There has been considerable discussion about the corporate tax system in the U.S. and the IRS’s global reach in the media over the past year. The rash of corporate inversions was the catalyst for the public discussion of the outdated worldwide corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system, which only six other countries have.
The IRS’s global reach also extends to personal income as well. Citizens and green card holders who work abroad must file a tax return for all income over $9,350.00. Although there are tax credits and deductions for income taxes paid to the country of residence, other taxes, such as the VAT, are not deductible. In other words, if the country of residence has a high consumption tax, i.g. the VAT, and a low income tax, then American expatriates could find their wages being squeezed both when they earn income and when they spend it.
In addition, citizens and green card holders who work abroad are required to file forms concerning their financial holdings abroad. These individuals must divulge the details of their financial holdings in the TDF 90-221 form, also known as the FBAR, which carries a $10,000 to 50% of an account fine for failure to file or incorrect information.
The 8938 form is also required under the more recent Foreign Account Tax Compliance Act (FATCA). It requires more extensive financial details, which is cross checked with foreign financial institutions, and it carries similarly harsh penalties.
Are Americans alone in this onerous system? Unfortunately, they are. Only one other country taxes its citizens is this manner. Eritrea, the small country on the northern border of Ethiopia, is the only other country which taxes its citizens who live and work abroad, but unlike the U.S., they have a reduced flat rate for those citizens and none of the reporting burden.
What can a U.S. citizen do to escape the worldwide tax burden? Just as corporations have sought tax relief through inversions, citizens can achieve similar results by renouncing their citizenship, and just like inversions, renouncing one’s U.S. citizenship has been on the rise in the last couple of years.
The tread of inversions and renounced citizenships is alarming. It speaks to a simple principle of economics, is membership worth the price? Americans abroad and corporate executives are resoundingly saying no and opting out.
For the most part, the drop in demand for American membership has been missed by the U.S. Congress, but in the recent report on tax reform from the Republican staff of the U.S. Senate Committee on Finance, they suggest moving away from a worldwide income tax system to a residence based system, matching other OECD countries. This has given many expatriates cause for hope.
Tax burdens should be tied to the public services a tax payer uses. Paying one’s “fair share” only makes sense if one is using a fair share. American citizens abroad don’t use American public services and thus should not be responsible for the provision of those services.
Maybe it is time we admit that the IRS is truly over-reaching.
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