Demand for Residence Based Versus Citizen Based Taxation
As politicians in Washington debate President Trump’s proposed tax reforms, Republican expat groups and Democratic allies are seizing the opportunity to present their own demands. They want to be taxed according to the country in which they live and no longer according to the country in which they hold citizenship. Along with a petition signed by thousands of US citizens around the world, the campaigners will give the Trump administration a detailed report on the benefits of a residence based income tax for the American economy, including an increase in exports and more tax revenue from wealthy foreigners living in the US.
A Controversial Tax Reporting Mechanism
Many expats also hope for a repeal of the Foreign Account Tax Compliance Act (FATCA), which took effect in 2014 and aims to deter tax evasion by Americans holding offshore accounts. FATCA requires Foreign Financial Institutions (FFIs) to report to the IRS information on accounts controlled by US persons (citizens or aliens admitted for permanent residence) with balances above a certain threshold: $50,000 for US residents and $200,000 for US expats. The IRS then compares the information provided with tax returns to ensure that all global income gets properly reported.
FATCA elicits controversy, not only because some people consider it an invasion of individual privacy, but also because of the perception that the US is coercing other countries into complying with it. For example, the Canadian government under former prime minister Stephen Harper claimed that it was forced to accept an information sharing deal imposed by the US under threat of penalties. Last year, the Canada Revenue Agency (CRA) turned over to the IRS banking records for more than 315,000 US persons living in Canada, twice as many as in 2015 (the first year the deal took effect). The CRA attributes this dramatic increase to the fact that Canadian financial institutions have had more time to conduct due diligence and pinpoint additional accounts that require reporting.
Launch of the Common Reporting Standard
Despite FATCA’s questionable tactics, it has encouraged similar legislation among other countries. In 2014, the Organization for Economic Cooperation and Development (OECD) developed the Common Reporting Standard (CRS) to combat tax abuse and evasion worldwide. This month around 50 countries participating in CRS will begin automatically exchanging financial account information with each other. Unlike FATCA, the CRS has no minimum balance that triggers reporting; Any size account can be subject to its requirements.
FATCA and International Money Transfers
About one hundred countries and thousands of financial institutions around the world participate in FATCA and regularly share customer account information with the US. Non-participating FFIs may be required to withhold taxes on behalf of the IRS for certain types of payments to US persons. Withholdable payments include interest, dividends, rents, salaries, and wages from sources within the US. In general, neither foreign exchange transactions nor remittances—sending money from the US to friends and family abroad—are subject to FATCA withholding, because they involve the transfer of funds from one place to another rather than an increase in income. However, gains from foreign exchange contracts, such as forward contracts (read our guide on managing currency risk), may be taxable. Be sure to double check with a tax advisor.
When transferring money to offshore accounts, US expats may be hard-pressed to escape the long arm of the IRS, at least for now. But they can keep a little bit more of their own money by relying on non-bank money transfer providers, which typically offer better exchange rates and lower transaction fees than traditional financial institutions. Use our comparison tool to identify the least expensive provider for your needs. And be glad Uncle Sam can’t get a hold of your savings!
