ACA Submits Proposals On Taxation Of Americans Abroad

By Editorial 23 January, 2014

American Citizens Abroad (ACA) has submitted a detailed proposal concerning the taxation of Americans abroad, in response to the United States Senate Finance Committee's discussion draft on international tax reform that was issued on November 19 last year.

The ACA, as the principal organization representing Americans overseas, has limited its comments to tax issues which impact US citizens and green card holders resident overseas.

It points out that it has previously recommended the adoption of Residence-Based Taxation (RBT) in lieu of the current Citizenship-Based Taxation (CBT), particularly in its position paper submitted to the House of Representatives Ways and Means Committee in July 2013.

Under the current CBT, Americans abroad remain subject to US taxation as though they were still US residents. Under RBT, only US residents, whether Americans or foreigners, are subject to US income, estate and gift taxation, while Americans resident abroad are taxed under essentially the same rules applicable to nonresident aliens.

The ACA proposes that, as part of a general tax reform package, an election should be provided to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions – for example, a minimum period of residence abroad, and an exit tax imposed on electing taxpayers where they are deemed to sell all assets at the time of election.

The exit tax on deemed dispositions would, it is said, "be designed to address Congress' concern that the few extremely wealthy Americans who may choose to move abroad should pay their fair share on capital gains."

However, if an exit tax is required by Congress, it recommends that "there must be a high threshold before the deemed capital gains are taxed, as well as a narrow range of assets subject to the exit tax, to ensure that that the vast majority of Americans will not have their savings impacted by the exit tax and will remain free to emigrate and to return to the US without undue financial burden."

The ACA therefore also stresses that Americans who are already resident overseas when the law changes from CBT to RBT should be largely exempt from the imposition of the exit tax "since their earnings and savings have been essentially realized overseas and in light of their generally non-existent consumption of services provided by the US government."

Finally, it recommends that "a comprehensive and non-punitive compliance program must accompany the introduction of RBT for those Americans already resident overseas who have not been in reporting compliance under present CBT rules." Once RBT is the default mode of taxation, the foreign earned income exclusion and foreign housing exclusion can then be repealed.

The ACA expects that revenues under RBT "would be substantially identical to those currently derived from CBT."

Under CBT, most Americans overseas owe little or no US tax due to the application of foreign tax credits, the foreign earned income exclusion and the housing expense exclusion. In fact, the ACA notes that "88 percent of all tax filings from overseas result in no tax due. Indeed, the total tax revenue raised under CBT is an insignificant rounding error in the US budget."

Under RBT, Americans abroad would be subject to the same withholding taxes on US source income and income taxes on US-source earned income that are applicable to nonresident aliens. In addition, it could be expected that the administration cost for the Internal Revenue Service would be significantly lower under RBT than it currently is for CBT.

Tags: Compliance | Citizenship | Tax | Tax Compliance | Tax Credits | Withholding Tax | Gift Tax | United States | Tax Reform | Exit Tax | Individual Income Tax | Services | Expats | Tax |


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