US taxes its citizens abroad on their worldwide income so that they don’t get the benefit of US citizenship without paying taxes to at least someone. If you have mostly investment income and live in a tax shelter, why shouldn’t you be required to pay American taxes if you’re able to jet around the world on your US passport?
Also, it’s not all downsides. If you live in a high-tax country and thus can get all your income tax credited due to foreign tax paid, you can even take advantage of US citizenship if you have US citizen children and earned income, being able to get up to a $1400 Additional Child Tax Credit currently per child that qualifies for the Child Tax Credit. I discovered this recently while preparing a return for an ex-pat that normally is a zero return, but some questions he asked made me think of the possibilities, and it all lined up for him to get the US government to send him $1400 just for being a US citizen and having children and earned income, despite not living in, working in, or paying any tax at all to the US.
The problem arises in combination with America’s legal situation of granting birthright citizenship to anyone born on U.S. territory, no matter the reason why the parents were there at the time of birth. It’s actually not at all rare that people hold U.S. citizenship because they were born there but have, otherwise, no connection to the country whatsoever; maybe their parents were temporarily working in the States and moved back to their home country soon thereafter, and took the children with them. Result: There are people with U.S. citizenship, in addition to the citizenship of whatever country their parents originally came from and where they grew up, who may never even have been to the States again in their lives and are, for all intents and purposes, nationals of that other country (and whose passports they use to “jet around the world”). I know such cases personally. Nonetheless, they are obliged to submit tax returns to the IRS. Maybe not actually pay taxes to the IRS because the foreign tax credit saves them from that, but just submitting the paperwork is a hassle. In addition, they have trouble finding a bank in their home country that wants to do business with them, for fear of doing FATCA paperwork (or being fined in America if they get it wrong).
Sure, they could renounce American citizenship to avoid that. But if that puts you in a situation where it becomes actually more difficult for them to travel to the U.S. afterwards than it is for someone who was never a U.S. citizen to begin with, then this is not an easy call to make. I’m not saying there is something fundamentally wrong or unethical with the U.S. system; but this unusual combination of automatic birthright citizenship on jus soli grounds, plus subjecting any U.S. citizen annywhere in the world to U.S. tax law, plus retaliating on someone who renounces U.S. citizenship, has a potential for making things nasty for people who are not in the least bit at fault for being in that situation.
Unlikely scenario, since almost all countries base taxability on domicile rather than citizenship. If you’re a resident of a country (and surely you are a resident somewhere), then you’re paying your taxes to that country, no matter which passport you hold. By the way, the U.S. does the same - foreign nationals residing in the U.S. do, of course, pay taxes there (subject to potential double taxation treaties). The taxability of U.S. citizens under U.S. law is in addition to, not in lieu of, domicile-based taxation.
Yes, and Eritrea apparently enforces this by threatening any relatives back home if the diasporiazed fail to pay.
The USA has tax treaties with a number of countries to accept each others’ tax rules - my father once called to verify the over-65 pension deduction for Canadian income, which he could apply doing his US taxes.
As others point out, the problem is more legal. When FACTA came out, a large number of dual US-Canadian citizens, with very little connection to the USA, suddenly found themselves in the position of having to allow US authorities to know their financial business. One lady I know had a brother about 50 years old, who had lived in Canada since he was a toddler. Anyone with foreign assets over $100,000 had to declare them, and had to file tax returns. An RRSP (retirement plan) could easily get over $100,000; most houses in Canada are worth more than that. People were getting notices from their banks that their information was being shared with US authorities.
Other countries were worse - apparently many European and other foreign institutions simply told their American customers thanks but we don’t want your business any more. (or worse yet, local citizens married to Americans got the same treatment because - communal property).
If Washington thought a bank had not reported truthfully, they were subject to a fine and withholding on any money due. Worse than trying to sort out any errors (not even deliberate misreporting) would be that their funds and abilities to transact with other banks would be frozen while expensive lawyers argued with the American government for who knows how long. Why bother inviting the hassle? This is, of course, the 500-pound-gorilla principle. If Eritrea tried that, nobody would pay attention.
How does that work in practice? Let’s say that I move from the US to the UK and go through all of the legal steps to become a UK citizen. I tell the IRS that they can go pound sand and that I’m not filling out any tax returns or paying them shit.
Will the UK extradite me? Will I be arrested if I land at JFK airport?
Extradition is a tedious process. It has to be applied for by the requesting country and reviewed by the courts in the requestee country, and that can take a while. There is an extradition treaty between the US and the UK, and it does not allow for the UK to refuse extradition of a British citizen simply on grounds of that citizenship, but the procedure for actually extraditing someone is long and cumbersome, so probably not the main thing to worry about. But the latter example - being arrested by U.S. authorities once you come within their reach - is not far-fetched. The IRS, having been told by you to go pound sand, could have an American warrant for your arrest issued, and then you better stay away from transferring at American airports.
IIRC the charge has to be a crime in the country extraditing too - and AFAIK not paying US taxes is not a British crime.
(This is the contention with the Huawei exec arrested in Vancouver. The claim is she defrauded a bank by claiming that the subsidiary allegedly doing business with North Korea was not doing so. Because that bank does business in the USA, the claim is she committed fraud. One argument against deportation is that this is not a crime in Canada, to lie to a Chinese bank that has ties in the USA. )
It depends how badly the USA wants you. They may arrest you to encourage you to pay taxes - and any outstanding fines related to those failures to file. They may try to seize your bank accounts - hence the reluctance of foreign banks to do business with Americans living overseas, they also don’t want to get into this mess of what can and can’t be seized.
That seems peculiarly narrow. That seems to me like saying if I commit a murder in Maryland, then the UK would not extradite me because “murder in Maryland” is not a crime in the UK.
I would think that “failing to pay taxes” is a crime in both the US and the UK so it would be one that is eligible for extradition.
Failing to file and pay taxes to the USA while not living in the USA that year… the UK does not have the requirement that a person not living in the UK, not earning in the UK, pay taxes in the UK. So the equivalent act is not a crime in the UK. (I hope - since I have UK citizenship and have never done anything there, never even been there for longer than 3 weeks, and then only 3 times in my life…)
The question as I understand it (IANAL) is would the equivalent act in the UK be a crime? I.e. is lying to a police officer (as opposed to outright obstruction, misdirecting them) a crime in the UK the way a lie to the FBI or congress is in the USA? Is importing a Kinder Egg a crime in the UK? Is constructing a cash transaction to keep each amount under $10,000US a crime in the UK? Is committing fraud in a third country a crime in the UK?
the USA has some pretty specific “500 pound gorilla” laws.
That’s sort of my point. Every single law between the US and the UK will be different in some way. Even laws between US states are different.
Take the structuring law, for example. Say the UK (just making this up) has a law that says you cannot structure cash withdrawals of less than 10,000 GBP to evade reporting requirements. Is that the same as the US law? The US law mentions dollars, not pounds, and the exchange rate makes the value of GBP different than USD.
So was what I did a crime in the UK? In the US, I made no withdrawals of GBP at all.
I’m sure we could analyze every law and show how it is different from the US to the UK. Do we look at the underlying conduct or the words of the charging instrument?
And how specific do we look? I’m sure that UK law doesn’t parrot exactly how and for what purposes that US citizens have to pay their taxes. But the UK law requires UK citizens to pay their taxes according to the dictates of the UK government. Why is that not similar enough to say that US citizens must pay their taxes according to the dictates of the US government?
It is interesting and perhaps we should take it to another thread as I see belatedly that we have likely hijacked the OP’s question.
The underlying conduct, of course. Otherwise there would never be extradition between countries that use different legal terminologies (or different languages, for that matter).
Okay, so in my structuring example (assuming the UK has a similar law at 10k GBP) how does one analyze that. I never withdrew any GBP, and as 10,000 GBP is about 13,000 USD if I consistently withdrew $9,990 at a time, is that to evade a British reporting requirement?
After all, the UK law does not make it illegal to try to fool the US government, only the UK government, and I didn’t try to do that. So my action would not be a crime in the UK, no? And is the relationship between $9,990 and $10k the same as $9,990 and $13k?
It seems like my prior hypo. I murdered someone in Baltimore, MD. But murdering someone in Baltimore, MD is not a crime in the UK. The UK murder laws (I’m guessing) would specifically say that it had to be done in the jurisdiction of the UK, so therefore my murder would not be a crime in the UK.
It seems that the “underlying conduct” approach is fraught with just as much peril as the charging instrument approach.
There’s an in-between approach that is used in a particular situation at my job* which involves looking at the statute , not the whole of the criminal law or the name of the crime. For example, in this NJ statute
Nothing in the statute says the conduct must have taken place in NJ ( that’s elsewhere in the code) and the behavior described in the statute would be charged as “robbery” in neighboring NY - but in the situation I’m talking about , the behavior would be a crime in both NJ and NY , even though the crimes have different names.
persons who are under community supervision in my state violate the rules of that supervision if they commit a new crime. And charging someone with a new crime committed in another state requires that the behavior be a crime both in that state & here- if the behavior is prohibited in both states, but it’s a less than misdemeanor offense in one, they aren’t equivalent.
If (we’re assuming this here) both jurisdictions have a requirement to report cash withdrawals above a certain threshold, and they also have a law making it a criminal offence to smurf withdrawals (i.e., splitting up a withdrawal into several smaller ones, each below the reporting threshold, with the intent to circumvent the reporting requirement), and you commit smurfing (i.e., you split up your withdrawals into smaller units to circumvent the reporting requirements in the relevant jurisdiction), then the requirement of double ciminality (that’s the keyword you want to google if you want to dig into the matter) would be met. If you commit the act in Britain and you smurf according to British law, but American law has no reporting obligation, or a reporting obligation but no corresponding criminalisation of smurfing, then there would be no double criminality.
No, UK law does not specify that a murder is only a murder if it takes place in the UK. Substantive British law defines murder; procedural British law defines the circumstances under which British courts have jurisdiction to try murder. If British law says that British courts do not have jurisdiction over a particular murder case (for instance, because it took place in the US, and no British person was involved in it either as perpretrator or as victim - the latter scenarios might also be grounds for jurisdiction, in addition to territoriality), then British courts will not hear the case. From the perspective of substantive British law, it is, however, still a murder, and meets the requirement of double criminality if American authorities request extradition for murder.
Having said that, as everywhere in law, there is debate. As far as double criminality is concerned, the debate is, among others, about how much in abstracto (comparing the abstract definitions of the criminal offences in the two jurisdictions) or in concreto (looking at whether the act in the specific case would be punishable in the two jurisdictions, independently of what the statute that criminalises it says) the analysis should be.
Very interesting and thank you. I will do more research when I have the time.
But as far as my response to the prior poster who said that as the UK has no law about paying US taxes, wouldn’t that be incorrect under your analysis?
As the UK does have laws about paying taxes when required, wouldn’t that apply for extradition purposes to a US citizen living in the UK?
I think you see my point. We can look at the law broadly or narrowly. The UK law says you must pay all taxes due to the UK. But as you point out, that is a jurisdictional and not a substantive thing.
But what if the UK didn’t have an income tax at all, but substituted a much higher general VAT and property tax as its replacement? It’s still a tax due the government, but would the fact that it was specifically an income tax that I didn’t pay the US versus a general VAT or property tax (that the US does not have, at least at the federal level) make a real difference? On one hand I think it would, but on the other, it is merely form over substance.
