ACA Urges Congress To Adopt Residence-Based Taxation

By Editorial 10 March, 2014

American Citizens Abroad (ACA) has provided testimony to the Senate Homeland Security and Governmental Affairs Permanent Investigations Subcommittee following its recent hearing on offshore tax evasion, and has recommended that the United States should implement a residence-based tax (RBT) system to avoid penalizing American expatriates.

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.

Under the current citizenship-based tax (CBT) system, Americans abroad remain subject to US taxation as though they were still US residents. Under RBT, only US residents, whether Americans or foreigners, would be subject to US income, estate and gift taxation, while Americans resident abroad would be taxed under essentially the same rules applicable to non-resident aliens.

The ACA has proposed that, as part of a general tax reform package, an election should be provided to citizens who are long-term non-resident citizens to be taxed as non-resident 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.

In her testimony, ACA's Executive Director Marylouise Serrato pointed out "the disastrous effects on Americans living overseas of recent Internal Revenue Service (IRS) enforcement methods," starting with the first Overseas Voluntary Disclosure Program and culminating in the passage and impending implementation the Foreign Account Tax Compliance Act (FATCA).

She said that the ACA has noted public statements by the IRS and members of Congress that have often referred to "tax cheats" with "no distinction between US residents deliberately hiding assets in foreign bank accounts and overseas residents who by necessity have foreign bank accounts in their local bank."

Admitting that many Americans resident overseas were still not filing US tax declarations and the Foreign Bank Account Report, she said that this was "largely due to ignorance of their filing obligation, not deliberate tax evasion. In fact, an IRS study has shown that over 90 percent of Americans resident abroad owe no US taxes."

In fact, Serrato added, "since Americans abroad pay taxes in the first place to their country of residence, it commonly never occurs to them that a second filing to the US is due under the unique US CBT system, … (while), unfortunately, a significant consequence of FATCA legislation is that foreign financial institutions are refusing bank accounts for Americans resident overseas."

It has become noticeable that even Americans abroad who are in full compliance with US taxes are being significantly affected – "accounts are being closed due to FATCA, investment in local non-US mutual funds is impossible due to the passive foreign investment reporting requirements, and efficient saving for retirement is not possible due to the US tax treatment of contributions to foreign pensions."

In addition, the 3.8 percent Medicare Tax is being imposed with no allowance for foreign tax credits, "which is blatant double taxation of Americans abroad, (and) is all the more objectionable as Americans abroad do not even have access to Medicare."

As all of these problems is put down by the ACA to the "unique CBT coupled with aggressive US techniques to stop tax evasion," and Congress is urged by the ACA "to support tax reform to adopt RBT, the efficient and fair taxation system applied throughout the entire rest of the world."

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