Another video I came across today on the subject of taxation of U.S. Persons in non-U.S. jurisdictions, and specifically on giving up U.S. citizenship — Robert Wood talking with Scott Drake on the Legal Broadcast Network. Looks like renounceuscitizenship beat me to it and wrote about this one a few weeks ago over at his own blog! Anyway, for those of our readers who are hard of hearing or just too impatient to watch a whole video, I’ve written up a transcript — you can click “continue reading” below to see the transcript, along with my own comments. Be forewarned: you will probably find the level and tone of discussion in this video to be rather disappointing.
0:13/Scott Drake, host: The following is a service of AGT Trust. Tax law journalist Robert Wood joins us to discuss his recent article in Forbes: “Ten Facts about Tax Expatriation“. As recently as the 1960s, you could conceivably leave the U.S. permanently and avoid paying some taxes. Over the last 20 years or so, Congress has made that option increasingly more difficult. Rob, welcome back!
0:37/Robert Wood: Thanks Scott, nice to be here.
0:38/Drake: Hey, wealthy Americans have been trying this for years with some success, although the last 20 years or so — as I said in the intro — it’s becoming increasingly more difficult. Can you talk about the article and what the restrictions are now?
0:55/Wood: Sure. Well first of all, I have to say this is one of those questions that gets asked a lot, but I think relatively few people act on it. It becomes tempting, I suppose, after some big event in Congress — a tax increase, or some other legislation that makes you think you want to move to a desert island. I think everyone has those kinds of feelings at one point or another in their lives, but relatively few people do it, and relatively even fewer people probably do it for tax reasons.
1:29/Wood: So the basic rules are, up until — and this is kind of a bright-line date in the article — up until June 17, 2008, there was basically a ten-year rule, so that if you left the U.S., and if you were a long-term resident or a U.S. citizen, and if you lef the U.S., that you would still be subject to U.S. tax for 10 years. There were ways to get out of that; one of the principle ones was that if you could show your leaving the country wasn’t tax motivated.
2:11/Wood: Suffice it to say, it’s sort of a ten-year recognition period. It wasn’t a bright line where you could just leave the country. The rules got a lot tougher after that date, Essentially. after June 16, 2008, if you expatriate then, tax motivation isn’t important anymore — that’s significant. And essentially, even more punitive than a ten-year recognition period is, in general the current rule is, you are treated as selling all of your assets for their fair market value the day you leave the country, calling it an exit tax. So the current rule is that.
2:59/Drake: Well I guess in many cases, the government can tax income worldwide, whether or not you’re in the U.S. or not — as long as you’ve been a citizen, it becomes really difficult.
3:09/Wood: Actually, that’s true. And that’s a good place to start, which is — sort of for any of this to make sense, you have to start from the premise that as a U.S. citizen, or a permanent resident — and that’s generally someone who has a green card — as a U.S. citizen, or permanent resident of the U.S. [inaudible] — you’re subject to tax on your worldwide income. That’s very different from a lot of countries. I mean, our system is such that it doesn’t matter whether you have income in foreign countries. There’s no restriction under U.S. law — although of course recently in the last year there’s or so been a lot of hubbub about Swiss bank accounts [camera fades to shot of UBS exterior]. It’s perfectly legitimate to have those, it’s just that you have to declare them in the U.S., and report them, and you have to pay tax on that income.
4:09/Wood: So you start with that premise — I would just say, the major group of people I see these rules really tripping up, would be not U.S. citizens, but people who’ve been living in the U.S. with a green card for a long time, and then they may be particularly surprised by this new set of rules.
4:35/Drake: Yeah that seems particularly confusing, and as you said, punitive. If someone has established residency in the U.S. with a green card, for them to leave maybe to go back to their home country, they then are still subject to U.S. tax law.
4:51/Wood: Yeah, now that’s right. And I would just say that there is one thing — one thing that if you read this Forbes article will become clear, although I tried to make it as simple as I can — the rules are very complicated. And I mean, even for tax law they’re very complicated. So there are certain things one can do. One of them, for example, is a way of posting a bond or other security, even if you are subject to this new exit tax, you can — provided that the IRS feels secure that it’s going to get its money later — you can avoid this deemed sale. The idea being that you are giving them security that they will get their tax when and if you ever sell your property. So there are some things you can do, and there are a few little exceptions, but they’re darned small and far between.
5:44/Drake: It sounds like deciding to expatriate really doesn’t have any big tax benefits. You’re giving up U.S. citizenship, you really do have to leave, but it doesn’t sound like you’re getting much of a benefit, if any, tax-wise.
6:03/Wood: Yeah, that’s right. I guess to take the other perspective — if you really wanted to leave, for perhaps other reasons, and didn’t mind giving up U.S. citizenship, and have citizenship in another country, or could easily get acquire it — I suppose it would be, if you are worth $10 million today, and you think that five years from now, you’re going to be worth $100 million, then that appreciation wouldn’t be subject to tax in the U.S. But I mean, you’re quite right, it’s a big, big step; relatively few people even think about it.
6:44/Wood: I guess my favorite example of somebody who just played really clever cards — and I should stress that this was in the 1990s, and this was before these current rules, even before the 10-year rule took place, as I recall — and that was a fellow who, one of the Dart family, very wealthy family, who left the U.S., expatriated, and was able to come back as a non-U.S. citizen ambassador from the country of Belize, which is where he had moved to — which is sort of a tax haven — and he came back to live in the U.S., in the U.S. embassy, which had just been opened for him in his previous hometown of Florida, where he had lived as a U.S. citizen. And if that doesn’t sound like a very clever tax scam, my name isn’t Rob Wood.
7:41/Drake: [chuckling] Well regardless of the issue, it’s a good idea to get professional help to navigate complicated waters such as these. Rob, it’s always a pleasure to have you talking with us, and you just keep writing there.
7:57/Wood: I’ll do my best. Thanks for having me.
8:00/Drake: Robert Wood is a tax lawyer. He has a nationwide practice. He is the author of more than 30 books, including Taxation of Damage Awards and Settlement Payments. He can be reached, with other articles and content and publications, at woodporter.com. He is also the host of the Tax Law channel here on the Legal Broadcast Network. I’m Scott Drake. This was, once again, a service of ATG Trust. Thanks for watching.
I hate to be critical of Robert Wood, who has done a far better job of covering this issue in other contexts — especially in his columns in Forbes, such as the one which Just Me blogged about on Friday. And to be fair, this video is from a couple of years ago, and no doubt his understanding of the issues has become more nuanced since then. But when talking off-the-cuff on video, he too ends up contributing to the assumption that renunciation is primarily an issue of “tax avoidance” by onshore persons. Wood does not in the slightest deserve the accusations of malice or ignorance that we have thrown at other professionals and journalists who write about this topic. He’s simply talking from his experience — and by the nature of what he does for a living, the majority of his acquaintances who have to deal with the U.S. insane rules for taxation of “foreign income” are his clients: U.S.-resident whales who are consciously trying to push the limits in order to minimise their U.S. tax bills, and not U.S.-non-resident minnows who are tax-compliant in the countries where they live and certainly don’t have enough left over to pay a tax lawyer an appropriate rate for his hard-earned professional knowledge.
Similarly, if you’ve ever tried to talk with your own friends and family back in the homeland about tax compliance issues faced by Americans abroad, you’ll find that many of them just don’t get it at a gut level, even if they’re aware of the issues intellectually. It’s too far outside of their everyday experience, so they fall back on what I call the “default American assumption” that gets pounded into everyone by the incessant background drumbeat of American jingoistic journalism — that the U.S. is the only place you can get rich, that overseas income means “passive income” hidden in Swiss banks, that “leaving the country” and “renouncing citizenship” are simultaneous and synonymous acts, and that the only people who need to worry about any of the above are the idle, undeserving rich with seven-and-eight-figure trust funds.
This is another reason why I and some other participants here on the Isaac Brock Society have little faith that lobbying the U.S. Congress or getting the U.S. media involved in this issue will bring us any meaningful redress of our grievances — at best these are stop-gap measures to prevent the situation from getting worse while we each try to make our own decisions about our citizenship issues. Certainly there are a variety of legitimate ways of engaging with this problem, and even I can’t help but salute and support the tireless efforts of organisations like American Citizens Abroad in this regard. But my personal opinion is that the best return on our time comes instead from getting this issue in front of government officials and journalists of the places where we live — making FATCA, FBAR, and all Congress’ other garbage laws into an issue of foreign relations, rather than internal partisan politics where it will inevitably get drowned in populist calls to hunt down domestic “tax evaders who are offshoring American dollars and American jobs”.
One last point worth noting: Wood and Drake’s comments at 4:09 through 4:51. Neither’s words evince much sympathy for American citizen emigrants, but in contrast both demonstrate concern over the unfairness and incomprehensibility of US tax laws to immigrants. This suggests an obvious framing tactic for people who want to get these issues in front of the U.S. media: stop mentioning emigrants at all (since, as is well known, we’re all fat-cat traitors sipping piña coladas on tax-haven beaches), and instead start bringing up the copious FBAR, foreign trust, and FATCA horror stories faced by immigrants and children of immigrants.