Man is an animal suspended in webs of significance that he himself has spun...

Tuesday, January 10, 2012

The Consequences of Being a U.S. Person

I have spent the last few days reading and contributing over at the Isaac Brock Society and following Just Me's links on his Twitter feed.  It has been a real education for me.  There is a saying in French, "nul n'est censé ignorer la loi." (There is no excuse for not knowing the law.)  I had no idea how ignorant I was until I met people who have done the research and do know what they are talking about.

Now that I am a little less ignorant, I would like to take this opportunity to make an important clarification about, and an appeal on behalf of, what are called "U.S. Persons."  Much of what I have posted here about U.S. tax law and reporting obligations I have tied to U.S. citizenship and that turns out to be a bit misleading.

U.S. citizens, I said, are taxed on their worldwide income.  This is still quite true but it is not the entire story.  More accurately, I should have said, "U.S. persons" are taxed on their worldwide income. This statement is vitally important to understanding just how aberrant the U.S. tax system is (and just how dangerous the FBAR and FATCA regulations are) because the term "U.S. Persons" includes U.S. citizens but is not limited to them.  Believe it or not, there are other categories of people concerned, people who are not citizens of the United States, and they have even less representation and less of a voice than overseas Americans.

A U.S. person is:  a corporation or entity based in the U.S., a U.S. citizen living in the U.S. or abroad, or a Resident Alien living in the U.S. (in other words, a legal immigrant or a Green Card holder) or you meet the Substantial Presence test (i.e. you live in the U.S. for a certain number of days a year).

All these people have exactly the same tax and reporting obligations on their worldwide income.  Yes, my friends, an immigrant or a Green Card holder living in the U.S. must report his or her worldwide income to the American IRS, report all his or her foreign bank accounts (even ones back in the home country) and is impacted by FATCA in much the same way as U.S. citizens.

To give you some idea of how this might work in practice, let's consider a hypothetical situation where my foreign spouse and I return to the U.S. Upon receiving his Green Card my spouse would be:

1.  Required to disclose all his U.S. income AND anything he earned in France (interest, dividends, rents) on assets he acquired before entering the United States.  Depending on the type of income, he may be required to pay U.S. taxes on that French income.
2.  Required to fill out an FBAR (Foreign Bank Account Report) disclosing all of his accounts in France and the balances.
3. And finally he would be required to fill out the new form 8938 (FATCA requirement) revealing his "foreign financial assets" (in other words just about anything he has in France).
4. Last but not least, in theory his bank in Paris would be required to turn over his account information in France to the IRS since by accepting a Green Card and residing in the U.S. he is a U.S. Person (not a citizen, mind you).

Not a pretty picture is it?  Failure to comply with the above may result in draconian penalties even if no tax is due.  I had no idea the U.S. tax system worked this way for immigrants and, I assure you, neither did my French spouse.

Clearly a potential immigrant to the U.S. with assets in the home or a third country would have to have a special kind of insanity to subject himself to this system with all the paperwork and potential for double-taxation. And it would do this person absolutely no good whatsoever to become a U.S. citizen since this would change nothing.  On the contrary, being a citizen would actually make it worse - one might shed a Green Card relatively easily (if done before the immigrant acquired too many assets in the U.S. or abroad) but U.S. citizenship is forever unless one renounces.

You know, if I were tasked with designing a system with the maximum number of disincentives in order to prevent educated immigrants with existing assets to come to the U.S., I doubt could have done better than this.  While this system has existed for some time, it was not well known until FATCA brought all these issues to light and the IRS actually started enforcing the rules.  Most immigrants were never aware of them and many are now in a terrible position made all the worse because they cannot vote.  I wonder if the French diaspora in the U.S. has brought this up with Mr. Courtial.

As for potential immigrants like my spouse, they have a lot of thinking to do.  I suspect that the young, educated, childless ones will continue to go to the U.S. but I doubt they will naturalize and surely they will have every interest in limiting their stay.  Older experienced workers with families and assets in the home country will probably avoid the U.S. in favor of places like Singapore or Canada.

Please feel free to correct me if there are any errors or omissions in what I have written here.  This is a complicated subject and I am not a lawyer or an accountant.  Also, I know that there are a lot of you visitors to the Flophouse are interested in immigrating and working abroad.  If you have a moment, I would very much like to have your impressions on this.  For U.S. citizens, how has the U.S. tax system impacted any ideas you might have had to live and work abroad?  For those of you from other countries does this information make you more likely to choose another another destination over the U.S.?


22 comments:

Peter W. Dunn said...

Hi Victoria, as our ranks increase our knowledge of the subject we should stop apologizing for not being a lawyer or an account. They are professionals who are busy doing their jobs, and they do not always have time to do their homework, or they get some paralegal who got c's in school to do their research. So I'm not apologizing for not being a lawyer or an accountant. What I will do is this: I will read peer-reviewed law journals, and I will search out what our rights are. The media is not doing this, nor are lawyers doing this on their blogs, nor are accountants. You also know more than most of them now. You were the one who knew about dominant nationality, which is our passe-partout, at least for us Canadians, to get us out of the prison doors of extra-territorial taxation, FATCA, and FBAR--but I think in the end, for all of us who have dominant nationality elsewhere (you too, soon, hopefully).

Victoria FERAUGE said...

I see your point, Peter. And thank you for all of your work it - what you've done is amazing.

I actually came across the dominant nationality when I was reading the Charter on the Rights and Responsibilities of a French Citizen. A lot of people misinterpreted it to mean that they would ban dual nationality in France (there was a thread on it in a French discussion board I frequent). Not at all, I said, it just that when you are in France you are French. Period. Now that sounded totally reasonable to me. I think we can all get behind the idea that if we are duals, the country we live in is the dominant nationality. Easier on everyone including our host countries.

You know when I started my quest for French nationality I was completely clueless about the fine print of being an American citizen. I was just happy at one point that I could be a citizen of both of the countries of my heart.

I am going to fight for my rights as an American but how I feel about France is separate from that. I want to be French because I love France and because I have a life here that includes people I love and could not imagine living without.

Victoria

Anonymous said...

Overall a nice summary. There are perhaps a couple of even more horrifying details you could add, at the risk of confusing with too much detail.

You don't need to actually move to the US for your foreign spouse to be subject to all this. He's liable as soon as he obtains a green card. Even if you decide not to move to the US after all, and just stay in France.

Once he has a green card the US will tax any capital gains your husband makes (sale of stock, artworks, rental properties, whatever). Tax will be calculated on the entire gain, denominated in US dollars. There's no "step up" for the gain from before he became a US person. And changes in the US dollar/euro exchange rate could produce a phantom US dollar gain that isn't a real gain at all -- doesn't matter, the IRS would still want a piece of it.

In answer to your final question... I lived and worked in the US (former green card holder) until just over three years ago. When I saw the insanity that was coming in the form of the "exit tax", I simply left and surrendered my green card there and then. I now do the same job as before, just based outside the US and not bound by the IRS. And every day I feel lucky that I made the decision to leave when I did.

Just Me said...

Thanks for taking on this subject, as it is one that gets even less coverage than the Expat deliminas. I only became aware of it, as I was doing my OVDP due diligence and started coming upon the reference to US Persons. New term to me, but as I discovered my wife who is an Australian was also trapped with me in the suckhole of US Taxation system. :)

Recently, I have been warning everyone and everywhere I can, in every blog post I make. I recently just added this note on the WSJ article about declining Chinese exports. See http://on.wsj.com/yVrTGs

Speaking of immigrants to the US, I said...

The way the IRS has treated them is not leaving a positive taste in their mouths. More and more are beginning to wonder if it is worth the cost to be a “US person”. Even the Economist in a recent article called “Dutchman Trapped,” noted. “America’s unusual requirement that its passport-holders pay it tax no matter where they live gives many qualifying residents good reason not to apply.” Good “reason not to apply”, indeed!

This is yet another example of the unintended consequences and non productive way the US taxes those it considers to be “US Persons”. You now have Expats like me, combining voices with US immigrants issuing the same dire warning to aspiring new skilled immigrants which could be contributing to America’s economic growth. “Don’t immigrate to America, and don’t take any action (marriage, adoption, or US investment) that could trap you into becoming a “US person” let alone a citizen. The cost is just too great!” I just issued two today!

Now maybe all of this is just a back door program to equalize the US to Chinese residency imbalance in both countries that Roger points out, and send Chinese and Indian immigrants packing as a strategy for export balance and “leveling the playing field”. However, in my opinion, this is just another example of unintended consequences of bad tax policy which marginalizes the US in the international financial community, reduces the attractiveness of America for skilled immigration, and harms American export growth which is greatly assisted by having a large Expat Diaspora. None of this can be good for America’s economic activity and job growth. Sometimes you just shake your head in wonder. How did America lose the plot?

Keep up the good work, and I agree with Petros. Just because we can't and shouldn't give legal advice, doesn't mean we don't have a role in educating as many as we possibly can about the misguided American "US Person"/ Citzenship tax policies and over-the-top enforcement actions.

Anonymous said...

Anonymous,
Onced your husband has a green card the US will tax not only his capital gains, but also all other income both earned and passive There is a limited foreign earned income exclusion but all passive income is taxable by the IRS. Foreitn taxs paid on each class of income may be applied as a tax credit against the US tax on that income. Foreign employer contributions to foreign Social Security and Pension funds is taxable by the US even though it may not be taxed by the foreign country.

Victoria FERAUGE said...

Thank you very much for your comments and for adding even more information. This is really serious. I've been talking to Americans and they had no idea that any of this applied to immigrants as well. I was one the phone with another U.S. expat and I told her this and there was a long silence and then she said, "You've got to be kidding. That's just crazy." I've talked to French friends about it and they were appalled (and a few were quite defiant. "No way would I submit to that...")

Up to now people were pretty much living in ignorance. And now that the word is out, the IRS seems to be saying that, due to all the publicity, people should now be well aware of these requirements and can't claim non-compliance because they didn't know. But if they come forward now through an IRS "amnesty" program they risk draconian fines even if no tax is due. 27% of the undeclared accounts even if they were accounts established in the home country before the person ever came to the U.S. All U.S. persons in this situation (U.S. citizens abroad and immigrants in the U.S.) are damned any way you look at it. And this is terrible for the U.S. economy and competitiveness in the world.

And if anyone thinks I am overstating this, the National Taxpayer Advocate in the U.S. just came out with this report that both explains the context and condemns the current system http://www.irs.gov/pub/irs-utl/2011_arc_internationalmsps.pdf

Lisa said...

I am in Sweden. Just recently, I met two Romanians who have been in Sweden for about 10 years and have built a solid, highly taxed (this is Sweden after all) middle class life. They told me after many years of waiting, they were recently informed they had won the US Green Card lottery. Having some education, they got on the web and began doing research and read about the US tax policies in some forums for immigrants. Because of those policies they decided to give the US a miss. It was the straw (or 800 lb gorilla) that broke the camel's back in their decision making. They realized they were too well established with too many overseas assets, e.g., property, pension plans and mutual funds that had negative tax consequences for them once they were in the US system. They said that the US Embassy called them 3 times. The US officials could not believe that someone would miss out on such a wonderful opportunity!

FB said...

Hello,

Many thanks for you blog. Excellent information.

I found a draft of the Charter on the Rights and Responsibilities of a French Citizen (http://www.lefigaro.fr/assets/pdf/droitsetdevoirs.pdf), but saw nothing about dominant nationality. I did find this "En devenant Français, vous ne pourrez plus vous réclamer d'une autre nationalité sur le territoire français". But I do not understand that to mean that a dual citizen would be protected from the obligations of the other nationality. Rather, it means that a French citizen may not claim in France an exemption to French law because he happens to be a dual citizen.

Do you have any other leads on the notion of dominant nationality. I just ran a search on "nationalité principale" et "nationalité dominante", but found nothing concerning France.

Again, many thanks for your blog. It is full of good information.

FB

Victoria FERAUGE said...

Hi Lisa, Thank you for the comment and the story.

I'm very glad they checked it out before they decided to pick up their Green Cards. Armed with information they were able to make a rational choice based on their own situation.

The U.S. certainly has every right to make its own laws and regulations but the reality is that highly-qualified immigrants have options. Until they are citizens or legal residents they can choose where they want to go. Given that these two had significant assets in their home country, it just wouldn't have been a good deal for them.

Thanks again and all the best to you,

Victoria

Victoria FERAUGE said...

Hi JB,

That's a very good question. What does France mean by "En devenant Français, vous ne pourrez plus vous réclamer d'une autre nationalité sur le territoire français?" I first asked this question when the charter first came out http://thefranco-americanflophouse.blogspot.com/2011/11/new-rules-for-acquiring-french.html

because a statement like this has international repercussions. You'll find a link on that post that explains "dominant nationality" (also called "master" or "effective nationality.")

I gave what I had to Petros over at Isaac and he's been doing the research and has come up some good stuff. Look here:

http://isaacbrocksociety.com/2012/01/09/dominant-nationality-protects-individuals-from-state-overreach/

and here

http://isaacbrocksociety.com/2012/01/07/dominant-and-effective-nationality-and-why-it-matters/

The latter is particularly interesting because he links to an an article about dominant nationality and the case of the US/Yemen citizen who was assassinated by the U.S. government. The author says that the U.S. government applied the concept of dominant nationality to justify killing a U.S. citizen living overseas without due process. Fascinating stuff.

All the best,

Victoria

Peter W. Dunn said...

hi Victoria: Just as a matter of clarification, the author of the article does not say that the US did use the justification of dominant nationality, but that they should. In other words, then they could kill any dual citizen, i.e., suspend their right to due process.

FB said...

Hello,

Following up on Schubert (at Issac), I just read the French-U.S. treaty on avoiding double taxation and tax evasion and found an article somewhat similar to that mentioned by Schubert for the Canadian-U.S. treaty. Even the title of the article is the same.

Article 28. Assistance in Collection
Subsection 5 reads " The assistance provided for in this Article shall not be accorded with respect to citizens, companies, or other entities of the Contracting State to which application is made... (extraneous details concerning dividends)".

If I read that correctly, it means that if you are a French national, France will not assist the U.S. in collecting taxes and penalties imposed by the U.S. on dual nationals having French nationality and living in France. Of course, it would help to be squeaky clean concerning your fiscal obligations to France.

I conclude the following:
1. Obtain your French nationality immediately if you do not already have it,
2. Do not travel to the U.S.

Ciao.

Just Me said...

Lisa,

I don't know if you saw my comment over at Jack Townsend's blog, but I did get the article from the Swedish paper from the reporter whose name you supplied. Thanks for doing that. With Google Translate, it gave me a pretty good read of what he was saying about FATCA, and frankly he understood it better than a lot of American Reporters. Thanks again for making the effort to post that information.

Victoria FERAUGE said...

Hi FB, I really your coming by and sharing your research. I think I do have to clarify two points:

The first is that I've never viewed becoming French as an escape from anything. I may be one of the rare U.S. citizens abroad who has actually filed her American tax returns and p[aid her taxes to the U.S. (it hurt but I told myself, hey, these folks back home really need the money. Some of that French solidarité has evidently rubbed off on me) So I have nothing to run from. Becoming a French citizen is something I want and, if they are gracious enough to accept me, I would prefer not to have to ask them to defend me.

The second is that I cannot hide my deep concern for my family as the FATCA laws are implemented. My French husband is not an American citizen and my children never asked to be duals. That either of them might suffer because of my citizenship makes me very unhappy indeed. And I'll be honest, if it comes down to it - the family wins and I will do whatever is necessary to protect them even if it means I can't be an American anymore.

Victoria FERAUGE said...

Oh and one more thing. Petros did his research on this topic and he has pointed out that any American who naturalizes in a foreign state (as I wish to do) has the option to relinquish (not renounce) American citizenship. Relinquishing is a more positive action because it isn't a rejection of former citizenship so much as it is a way of affirming one's love and loyalty to the new state. You can read more here:

http://isaacbrocksociety.com/2011/12/12/relinquish-dont-renounce-if-you-can/

FB said...

Hello,

Sorry if my comments were viewed as "escapist". I suppose they were in reaction to the fear and dismay expressed by many people on many blogs. Including your own "deep concern" for your family.

Thank you for the article on relinquishing. It should be useful.

If you prefer not to publish this message, I understand as it provides no new information.

Ciao

Victoria FERAUGE said...

Hi JB,

Not at all - your comments were just fine and I really appreciate your stopping by and taking the time to add them to the discussion here.

I just wanted to be clear because I don't want the people (the French) to wonder if I'm becoming a citizen because I don't want to be American anymore.

This is a little like a man telling his fiancee that he wants to be with her because she's not his first wife.

See what I mean?

Victoria

DonPomodoro said...

I have seen the effects of this policy first hand: as a student in the UK many of the foreign students wanted to remain in the UK afterwords to work, and the UK has an option called "Non-Dom Status" which means that you only pay taxes to the UK on income earned in the UK itself. This is why all of the Russian oligarchs like Roman Abramovich like in the UK because they can benefit from living in London while continuing to pay a 13% income tax rate on everything in Russia. This policy also benefits the average middle class person looking to immigrate as well.

In comparison to that, everyone that I know who studied in the US went there to solely to study and then to leave. Several didn't stay due to the immigration system there making it difficult if not impossible to remain, but several others told me that it was because of the tax situation. These are the exact people that the US should be trying to attract which the UK is getting easily: educated, single, young professionals prepared to move permanently to the country and contribute significantly. I find it strange though that foreign students in the US were more aware of the dangers of becoming a "US person" than most US expats abroad seem to be...

Victoria FERAUGE said...

Thank you for sharing that experience. I hadn't known about the "non-dom" status but I think that is very good policy.

That pool of highly-educated, highly-skilled migrants is much sought after by many countries. I wrote today about China becoming a destination country and they are attracting a lot of North Americans, Africans and Europeans to their shores. But one group I didn't talk about in my post is international students. Here is what MPI has to say about this:

"In addition to the immigration of foreign-born workers, China is also experiencing increased numbers of migrants entering the country for the purpose of study. China now ranks as a major destination for international students, with an estimated 238,184 foreign students in 2009, ahead of both Australia and Canada. South Korea accounted for more than one-quarter of the foreign-born students in China, followed by the United States and Japan with 7.8 percent and 6.5 percent, respectively."

Its' a market and countries are in competition. MPI said in another report that the U.S. needs to be very careful going forward - just because it WAS a top destination does not mean it will remain so in the future. Something to think about and since the U.S. is just about the only country that has a tax system based on worldwide income, that is a powerful disincentive compared to other places.

Anonymous said...

After commenting on your The 2012 Diaspora Tax Wars article, I came across this one. This is exactly what I was talking about before. To answer your question, for someone like me (who doesn't earn a lot of money and who didn't have any real assets in France), it still made sense to come to the US, get a green card, then become a citizen. J'ai hésité longtemps mais, sans entrer dans les détails, c'est quand même avantageux pour moi et pour ma façon de vivre. (Les 180 dollars dont je te parlais précédemment ne me font pas vraiment passer dans la catégorie supérieure.)

Victoria FERAUGE said...

It sounds like it was a good decision for you. Citizenship does make sense in a lot of cases -it gives you the right to vote, for example, or to have protection against deportation. It's also the most public way of expressing your love for and commitment to a country. Which is why I wish to become French.

But if you have American citizenship things can get very complicated very quickly. Like you I never earned enough money in France to pay U.S. until last year. We had purchased a small apartment a few years ago under the Perissol law and we sold it. Regardless of my income I still paid taxes to both the U.S. and France on the sale. There is no exclusions for capital gains. That hurt and it does mean that we won't be buying any more property here anytime soon until we talk to an international tax lawyer.

Our other concern is inheritance. If my husband becomes a Green Card holder his inheritance will become taxable in the U.S. as well as France. It would be very sad to have to sell a house in France that's been in his family for 4 generations just to pay both countries a share. See what I mean?

Anonymous said...

Hello again Victoria! Yes, it does make sense. (I should have written that I don't have children and am single. So the decision was easier to make.) Bonne continuation et bonne "chance" pour la naturalisation.