This is Part 3 of our series explaining the Saving Clause in the Australia / US tax treaty. In Part 1 we saw how international tax works for 90% of the world’s population: income sourced in the country where you live is taxed only by that country. Income from elsewhere is governed by the treaty and generally taxed by the source country – with a tax credit in the resident country if it is also taxed there. In Part 2 we saw how the Saving Clause works in US tax treaties: US citizens are subject to US tax wherever they live due to the unique practice of Citizenship Based Taxation; the Saving Clause allows the US tax its citizens as if most of the treaty did not exist, allowing the US to tax foreign-source income of foreign residents. Continue reading “Explaining the Saving Clause III”
This is part 2 of a three part series explaining how the Saving Clause works in international tax treaties. In part 1, we saw how international transactions are taxed for almost 90% of the world’s population under Residence Based Taxation (RBT). We looked at the example of Maria, an Australian resident with rental income in Santiago Chile. Maria pays tax to Chile on the rental income, but is not required to report or pay tax in Chile on any of her Australian income. On her Australian tax return, Maria reports the Chilean rental income and is able to deduct the tax paid in Chile from her Australian tax. Essentially, Chile has the first right to tax Chilean source income. Continue reading “Explaining the Saving Clause II”
Just before Christmas, Karen released our initial Steering Committee work on the group strategy for your feedback through the blog comments, our Facebook Group or Private Message. Perhaps the timing was not the best given how frenetic things get for most of us over the holiday season? Continue reading “Strategy Document Feedback”
When it comes to fixing the tax treaty, the “Saving Clause” is a key piece of the puzzle. From the discussion that followed the Strategy Roadmap, it is clear that many find the saving clause very confusing. So, in a series of three posts, I’m going to attempt to explain how the saving clause works and why it is important. In this first post we’ll look at how international tax works under the Residence Based Taxation model used by three quarters of the taxing jurisdictions in the world and covering almost 90% of world population, without the saving clause. The second post will look at how the saving clause, coupled with Citizenship Based Taxation changes the result. In a nutshell, we’ll see that the saving clause allows the US to tax US citizens living in Australia on their Australian source income. The final post will explore ways to fix the problem. Continue reading “Explaining the Saving Clause I”
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
― Abraham Lincoln
While it may seem like there’s very little activity here, we have been busy behind the scenes. The Steering Committee (myself, Carl Greenstreet, and Caroline Day), have been working on articulating our strategy. We have a very rough draft of our initial strategy roadmap that we are now releasing for comment. There are still many holes to fill – the table of contents shows an outline of where we’re heading.
Previous blog entries have discussed our overall vision. Carl’s Plan to Succeed post foreshadowed much of the structure of the current document. In Priorities I outlined several main goals which have been incorporated here. And in One Step at a Time I talked a bit about the long time horizon that may be necessary in our struggle. The governance section of the document comes mainly from my Steering Committee post. The Strategy Roadmap pulls all of this information into a single document.
This is a first draft. Your comments and suggestions are needed to assist with refining the current document and extending it. Getting the strategy right is an important first step. As the old proverb goes: “What’s the use of running if you’re not on the right road?” You can make comments here, on the Facebook group, or by completing the feedback form on the About page.
Comments will help us develop a coordinated action plan for 2017. We look forward to your feedback, and will be calling for assistance from everyone as our plans for 2017 take shape.
I’d like acknowledge Carl’s efforts in putting together the initial outline that became this first draft. Fleshing out his outline has been a group effort. If you are interested in joining the Steering Committee to help with further refinement of this document, please fill in the form here.
Download the document here: FTT Strategy Roadmap
On 29 November I submitted a Freedom of Information request to the ATO requesting copies of all data about my accounts that was sent to the IRS under FATCA. The fact that I had to ask is outrageous – account holders should be automatically notified when their data is sent overseas. But, current Australian privacy law does not require any notification. Continue reading “FOI Request”
Walter B. Wriston (former CEO of Citicorp): “All the Congress, all the accountants and tax lawyers, all the judges, and a convention of wizards all cannot tell for sure what the income tax law says.”
Applying US tax law to “foreign” legal structures is problematic.1 This is one of the great frustrations of trying to comply with the US system of citizenship based taxation (and one of the reasons why this extraterritorial application of US law should be carefully considered by all countries who negotiate tax treaties with the US). Inevitably there will be differences of opinion as to how US law applies to particular foreign income or taxes – and these differences will lead to different US tax treatment of the same or similar items. There may be no single “right” answer, and we (or the tax professional we have hired) will have to choose how to interpret US tax law to determine our US tax liability on our foreign (home) income. Understanding how our local law meshes with the structures defined in the US tax code is the first step.
In Australia, we have two advantages relative to much of the rest of the world (especially those which are not part of the Commonwealth). First, our laws are written in English. While there are several Aussie colloquialisms that differ in meaning from American English, our laws and other formal writing are written in language that is mostly the same as US English (with a few extra vowels here and there, and the occasional “zed” that has been replaced by an “s”). Second, our legal system is derived from the British system, so many of the underlying principles are at least similar between the two countries. Even so, there are differences.
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 – , ). It appears now that the current FATCA repeal bills will be re-introduced when the new Congress convenes in January.
For those who are not following the Facebook group, I was a guest on a video podcast produced by IRS Medic:
Please share this link with anyone who might be interested.
It’s crystal clear by now that the US and Australian governments are not going to wake up tomorrow and realise that FATCA and CBT are unjust and discriminatory. It will take quite some time to get rid of CBT and move to RBT. The other night I was catching up on my long list of podcasts, and stumbled upon the latest edition of the Freakonomics Podcast – In Praise of Incrementalism. The podcast explores how an incremental approach worked for gay marriage, and the civil rights movement as well as how an incremental approach might be used for current issues such as #BlackLivesMatter. Listening to the podcast soon after reading a discussion about the civil rights movement in the American Expatriates Facebook group, started me thinking about our struggle to get our elected representatives to understand the injustice of FATCA and CBT. When it comes to fixing FATCA and CBT, a home run is unlikely. But each hit makes a run more likely. So while we have our eyes on the prize, we need to also aim for small victories that will eventually make a shift to RBT seem inevitable.
What does incremental look like?
Incremental is SLOW. It’s not exciting. But eventually it gets you there.
The incremental approach is most effective when the obvious, low-hanging fruit, is tackled first. I’ll suggest three potential baby steps that could get us on the road to victory – please add more in the comments.
Many of those claimed as US persons don’t identify as Americans at all. Perhaps they were born in the US, but their non-American parents took them home while they were still children. Or maybe they were born outside of the US with at least one US citizen parent. They may not even speak English. And now, if they admit their place of birth or parentage to their local bank, they are asked to fill out a W-9 so their account information can be sent to the IRS. What right does the US have to tax these people? The injustice is so obvious that President Obama has proposed an inadequate remedy in the 2016 and 2017 budget proposals. And recently there has been some push back against the US taxation of Accidental Americans in France.
Last week’s post argued that US Persons should be automatically notified when their account information was reported to the IRS via the ATO. Implementing this type of reporting would be an acknowledgement that affected US Persons have a right to know who has their financial information. Again, this is a baby step towards overturning the massive privacy violations of FATCA. A comment in the Facebook group argues that privacy is just a distraction, and that we should, instead focus on more substantive problems with FATCA. However, once our governments admit that there are some privacy concerns with FATCA, it may be easier to get them to understand some of the bigger problems.
Same Country Exemption (the right way)
This excellent video by Professor Allison Christians (McGill University) from 2014 was recently linked in the Citizenship Taxation Facebook group.
Starting about 6 minutes into the video Professor Christians advocates a “Same Country Exemption (SCE)” as an incremental approach to dismantling FATCA. SCE has a bad name among some groups of US expats because of a specific proposal that links SCE with IRS compliance. However, I think Professor Christians is advocating a simple SCE without any need for the FFI to check anything other than proof of residence: if you bank where you live, the bank is absolved of all FATCA reporting requirements. Plus, you’re being taxed where you live, so the chances of your “foreign” bank account being used to evade a significant amount of US tax is fairly small. SCE would be a small incremental step that would bring relief to many (not all) of those adversely affected by FATCA. Does it go far enough? No. But, implementing this type of SCE would alleviate at least some of the injustice of FATCA – it would be a small wedge that might allow us to push the door open wider.