On Monday, February 2, 2015 the Treasury Department unveiled the Obama Administration’s 2016 Budget, known as The “Green Book”. In all likelihood the provisions in the Budget will never become law – especially as the Republicans now control a majority of seats in the House of Representatives. One item in the Budget was of profound interest – a revenue proposal to “provide relief for certain accidental dual citizens” see page 282.
In the Proposal, significantly the Administration acknowledged that many Americans have US nationality foisted upon them by happenstance. There is express recognition that many individuals who wish to expatriate have valid reasons, well aside from US tax, for doing so. For example, the proposal recognizes that it may be illegal for an individual who is a citizen of a particular country to hold another citizenship. This is generally the case, for example, in GCC countries.
The proposal recognized that many such dual nationals wish to formally expatriate the US, but noted they must be able to certify US tax compliance for the 5 years prior to the year of expatriation: “Because U.S. citizens are subject to U.S. Federal income tax on their worldwide income, dual citizens who choose to expatriate may be required to pay a significant amount of U.S. tax before they are able to certify that they have satisfied their U.S. tax obligations for the five taxable years preceding the year in which they expatriate.” The Administration seemingly recognizes that worldwide taxation is simply not appropriate when an individual has had only very minimal contact with the US despite technically being a US citizen under the US laws.
Details of the Proposal
The proposal exempts certain individuals from both (i) annual US worldwide income taxation and (ii) taxation as a “covered expatriate” under the Exit Tax regime of Code Section 877A. (Note – No mention is made of exemption from the punishing taxes imposed on US recipients of gifts or bequests from “covered expatriates” under Code Section 2801.)
The Administration’s proposal provides as follows:
“[A]n individual will not be subject to tax as a U.S. 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.
The proposal would be effective January 1, 2016.”
Many individuals will not qualify for the benefits of this proposal because the tests are very stringent. For example, the individual must have attained his dual nationality at birth – he must have been born both a US citizen and citizen of another country. Obtaining another country’s citizenship by naturalization later in life due to eligibility from a parent or other ancestor will not count. In addition, the individual must never have held a US passport, or, if he did, it must have been for “the sole purpose of departing from the United States in compliance with 22 CFR §53.1”
Emphasis on US Passport
While there are many other points that can be raised about the Proposal, I will focus on the Administration’s emphasis with respect to the US passport. Generally, the referral to 22 CFR §53.1 deals with a US citizen’s entry or departure from the US. Section 53 provides that it is unlawful for a US citizen to enter or depart, the United States, without a valid US passport, unless an appropriate exemption applies. The Administration’s proposal limits eligibility for those who hold a US passport. The proposal permits obtaining a passport only for “departure from the US”. Due to the passport limitations contained in the Administration’s proposal, it will be feasible for only a handful of persons. Specifically, the proposal can benefit one who has never had a US passport (in my practice the dual nationals I have met have all held US passports at one time or another), or one who obtained a US passport as a child after being born in the US strictly so that he could leave the US with his parents in order to return to their homeland.
The Proposal does not permit having held a US passport for purposes of entering the US. It seems to me that if the dual national had a US passport and entered the US with his other country’s passport, he’d be in violation of the US law contained in 22 CFR §53.1. Thus, the dual national who had a US passport might benefit from the Administration’s provision only if he never entered the US (e.g., not even for a visit) – unless the provision is also available to the dual national who may have entered the US on his other country’s passport, presumably in violation of 22 CFR §53.1.
The emphasis by the Administration on the holding of a US passport is very telling. It reflects the view of the Administration that applying for, or holding a US passport is a clear indicia that the individual is a US citizen and that this provides a subjective and objective affirmation of his or her US citizenship. Sadly, I have had dual national clients advise me that they were given incorrect information by the US Department of State through its Embassies and Consulates to the effect that the person “must have” a US passport to enter the US or certain other countries. These are individuals who committed expatriating acts with the subjective intent to relinquish US citizenship (usually by taking on another country’s citizenship; and generally with many of my clients, the other country prohibits holding any other nationality), but who are later advised by the US Consulate or Embassy that they must have a US passport in order to enter the US. Typically the individual will then believe the US passport is “only” a travel document and is not somehow an affirmation of US citizenship. Those who committed expatriating acts years ago and are trying to obtain Certificates of Loss of Nationality (CLN) back-dated to the date of the prior act know that renewing or using a US passport after the date the potentially expatriating act was committed can be a death knell for issuance of the CLN.
What Might the Future Hold?
While the Proposal is untenable for many “Accidental” dual nationals, I believe it may still be a good sign. The Administration’s Proposal may be quite significant in that it arguably indicates it is beginning to see that the law should recognize there is indeed a difference between a “technical” and “formal” definition of US citizenship and the substantive or meaningful definition, the latter of which is the only one that should attract citizenship-based worldwide US taxation. Put another way, maybe the Administration is coming full circle and finally recognizing there should not be “taxation without representation”.
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