Call it a Christmas miracle, but something unique happened over the holidays: A conservative Republican made a move that even Democrats applauded.
N.C. Congressman George Holding introduced a bill on the last week of the session called the “Tax Fairness for Americans Abroad Act.” The bill, which would allow more equitable treatment of Americans overseas, was applauded by both political parties abroad.
Why is this so important? Because draconian U.S. tax and financial legislation has been prompting Americans abroad to give up their citizenships in droves. What used to be a couple hundred of “relinquishers” a year is now tallying above 5,000 annually. Many are fleeing the negative impact of a trifecta of heavy-handed regulation.
The root of the problems lies in citizen-based taxation. Only the United States and Eritrea tax their citizens based on citizenship. That means Americans who live and pay tax abroad are also subject to U.S. tax laws unless addressed in a treaty or in specific tax codes. There are a number of new laws that have ensnared the 9 million Americans overseas, making it difficult to run a small business or even open a bank account.
Holding’s bill changes the root of the problem. It would allow for a residence-based tax system and could pave the way to solve some of the newer ex-pat tax perils too.
One of those new laws is FATCA. The Foreign Account Tax Compliance Act was established to catch tax evaders — such as rich Americans who live in New York City and hide money in Switzerland. New FATCA treaties require foreign banks to gather Social Security numbers (heightening the risk for identity theft) for all Americans, including those who live abroad. It requires banks to gather and report at a level deeper and broader than an individual’s requirement. Even five-year-old toddlers with a couple hundred dollars are being forced to provide signed IRS forms to foreign banks.
Many banks don’t want the hassle and are kicking out Americans, refusing them accounts, credit cards and mortgages. Even dual citizens — say, someone with French and American passports — are being refused financial services overseas because of their American half.
FATCA “disregards the Fourth Amendment and privacy rights by requiring the bulk collection of innocent Americans’ financial records,” according to U.S. Sen. Rand Paul, who wants it repealed.
It would be too easy to just blame regulation-loving Obama years for this. Sadly, the Trump era has exasperated the situation with last year’s big tax bill.
Part of Trump’s tax bill introduces two new international taxes — the transition tax and GILTI. These target trillions of dollars in profits held abroad by behemoth companies, including Apple and Google. The bill forgot however to distinguish between Google and small business owners or to set any kind of minimum.
Regarding the transition tax, an American accountant who runs a small business in Israel or Canada has to pay retroactive tax on profit “held overseas” going back to 1987. That includes profits they are saving for retirement or education. The new law isn’t covered in tax treaties, so the small businesses pay taxes twice. In some countries that means paying up to 50 percent first to the resident country and then an extra 17 percent retroactively to the U.S.
The GILTI tax starts in 2018. Under that, the small businesses still pay tax in their resident country and then more tax to the U.S. The calculations are complex and require expensive professional preparation. I know of at least one foreign-based small business owner that is preparing to sue the Treasury Department as a result.
Grover Norquist tweeted that “the biggest mistake of Tax Reform (otherwise, a great step forward) is ignoring the Americans who work overseas. Companies will no longer be double taxed. But Americans abroad will still be. This must be fixed, ASAP.”
He’s not being overdramatic. I’ve seen people panic and cry on social media from Australia to Finland about this. They are being forced to choose between selling their home and using pension savings to pay this tax or give up their beloved citizenship. (And the latter option isn’t free either. It costs at least $3,200 these days.)
It is unusual that Rand Paul, Grover Norquist, Democrats and Republicans and I all agree, but that day is upon us.
I can’t help wonder what the writers of our Constitution would think of all of this? It’s time to fix this before we start seeing smart Americans abroad receive Nobel prizes or start successful companies under another flag simply because they couldn’t afford the undue burden of being an American overseas.
How embarrassing for us. How sad to see fellow Americans give up their passports for this.
Marybeth Sandell is a communications specialist from the Sandhills area and former UNC Pembroke professor currently living in Europe.