit with burdensome new tax filing requirements under the Foreign Account Tax Compliance Act (FATCA). For a growing number of external Americans, FATCA appears to have shifted the balance away from maintaining the citizenship tie.

There is only one clear-cut path to losing your US citizenship: through express formal renunciation at a US consular facility outside the United States. More are taking that route (Facebook co-founder Eduardo Saverin is a notable example). Renunciation involves multiple interviews, an oath, and a $450 filing fee. Renunciation can also implicate a hefty tax obligation. Individuals have to pay an exit tax on unrecognized capital gains (expatriation is treated as a tax event) and any back taxes owed (external citizens have always been required to file).

A more novel escape route (rediscovered, really) is through “relinquishment”. Under section 349 of the Nationality Act, naturalization in a foreign state will result in loss of US citizenship if accompanied by an intent to relinquish. In the past, it was the Government that asserted the existence of such intent. The Supreme Court constrained the practice in a series of mid-20th century decisions, and since 1990 at least, the State Department as a matter of administrative practice has assumed that an individual never intends to relinquish citizenship except where expressly renounced.

But now that there are reasons to lose citizenship, some will argue that, yes, in fact they did intend to relinquish citizenship when they naturalized elsewhere. The DC Circuit overturned the State Department’s refusal to accept such an argument (on somewhat anomalous grounds in a case involving naturalization under Israel’s Law of Return) in its decision last year in Fox v. Clinton.

For the moment, relinquishment triggers the same exit tax as renunciation – the IRS computes tax due as of the delivery of the notice of relinquishment, not the date of the expatriating act. I wonder if there isn’t a case against that, in support of backdating. In any event, relinquishment reduces bureaucratic hassle, eliminates the oath requirement (no good feeling there!), and saves the $450 fee, so I imagine its popularity will increase.

In the meantime, my correspondent on expatriate matters, the very well informed and thoughtful Victoria Ferauge (resident in Versailles), tells me that many nonresident US citizens are getting tax compliant precisely in order to cut the citizenship cord without the IRS getting in the way.

That’s too bad. The US is the only OECD country to tax non-resident citizens. Most are getting caught in a dragnet aimed at much bigger fish and the different problem of asset offshoring. Just as other countries are looking to cement ties with non-resident citizens, the US seems to be scaring its away. The better fix for all of this would be to roll back FATCA as it applies to ordinary Americans overseas, eliminating the need to become un-American. In the meantime, we will almost surely see more fellow citizens heading to the exits.

10 Responses

  1. Actually, the process of relinquishment is not particularly novel, except that the State Department does not itself really push it as an option, probably because they would have to process the paperwork without the $450 fee–your government becoming so desperate to find new sources of revenue to stem the tide of a trillion dollar budget deficit.  Relinquishment of US citizenship, usually by becoming a citizen of another country, is perfectly normal way to go, and many of the folks who comment or blog at the Isaac Brock Society have been able to receive back-dated CLN, to the day of their taking on of a second citizenship.  Even a couple of individuals with whom we have contact, who US border guards harangue into obtaining a US passport after their becoming Canadian, have successfully argued to State that they did not want to obtain a US passport but were forced to do so; even in these cases, it is very possible to obtain a back-dated CLN–as they successfully indicate to the US Consulate their desire to relinquish at the time of becoming a Canadian citizen.
    Becoming a non-US citizen is a great matter of rejoicing for these reluctant Expats.  Once they announce to the others their reception of their CLN in the mail, they receive multiple expressions of congratulations.  I know people who feel great relief at receiving their CLN and have expressed to me how happy they are. 
    How many countries in the world do you know that people literally congratulate them when they receive proof that they are no longer a citizen of that country?  This is proof positive that US citizenship is the worst citizenship in the world.
    So happy Independence day, you Americans.  But for me and many thousands of people, we are glad to be independent too:  independent from America.
    Peter W. Dunn, PhD
    Administrator, Isaac Brock Society
    proud non-American since 2011

  2. Very well said, indeed, Peter! Once again, thanks for all your energy and dedication on this horrendous, abusive and completely misunderstood and misreported issue. And congratulations once again on having successfully freed yourself from the bonds of “slavery” and torment.

  3. The US has priced its citizenship out of the market for the vast majority of Americans living abroad. While other countries value its diaspora, the US shows nothing but disdain. Expect disdain in return.
    When the cost of something far exceeds its benefits, that ‘something’ loses value. Citizenship is no exception. The US government alone needs to take full responsibility for the devaluing of its citizenship to the point where its isn’t worth keeping, and to stop blaming the victims of its persecuting policies.

  4. I am reading this article in a bad day as I am struggling to work on my IRS Return 2012. This has now lasted several months, I had extended it for October 15th because I had to do my country of residence first. I am coming to the conclusion that if I remain a dual citizen paying taxes to two countries I will not be able to afford it. Paying Social Security Self Employment Taxes to the two countries will take a chunk of what I earned, Paying US taxes in my pension from my country of residence that don´t charge me taxes increases the disaster. The worse part is that I know that there are Americans Abroad who don´t pay those taxes because of treaties with the USA. So, not only I moved to the wrong country (in this case I was born in one) but I also made another mistake of becoming an American citizen. As I see it I have four choices: stop working, move back to the USA jobless, renounce the US citizenship or continue to work only to pay taxes.

  5. Thanks for the comments. which seem to reinforce the thrust of the post. I wonder if the State Department keeps any statistics on relinquishment cases (as they do with renunciations).

    Victoria had this very interesting post yesterday on FATCA and some emerging congressional opposition to the bilateral agreements Treasury has been undertaken re FATCA enforcement. Sounds like the Obama Administration sees these agreements as authorized by FATCA, but not everyone’s on board. Readers of other strands of this blog will recognize this as a “sole executive agreement” question – when does the President have the power to enter into agreements without congressional approval? It has also recently been broached in the context of the anti-counterfeiting treaty. A development that will be worth keeping an eye on!

  6. Peter, 
    On the subject of the IGA and what in the heck they really are, Allison Christians (professor at McGill University Faculty of Law) has some very good posts about them on her blog Tax, Society and Culture.  Here are a couple of them:
    Current Status of US Tax Treaties with FATCA IGA Update
    IRS Brushes Away the Constitution to Make Way for FATCA
    Correcting the Record 5 Ways on the Stories about Sen Paul “Blocking FATCA Treaties”
    Bonne lecture!

  7. A couple of comments.
    The State Department issues CLN’s to both relinquishers and renounciants. In both case the Secretary of State is required to provide copies to US Customs and the IRS(Secretary of Treasury). Additionally in the case of renounciants the State Department is required to provide copies to the FBI(for maintaining the list of those prohibited for purchasing firearms and handling hazardous materials). The IRS in theory publishes a list of all relinquishers and renounciants(from the CLN’s they receive) however, from many accounts the IRS list is very innacurate and understated. The FBI publishes raw numbers but not names from their own CLN data(renounciants only) that is often far higher than the IRS data.
    The relinquishment and renounciation ceremonies are in a strange way a lot like naturalization ceremonies. They are done in a DMV like atmosphere of the American citizen services section of US consulates and embassies in the same rooms where US citizens go to obtain passport and notarial services. Under the law there is in theory supposed to a US flag in the room during renounciation oath but according to many reports they are missing or battered and tattered. At one point in Toronto the US consulate did a “group” renounciation ceremony due to high demand.

    The author is this article does not seem to have read your previous blog post on what “most” naturalization ceremonies are really like.

  8. There is also a very lengthy report of different relinquishment and renounciation experiences around the world linked below:
    Additionally a former American now turned Japanese Citizen Eido Inoue has a very interesting blog discussing his experience in naturalizating as a Japanese citizen and relinquishing his US citizenship(Japan does not allow dual nationality)

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