03 Jul This July 4th, Exploring Paths Away From Citizenship
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.