Residence-Based Taxation Put Forward For Americans Abroad

With regard to the increasing talk in the US Congress on tax reform, American Citizens Abroad (ACA) has provided the House of Representatives Ways and Means Committee with a full reform proposal for the enactment of residence-based taxation (RBT) for American expatriates.

ACA has said lawmakers should enact RBT instead of the present citizenship-based taxation (CBT) system because it would reduce compliance burdens for expatriates, eliminate double taxation and costly double reporting, and improve competitiveness.

Under the current CBT, Americans abroad remain subject to US taxation as though they were still US residents. Under RBT, US residents, whether Americans or foreigners, would be subject to US income, estate, and gift taxation, while Americans resident abroad could elect to be treated in a manner analogous to non-resident aliens and only be taxed by the United States on US-source income.

Americans abroad would still be taxed through a system of withholding taxes on passive US source income (such as dividends, interest, and royalties); capital gains and rental income taxes on US real estate; and normal income taxation on “effectively connected” income earned in a trade or business in the United States. They would also remain subject to US estate tax on assets located there, including real estate and securities.

If a departure or exit tax based on the mark-to-market valuation of unrealized capital gains at the time of departure is a condition imposed by Congress, ACA’s position is that there should be a “grandfather” clause shielding overseas Americans meeting certain residency minima from the tax, together with a high asset exclusion threshold for Americans leaving the United States and measures to help holders of illiquid assets meet their exit tax obligations.

Following an analysis of Internal Revenue Service (IRS) statistics, ACA also considers that a switch from CBT to RBT would be revenue neutral. Under CBT, the IRS already “recognizes the first right of taxation of the country of residence, and, due to the crediting of foreign taxes, collects no tax from the vast majority of Americans abroad.”

The National Taxpayer Advocate has previously said that “about 82 percent of all Americans abroad owe no US taxes. For most Americans abroad, the real hardship of CBT is the cost, time, and legal risks involved in compliance.”

Tax revenue from Americans abroad is found to account for less than 0.2 percent of total US tax collections. Under RBT, it is noted, the United States would be able to claw back revenue, mostly through withholding taxes on financial assets and taxes on US effectively connected income.