Back

Why the US Tax System Needs to Change

A Cry For Help

When I received this email below, from a Saudi Arabian-US dual national, it was reaffirmed for me without any doubt that the current US system of taxation has to change, and that it has to change sooner rather than later.  As a US tax attorney practicing for over 30 years (28 of them abroad), I’ve known for quite some time that the US system of “worldwide” income taxation imposed on US citizens and green card holders regardless of where they live or where they may earn income, is viewed as inequitable and overly burdensome. The email I received, however, served to underscore the notion.  I’ve reproduced it, verbatim:

Dear,

Please i need your support about the tax and i have question ,How can i buy the tax ? What the roles for tax ? What is the highest amount in the year? when taxes are calculated ?

I do not know what to do and today i went to the embassy and give me your email.

Regards,

Y___

The author of the email (“Anon”) is apparently one of many hapless dual-nationals now caught in the big FAT(CA) trap.  He’s obviously never filed a US tax return, is clueless about FBARs,  SFFA’s reportable on Form 8938, PFICs, CFCs and all other variations of the US tax alphabet soup. Here’s a handy summary of the typical tax and information returns required of Americans abroad.  

Now, Anon’s local bank in Saudi Arabia (which is viewed as a “foreign” financial institution for US tax purposes) is probably asking him for a so-called “FATCA certification”.  In all likelihood, the bank noticed that Anon’s Saudi passport listed a US birthplace. As part of the FATCA mandate imposed on this “foreign” bank, Anon must now “certify” his US status or provide evidence satisfactory to the bank that he is no longer a US person.  Anon has probably done some investigating about FATCA and what it means to be a US citizen. Anon has just been given the shock of his life.

Anon may have been born in the US by happenstance while his parents were studying there and thus, Anon obtained US citizenship at birth regardless of whether he or his parents actually wanted it.  His US status probably resulted because he was simply a victim of  the US adherence to the common law principle of “jus soli”, the “law of the soil” under which the place of a person’s birth determines his citizenship regardless of any other factor. He probably obtained Saudi nationality because his father was a Saudi national.  The case of this “Accidental American” demonstrates that multiple citizenship can arise because different countries often have different rules governing the criteria for citizenship with the result that the individual may satisfy the citizenship requirements of more than one nation at the same time.

Multiple Nationalities – Multiple Problems?

Having multiple citizenships can sometimes cause problems since one country’s laws or policies might conflict with those of the other country. Some countries prohibit their citizens from holding dual or multiple citizenships. This prohibition can be enforced by requiring the individual who applies for naturalization in that country to renounce all existing citizenships. It can also be enforced by stripping citizenship from an individual who voluntarily acquires the citizenship of another nation, or by other means. Many GCC countries do not permit dual nationality – for example the Kingdom of Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait. Anon is probably very concerned about the possible consequences of holding both US and Saudi nationalities. 

Hope on the Horizon?

An early December report on tax reform from the staff of the US Senate Committee on Finance shed a much-needed ray of light into the dreary tax world of the US expat community. On page 282, the Republican report stated: “The United States is the only industrialized country in the world that imposes citizenship-based taxation. In other words, the United States taxes its citizens on their worldwide income even if the citizen resides outside the United States and has no connection to the United States other than citizenship.” 

The report added words that lit up the smiles of US expatriates abroad:  “The United States needs to rethink its taxing rules for nonresident U.S. citizens.” The report referenced a proposal from American Citizens Abroad, calling for “residence” based taxation, a model that has garnered applause from tax professionals and Americans living overseas whose worlds have been upended because of the US worldwide tax system and the recent enactment and enforcement of FATCA.   Not only are such Americans facing decreased job, banking and investment opportunities abroad, they are seeing their marriages and personal relationships crumble, are having increased concerns with personal security and are facing what feel like insurmountable obstacles in trying to become US tax compliant.

Perhaps the New Year will bring further attention to these matters and see some much needed action take place in Congress.

A reader of my blog pointed out that there is an active international movement to repeal FATCA and to change the US tax rules for ex-pats. He sent these links: https://www.abolishfatca.com/live/ and https://fatcalegalaction.com/

 

Follow me on Twitter: @VLJeker


Leave a Reply

Your email address will not be published. Required fields are marked *

Name *