It’s been ten days now since the US election. Many (including me) were surprised by the result. Regardless of how you voted (or didn’t – I’m no longer eligible to vote), the US electorate has spoken, and it’s time to move forward under the new regime. Over on the Isaac Brock website, they are organising a letter writing and Twitter campaign to encourage the Trump transition team to enact the planks in the GOP platform calling for the repeal of FATCA and legislation to enact Residence Based Taxation (here are two other currently active threads – [1], [2]). It appears now that the current FATCA repeal bills will be re-introduced when the new Congress convenes in January.
Here at FixTheTaxTreaty.org, however, we are focused on action inside Australia. While I am hopeful that some relief may come from a repeal or softening of FATCA on the US side, until we see any actual changes being proposed in Congress or by the Trump transition team, we need to proceed on the basis that nothing will change. This is not pessimism on my part, I’m just trying to be pragmatic. Outside of the “walled garden” of US expat sites, all of the discussion I see of Trump’s tax reform proposals include corporate reform to repatriate the billions of dollars that Congress assumes US companies are holding overseas to avoid US tax, and tax cuts for the wealthy including repeal of the estate tax (e.g., New York Times, Forbes). While there are some in Congress who understand the injustice of FATCA, it will take some persuasion to get repeal passed. A move to RBT will be even more controversial.
If the FATCA repeal makes it through Congress without the RBT legislation, then all of the problems with the tax treaty will still affect those Australian citizens and residents who are required to also pay US tax. Even if FATCA is repealed and RBT is enacted, there are still problems with the treaty, though the number affected will be much smaller. The US will still tax US residents, which will include Australian expats and former Australian residents who have superannuation accounts and, possibly, Australian managed investments.
For these reasons, I think we have to proceed on the basis that nothing really has changed – until any changes are known.
Good post.
FATCA and CBT are entirely separate issues. They are contextually related but they are not logically related. A repeal of FATCA would have no impact on the CBT regime. For those who comply, CBT makes living outside the United States, as a U.S. citizen, almost impossible. It’s a sad state of affairs when the only Americans abroad who are not under pressure to renounce U.S. citizenship are those who are not tax (or should I say “information return”) compliant.
Furthermore, it’s not clear that a repeal of FATCA would have any effect without a repeal of the IGAs. The FATCA legislation (except the terms that apply directly to Americans abroad) has in effect been replaced by the IGAs.
In any event, you are right to continue your work by focusing on what is happening in Australia. You need to pressure your government so that regardless of what the United States does, Australian citizens residing in Australia are safe.
Interesting insight that repealing FATCA on its own may have no effect on the IGAs. I think it’s probably more likely that the IGAs may be invalidated (especially if President-elect Trump and his team see the IGAs as an inappropriate exercise of presidential power or as treaties that have not been ratified by the Senate) without repealing FATCA. This could lead to a nightmare situation, especially if the US Treasury/IRS decides to enforce FATCA absent the IGAs. I wonder whether it is possible for the Congress to include a repeal/repudiation of the IGAs in the FATCA repeal legislation that is planned for the new Congress.
Unless the US joins the rest of the world and taxes based on residence rather than citizenship, the inadequate treaty will have negative effects on Australians. Even if FATCA and the IGAs are repealed, we can’t put the genie back into the bottle. Many Australians have already been identified to the IRS. Once they enter the US tax system, they will be caught there until they renounce. And those who have been identified and do not become US-tax compliant, will be looking over their shoulders and staying as far away from the US as possible.
One cannot predict the future. But some thoughts on the FATCA IGAs and the incoming administration:
1. Unless the IGAs attract the attention of the new administration nothing will happen. Remember that only people outside the USA care about FATCA. Furthermore, the IGAs have been written to impose no obligations on the United States. So, it may be a long time before FATCA even gets the attention of the administration.
2. The legal status of the IGAs is not clear. The administration could simply take the position that they are not treaties. If they are not treaties then they are not subject to the usual “with the advice of the Senate” kind of stuff. On the other hand, the administration could argue that they are (in most cases) extensions to existing lawfully approved treaties. The fact that other countries regard the IGAs as treaties is probably irrelevant.
3. The most that Congress could do (I think) is to amend Chapter 4 (the FATCA section 1471 – 1474) of the Internal Revenue Code to restrict the ability of the administration to do FATCA related things. But, the authority for the IGAs didn’t come from Chapter 4 anyway. If the authority exists, it comes from some general power to do what the administration wants. For this reason, I believe that a repeal of FATCA would leave the IGAs intact.
4. The best thing that could happen (for the long run) would be for the USA to attempt to enforce the 30% FATCA withholding provisions. Then the rest of the world would see what the USA is really about and would be forced to fight back. I doubt that Treasury/IRS would attempt this. But, if they do, the world will have to figure out how to make an immediate move away from the U.S. dollar which will hurt the USA and benefit the rest of the world. The reality is that the USA has an adversarial relationship with most of the world. Sure, it will be turbulent for a while. But, when the storm subsides, the USA will be the clear loser in any attempt to impose FATCA withholding. To be clear: I am not wishing for this.I simply recognize that if it were to happen the long run outcome is positive.
Some thoughts on the CBT problem:
The simple reality is that it is not possible to live (in the sense of normal financial and retirement planning opportunities) as a “U.S. Tax Compliant” person outside the USA. This is the reason/motivation for your blog. Any person with a U.S. place of birth, who lives outside the United States is under siege. In fact, the problems of tax compliance are so difficult that the only Americans abroad who can keep U.S. citizenship are those who do NOT enter the U.S. tax system. Your comment includes: “Once they enter the US tax system, they will be caught there until they renounce.” Yes, that’s right.For those who doubt this, I offer this post that I wrote some time ago:
https://citizenshiptaxation.wordpress.com/2015/06/30/part-3-living-clean-how-to-live-outside-the-united-states-in-an-fbar-and-fatca-world/
Some thoughts on the Resolution of The CBT Problem:
This can be resolved through a combination of 4 different ways:
1. Congress can change the Internal Revenue Code so that Americans abroad are treated the same as non-resident aliens.
2. The Administration can correct virtually ALL of these problems through its regulatory authority. If one were to actually read the Internal Revenue Code, one would see that Congress has delegated enormous regulatory authority to Treasury. I will leave the details for a separate comment, but almost every problem burdening Americans abroad can be fixed with the stroke of a pen. Obama could do this before he leaves office. But, he won’t. Why not? The answer is that through CBT the USA has found a way to impose a capital tax on other nations. The fact that the CBT problems have NOT been fixed strongly suggests that the USA does NOT want to fix the CBT problem.
3. Countries could stand up for their citizens who are being attacked by U.S. tax laws. For example Australia should interpret the U.S. Australia tax treaty as NOT allowing the USA to impose rules on Australian citizens that prevent them from living normal lives. Ditto for all other countries. It’s hard to understand why they have not done so. My theory is that they don’t understand how disruptive U.S. CBT is to their sovereignty and economies.
4. Americans abroad are simply going to have to decide the extent to which they are willing to put up with this. Once upon a time, in a very far off land, a group of people decided that they would no longer allow their lives to be controlled by the Government of another distant land. They simply said no. They made a difference. They spawned the Empire that is oppressing you today. I am inclined to think that Americans abroad (as did their ancestors) can make the biggest difference here. But, I am also inclined to think that few of them will make the effort to save themselves.
Was it Mark Twain when writing his thoughts on patriotism who said:
“Loyalty to country always. Loyalty to the government when it deserves it.”
If Mark Twain were observing the situation today he might say:
“Renounce your citizenship. It doesn’t make you any less American and it might make you more American.”
Very astute comments, John Richardson. Thanks.
Thanks for your comment, John.
Of course, many in the US expat community are watching the incoming administration carefully for signs that they might do something about FATCA and/or the IGAs. We need to not lose sight of the fact that the IGAs are bilateral agreements. The government of Australia signed the Australian IGA, and the government of Australia has the right (I would say the obligation) to ensure that the US lives up to its side of the agreement. As far as I know, the US has not provided Australia with any information that would not have been provided before – the US promise of (limited) reciprocity has not been delivered.
There was an interesting conversation on twitter last week (collected here) where Allison Christians suggested that Australia would be within its rights to decide that reporting to the IRS on Australian residents under the FATCA IGA was “contrary to public policy” and therefore could be refused under the treaty (yes, the same treaty that provides the cover for information exchange under the IGA). The banks would have lived up to their obligations by reporting to the ATO – so would be FATCA-compliant by virtue of the IGA, even if the ATO decided to restrict the data passed on to the IRS to only those accounts held by non-residents of Australia. Not that I expect our current government to do any such thing.
I like this part from John Richardson: “Australia should interpret the Australia-US tax treaty as NOT allowing the USA to impose rules on Australian citizens that prevent them from living normal lives.”
Part of this may be the insistence that transfer of FATCA information to assist US extraterritorial tax on Australian tax residents is not required by the tax treaty, as it violates Australian government public policy for its residents (such as superannuation, residence based taxation,etc.). (Note US persons not tax resident in Australia are excluded in this statement.)
There are a few possibilities of hope with the new US administration of a reversal of the recent trend in ever tightening and more restrictive regulation and punitive penalties by the US government on US persons living overseas:
FATCA IGA are by Executive Order. Trump said he would repeal the Obama unconstitutional Executive Orders. There is only one year notice required to repeal FATCA IGA executive orders. This may be done without Congress. Such notice may then oblige Congress to tidy the matter with legislative repeal of FATCA.
Repeal of FATCA and shift to residence based taxation are in the Republican Party Platform. The Republicans now control both houses and The Executive. Mick Mulvaney (R-SC) has sponsored a bill H.R. 5935 to repeal FATCA. Legislative repeal of FATCA would then oblige the Executive to rescind the executive orders relating to FATCA IGAs. Trump said that for every new regulation he wants two repealed (repeal of FATCA and the IGAs could help him here).
There may be lots of change the same way FATCA was brought in. Who says everyone in Congress need know or care about it all? Repeal of FATCA may be undebated and tacked onto an unrelated bill. Ending FATCA and brining in a shift to residence based taxation this way would be poetic justice.
Trump has talked about territorial based taxation for companies. Hopefully there will be some translation of this to individuals.
In regards to Australia, the Australian Government needs to be accountable for tax treaty malpractice for approving the Australian-US Tax Treaty that may guarantee double taxation. Another area of accountability is then the Australian Government and ATO pretending wrongly that the tax treaty is an “all good agreement” comprehensively preventing double taxation.
Also, the Australian government needs to be accountable for the error in stating that extraterritorial double taxation of Australian residents should be raised with the US government in the first instance. The right of the Australian government to protect and exempt its resident citizens from unjust extraterritorial law is an Australian sovereign issue. This matter should rightfully be raised and acted on by the Australian Government in the first instance via prioritisation of tax treaty renegotiation.