WHY ARE AMERICANS GIVING UP THEIR PASSPORTS?
In the wake of the recent stringent US tax policies, a staggering number of US citizens have either been renouncing their citizenship or abandoning their green cards. According to the US Treasury Department Data, for the third year in a row, this number has risen above the numbers set from the previous years.
The US Treasury revealed that in 2015 alone, 4,279 individuals called it quits with the US in comparison to the 3,415 people from the previous year.
The IRS publishes the list of individuals expatriating on a quarterly basis and their latest list contained the information of 1,058 US citizens and permanent residents who surrendered their passports from September to December.
Needless to say, the increase in renunciation is due to the introduction of the Foreign Accounts Tax Compliance Act (FATCA), implemented in 2010. The Act imposes tax on US citizens based on their worldwide income and not just money earned in the US. Although up to $100,800 can be excluded from their income along with certain housing costs. Non-compliance of this legislation, even if it is unintentional, is met with harsh penalties.
As Andrew Mitchel, an international lawyer who reviews IRS data put it:
"An increasing number of Americans appear to believe that having a US passport or long-term residency isn’t worth the hassle and cost of complying with US tax laws".
During the time of its implementation, President Obama backed the law as a "global standard" in opposing tax evasion. In 2009, following the disclosures of the banker turned whistleblower, Bradley Birkenfeld, the bill was passed by Congress following the revelation of illegal financial activities involving UBS AG bank.
Birkenfeld testified that UBS enabled tax evasion by US tax payers which led to UBS admitting to its illegal activities and later paying a hefty $54 million to settle the matter.
During this time, the US government began their clampdown on banks, and bankers were forced to reveal the information of US citizens' accounts abroad. More than 180,000 banks adhered to the government’s demands, however the crackdown led many foreign banks to abandon business with Americans residing abroad, forcing some US citizens to surrender their passports.
It has been reported that since its implementation, the US authorities have managed to collect in taxes and penalties alone, $13.5 billion from Americans and foreign banking institutions.
United States and Eritrea are the only two countries that impose taxes on their citizens' irrespective of place of residence, however, unlike the US; Eritrea does this at a reduced flat rate of two percent. According to the US Treasury Secretary Jacob Lew, this is because the government has an obligation to ensure that all Americans pay their taxes.
In a statement Lew said “Offshore tax evasion undermines confidence in our tax system and deprives the United States of revenues necessary to protect and provide for its citizens”.
One might think of the disadvantages following the renouncing of citizenship, and there are certainly some downsides. Not only has the cost of completing an application to surrender risen from $450 to $2,350, but US citizens must also settle all U.S. tax liabilities from the preceding five years before kissing their citizenship goodbye.
What's more, according to US Tax Services, Americans who have given up their citizenship can still return to the US but only for short visits. This means that natives will no longer have the opportunity to reside in their birth country without having the appropriate visas.
For example in its guide to renouncing citizenship, Tax Services states; "if a relative who lives in the U.S. were to become sick, you would not be allowed to simply move to the U.S. to take care of them. Or if your kids end up residing in the U.S., you would not be able to simply move in with them as you grow older.”
A number of high-income citizens may owe a type of capital gains tax called an “exit tax”, and though some may have the luxury of being able to keep up with the obligations of their residing country along with the United States', others who live on a more modest income may not be so lucky and will ultimately be forced to make the tough decision of choosing between the two. The general consensus is that it is the last thing a proud American would think of doing. Giving up your nationality and renouncing the country you were born in is an emotional burden, which can be highly traumatizing for the individual and their family. But the significance of FATCA’s policies has left many in despair and with little choice but to sign the oath of renunciation. It would also be reasonable to suggest that the implications of FATCA would seriously impact the decision of foreigners who are considering making the move to the US. After all, would the opportunity to become a US citizen warrant being subjected to double taxation?
© Consortium International Limited 2016
Posted on Thursday Apr 14