In practice, with increased IRS focus on international money and banking, citizenship based taxation has worked an extreme injustice on law-abiding Americans working abroad, because in the eyes of U.S. federal tax law, the American abroad is still required to report his income to his home country and the IRS, as well as to his newly-adopted country. Moreover, what appears to be a local bank in the eyes of most Americans abroad, is suspiciously seen by the IRS as fair game for inquiry regarding unreported income. Jackie Bugnion has been at the forefront of the fight for tax justice for Americans abroad as the tax director of American Citizens Abroad for several years and now in her individual capacity.
Founded in 1978, American Citizens Abroad, Inc. (ACA, Inc.) is a non-profit, non-partisan, volunteer association whose mission is to defend the rights of Americans living overseas. ACA works to represent overseas American interests before the Executive Branch of the US Government, the US Congress, the Federal Judiciary, and in the press.
This year, American Citizens Abroad, gave its highest award, the Eugene Abrams Award for 2017 to Jackie Bugnion. Mrs. Bugnion served on the ACA Board and Executive Committee for 12 years, from 2003 to 2015, and she was the driving force behind the promotion of Residence-Based Taxation (RBT), writing detailed RBT proposals, visiting lawmakers and giving speeches. She was instrumental in creating relationships with key legislators and the tax writing committees on Capitol Hill, and she wrote policy papers which helped establish ACA as the premier thought-leader on issues affecting the community of Americans living and working overseas. Mrs. Bugnion participated in the team that published ACA’s anthology of short stories, “So Near Yet So Far.” The stories included in the collection are written by Americans living and working overseas and cover a myriad of experiences and issues. After publication, the book was sold to the public and copies were distributed to members of the Congress helping them to understand that Americans overseas were very much like those living in the United States and that their issues must be heard and addressed by their Representatives.
Jackie received her MBA from Harvard Business School and a BA in Economics from Cornell. She was born in the United States and later in life after graduation moved to Switzerland.
With Jackie’s express permission, we are proud to republish the below article written by Jacqueline Bugnion which was submitted to the Senate Finance Committee following the Committee’s public request for tax reform proposals.
Submission to Chairman Hatch’s request for tax reform proposals
Adopt residence-based taxation (RBT) for Americans resident overseas
The Senate Finance Committee and the House Ways and Means Committee have both cited the need to review the way that the United States taxes its citizens and green card holders who reside overseas. The current policy known as citizenship-based taxation (CBT) is increasingly called into question as it taxes Americans on their worldwide income irrespective of their residence, domestic or overseas. I am an American citizen who has resided overseas for 52 years, as my husband is a foreigner. I have personally observed the devastating consequences of CBT on Americans abroad and strongly urge Congress to adopt residence-based taxation (RBT).
What is RBT? Under RBT, the U.S. would tax its citizens and green card holders who reside abroad the same way that the U.S. currently taxes non-resident aliens, i.e. through taxation of U.S.-source income only. FDAP (Fixed, Determinable, Annual, Periodic) income would be taxed largely through withholding at source by the paying agent. Effectively connected U.S.-source earned income would be reported on Form 1040NR and taxed under U.S. income tax rules. Foreign-source income would not be taxable.
RBT would apply to all bona-fide overseas residents. RBT would be immediate and automatic, but would not be open to residents of Puerto Rico or to military and diplomatic personnel stationed abroad. As an obvious anti-abuse measure, RBT would not be available to residents of designated tax havens. RBT would not be compulsory; Americans abroad for a short period of time, such as academics on sabbatical, may opt to stay under CBT.
The rules for RBT are already in place as they apply to foreigners with U.S.-source income. Withholding taxes on FDAP U.S.-source income would lead to automatic, efficient tax collection. In fact, withholding tax at source would in certain circumstances shift taxation from foreign countries to the U.S.
Shifting from CBT to RBT would be close to tax revenue neutral. Analysis of the IRS 2555 statistics, relating to the foreign earned income exclusion reported by overseas Americans, shows that a significant share of wages and salaries of the highest income groups is U.S.-source, and hence would continue to be taxed by the U.S. under RBT. The top 1% income group account for more than 50% of all taxes paid. In addition, the U.S. today under CBT renounces most claim on tax liability on foreign earned income, by allowing foreign tax credits and the foreign earned income exclusion. These two factors and few minor ones, lead to a neutral tax revenue situation. Any possible difference between CBT and RBT would be utterly insignificant in the U.S. budget – less than 0.001% - so small that it could swing either way.
IRS enforcement costs under the current international tax system are disproportionate to revenue. The international tax forms create burdensome filing costs for taxpayers and create heavy administrative costs for the IRS; this is terribly inefficient when the vast majority of overseas taxpayers owe no U.S. tax.
Tax collected currently under CBT, other than that linked to U.S.-source income, comes from unacceptable instances of double taxation. Incompatibilities between the U.S. tax code and foreign tax systems lead to double taxation. The outrage of Boris Johnson, at the time Mayor of London, when the U.S. taxed the capital gain on the sale of his U.K. home illustrates this issue very well. There are numerous examples of differences between U.S. and foreign tax systems which penalize Americans abroad. To cite just a few:
- IRS does not recognize foreign pension funds and therefore taxes all contributions; it treats income generated over the years as coming from a PFIC fund, guaranteeing a negative return.
- U.S. legislates double taxation in the cases of the NIIT and the Additional Medicare Tax since neither allow foreign tax credits. This is particularly cynical since these taxes aim to finance U.S. medical care; Americans abroad pay into their foreign health programs and are excluded from the Affordable Care Act.
- Some countries have a wealth tax on all net assets instead of a capital gains tax on securities investments. The U.S. taxes the capital gains, but does not allow foreign tax credits against this income.
- Definitions of what is an income tax and what is a social security tax varies enormously from country to country, with onerous tax consequences for U.S. citizens abroad.
- All OECD countries, except the U.S., have replaced sales taxes by VAT, which can range up to 20% of the price of goods and services purchased. The U.S. does not recognize VAT paid as compensation for the U.S. tax liability, even though it does accept deduction of U.S. state sales tax.
- Entrepreneurs in countries without a totalization agreement are subject to double contributions to social security, in the foreign country and in the U.S.
Beyond the immediate issue of taxation, moving from CBT to RBT would have major advantages for Americans abroad, at essentially no cost or lost revenue to the U.S.:
- CBT tax law and related FATCA asset and revenue reporting requirements amount to a bank lockout for Americans abroad. FATCA reporting rules imposed by the U.S. on foreign financial institutions, accompanied by draconian penalties for non-compliance, strongly discourage foreign banks from accepting American citizens as clients. In addition, the U.S. Patriot Act know-your-client requirements have effectively cut off Americans abroad from access to U.S. financial institutions. It is difficult to function without a bank account in today’s world.
- FBAR and Form 8938 reporting requirements shut off employment and investment opportunities for Americans abroad. The FBAR requirement to report bank accounts with only signature authority eliminates jobs in financial positions. Foreign employers refuse to have their accounts reported to the United States, and such reporting is illegal in many countries. Form 8938 requires foreign companies in which an American holds 10% ownership to report this ownership to the IRS. This measure has shut out entrepreneurial and partnership opportunities for Americans overseas.
Consequently, the number of renunciations of U.S. citizenship is skyrocketing from a few hundred in 2008 to well over 5,000 in 2016. And this is just the tip of the iceberg. The blatant discrimination and unfair treatment of Americans abroad at the hand of their own government has created massive anger and frustration in the overseas community of more than 8 million Americans. The financial burden of compliance is far in excess of reporting requirements for U.S. residents and easily runs into the thousands of dollars, which is all the more ludicrous when the vast majority have no U.S. tax liability.
Adopting RBT meets three of the four tax reform objectives cited by Senator Hatch.
- First, it provides relief to middle-class individuals and corrects major unfairness.
- Second, it removes impediments and disincentives for savings and investments.
- Third, it makes Americans abroad and therefore the United States more competitive in the global economy while preserving the tax base.
I thank you for your attention to the above.
Jacqueline Bugnion July 8, 2017
BA in Economics, Cornell University, 1962
MBA, Harvard Business School, 1964
Tax Director, American Citizens Abroad, 2003-2015
Tax Notes International, Volume 62, Number 11, June 13, 2011, Jackie Bugnion, Overseas Americans Should Have a Say in National Tax Reform Debate
Tax Notes International, Volume 66, Number 5, April 30, 2012, Jackie Bugnion, American Citizens Abroad’s Recommendation for U.S. Tax Law Reform
Tax Notes, December 1, 2014, Jackie Bugnion and Roland Crim, Thank you Mayor Boris Johnson for speaking up for many
Tax Notes, Volume 148, Number 8, August 24, 2015, Jacqueline Bugnion, Concerns About the Taxation of Americans Resident Abroad
Tax Notes, May 30, 2016, Jacqueline Bugnion and Paula N. Singer, A Proposal for Fair U.S. Tax Treatment of Foreign Pensions