Canada: US Proposes Relief For Some Who Renounce US Citizenship: Is FATCA A Motivating Factor?

On February 2, 2015 the Obama Administration acknowledged the plight of certain US citizens residing abroad and proposed limited relief. In the "General Explanations of the Administration's Fiscal Year 2016 Revenue Proposals"1, known as the "Green Book," the Administration proposed a change to US law (the "Proposal") that would allow certain dual citizens to renounce their US citizenship without the fear of delinquent tax filings, penalties, the US exit tax, and the other consequences to being a covered expatriate.

The details of the Proposal, and the chances of being given the effect of law, while interesting, are less so than the Administration's motive for advancing it. Politicians don't get re-elected by winnowing away their constituency base or enacting legislation that has the effect of raising tax (even in small measures). Normal people, even politicians, behave rationally so there must be a reason for the Proposal. Could the Proposal play a small part in a more subtle strategy that might involve foreign opposition to FATCA and IGA-partner domestic legislation?

Some Canadian dual citizens who wish to renounce US citizenship may qualify

In the Green Book under the heading "Simplify the Tax System: Provide Relief for Certain Accidental Dual Citizens," individuals who became dual citizens of the US and another country at birth, remain a dual citizen of that other country, and have minimal contacts with the US would be able to renounce US citizenship without having to file delinquent US tax returns and escape the US exit tax, and other negative consequences of being considered a covered expatriate.

Specifically the Proposal provides:

...an individual will not be subject to tax as a US citizen and will not be a covered expatriate subject to the mark-to-market exit tax under section 877A if the individual:

1. Became at birth a citizen of the United States and a citizen of another country;
2. At all times, up to and including the individual's expatriation date, has been a citizen of a country other than the United States;
3. Has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½;
4. Has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1;
5. Relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen; and
6. Certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.

This is a positive development because it represents an official acknowledgement of one unfortunate result of citizenship based taxation: US citizens are taxed on their worldwide income regardless of whether they have ever set foot in the US or availed themselves of US citizenship.

As drafted, the Proposal would apply to a certain subset of individuals who had citizenship foist upon them without the benefit of ex-ante counseling as to their choice of parents or place of birth. And that of course includes everybody who was ever (or will be) born. However, these individuals are unique because as US citizens, by parentage or place of birth, they are then taxed on their worldwide income.

Will the Proposal become law, and is the back door unlocked?

It is important to remember that the Proposal is not law, and it is not even proposed law. It is simply a portion of the Administration's 2016 revenue proposals. Before it can become law, the entire budget proposal is vetted independently by both the House of Representatives and the Senate, they then agree (or not) on a consolidated version, which becomes the budget resolution and is binding on both houses of Congress, but is not yet law. The budget resolution becomes the blueprint for actual appropriation and bill-making process. In other words, there is a lot of work before the Proposal will become law, if at all.

In Canada we are accustomed to Parliament passing a budget bill every year; however in the US, the law-making process is much less certain. The last time the US approved a true budget bill was in 1997 during the fifth and sixth years of the Clinton Administration. In that year, the Democratic Party controlled the Executive Branch and little else because both the House of Representatives and the Senate were controlled by the Republican Party. Thus, although it is a rare event that budget bills get passed into law, the last time it happened (as now) the President's political party was the opposite of the controlling party in both houses of Congress.

In spite of the apparent long-odds that the proposal will become law, there is a back-door that could give the Proposal the effect of law without being processed through the Congressional meat grinder. The back door was left unlocked by Congress in 2008 when it enacted section 7701(a)(50) of the Internal Revenue Code, which provides:

Termination of United States Citizenship

A. In General. An individual shall not cease to be treated as a United States Citizen before the date on which the individual's citizenship is treated as relinquished under section 877A(g)(4).

B. Dual Citizens. Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.

Clearly, Congress has given the US Treasury the authority to adopt special rules to determine the date on which an individual lost his US citizenship, provided he was a dual citizen at birth. Section 7805 authorizes the Treasury to issue such regulations in temporary, and therefore effective form, and since the regulations would be legislative in nature the only notice required is that found in the Administrative Procedures Act (as little as 30 days). In other words, regulations that carry the weight of law could be issued quickly.

Of course, hammering the terms of the Proposal into regulations would likely require some work because they would have to reflect Congress's intent when it adopted 7701(a)(50)(B). However, once regulations are issued they are difficult to legally overturn. Provided Congressional intent is clear, the US Supreme Court2has stated that regulations are given controlling weight unless they are "arbitrary, capricious, and manifestly contrary to the statute."

Why would the Administration propose relief to people who wish to renounce US citizenship?

The Proposal possesses a visceral, and even humanitarian, resonance. However, the fact is that when taxpayers renounce their US citizenship, thereafter they neither vote nor pay taxes. It must be a universal truth that politicians do not get reelected by giving any type of relief to individuals who will, by definition, become non-voters. Further, the Office of Management and Budget calculates that, if it becomes law, the Proposal will result in a loss of revenue of $403m from 2016 – 2025.3 Politicians in the US frequently face pointed, uncomfortable questions from their constituents at election time when they've raised taxes, slight though they may be.

Even though the Proposal estimates a modest drain on the public coffers, the Proposal may prove to be a net benefit because revenue loss is only one side of the equation. The other side of the equation is the cost to the IRS required to process 5 years of tax returns for thousands of annual expatriates. According to the most recent statistics available, only 9%4 of the US citizens residing abroad owe US tax, thus the IRS's administrative cost to process the tax returns for renouncers could easily exceed the revenue collected. Waiving the filing requirements for these US citizens who are dual at birth could therefore be net accretive.

Another possible cost-saving motivation could be the compliance burden associated with FATCA. In 2015, foreign financial institutions will begin to report the holdings of US customers. If the Proposal is given the force of law, many of these individuals, who otherwise would have been reported, will be excepted if they renounce their US citizenship.

Is there another motive to relieve these dual citizens from tax and filing obligations?

If the foregoing cost-benefit analysis seems to stretch the bounds of logic, you're likely paying attention. The simple fact of the matter is that the Proposal is unlikely to find a champion in Congress because, while the right thing to do, it is not the type of platform that has the sizzle required to get anyone re-elected.

If we assume that the Proposal faces strong political headwind, as I believe we must, why is it there? Is there a strategy the Administration is pursuing in which the Proposal plays a role? Otherwise, why waste the paper, or even pixels?

One reason that makes some sense is that the Proposal was included in order to quell opposition to FATCA in IGA-partner jurisdictions. Recall that IGAs are typically not self-executing and require domestic legislation to go into effect. Many of these IGA partner countries may find it difficult to pass legislation that disparately treats those with only domestic citizenship and those who have dual citizenship. The Proposal would make renouncing US citizenship for some a much less draconian process, and thus may stem domestic legal challenge.

For example, in Canada there is active litigation that challenges the legality of the legislation that implements the IGA. According to the Statement of Claim, both plaintiffs were born dual citizens. If the Proposal were given the effect of law, and if they qualified under the terms, presumably they would be entitled to renounce their US citizenship and avoid the appurtenant filing obligations, failure to file penalties, and tax obligations. Whether that would be sufficient to nullify the lawsuit is a question for Canadian constitutional and litigation lawyers, of which I am not.

Conclusion

Regardless of the Proposal's chance of being given the effect of law, the Administration's motivation for bringing it forward, or the narrow class of individuals to whom it would apply, the Proposal is positive step. It is evidence that the unenviable predicament faced by dual citizens living abroad has been heard in Washington, DC and there may be the political will to affect change. Change may come quickly or not at all, but it will never come until there is understanding of the issue. The Proposal is an indication that understanding may be taking hold.

Footnotes

1. http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf

2. Mayo Foundation for Medical Education & Research v. United States, 562 U.S. ____; 131 s. Ct. 704, (2011); Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

3. http://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/tables.pdf

4. National Taxpayer Advocate 2011 Annual Report to Congress at 156. Citing Memorandum for Secretary Geithner from J. Russell George, Treasury Inspector General for Tax Administration, Management and Performance Challenges Facing the Internal Revenue Service for Fiscal Year 201113 (Oct. 15, 2010).

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
15 Oct 2018, Other, Calgary, Canada

Canada and the United States treat Cannabis differently. Get insights on how Canada’s legalization of adult-use cannabis on October 17, 2018 will impact cross-border trade and investments between Canada and the US.

18 Oct 2018, Webinar, Calgary, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad. Many US residents will see an immediate benefit on their 2018 tax return, but for US expats and green card holders living abroad, things may have changed for the worse.

20 Oct 2018, Seminar, Vancouver, Canada

On Dec. 22, 2017, President Trump signed into law the biggest US tax reform bill in 31 years, changing the lives of Americans at home and abroad.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions