Political journalists, like OCCRP, close their eyes for the shadow side of international exchange of tax information. One of the topics that does not interest them is that exchanging tax information may have harmful consequences for decent citizens when illegal tax systems are exported, like is happening to FATCA and the Accidental Americans.
The United States is using the treaties based on FATCA to force financial institutions to report (with the tax authorities as intermediaries) tax residents of other countries to them when they have the U.S. nationality, a nationality may be obtained by birth. In this way the citizenship-based taxation system is exported to Europe and the rest of the world.
In this article I explain the background of FATCA in Europe once again. Those who want to hear a personal story can listen to an audio podcast.
- The vast majority of countries’ income tax systems are based on the residency of taxpayers. Only the United States and Eritrea utilize a citizenship-based taxation system.
- The United States generally automatically grants citizenship to individuals born within its jurisdiction. Other circumstances, such as parentage, can also lead to a person being deemed to be an American citizen by the United States government, even if the individual was born outside the United States. Indeed, some individuals may be considered to be U.S. citizens by the American government despite the person never having had any substantive connection to that country (‘Accidental Americans’).
- All U.S. citizens have to file American tax returns and report their world income, as ‘US persons’. This is a costly affair, a tax adviser is needed. (The US person is a person who has to file tax returns regarding the world income and also includes residents of the U.S. and Green Card holders.)
- According to estimations of the U.S. government fewer than 10% of all individuals who file American tax returns from a “tax home” located outside the U.S. ultimately owe any taxes to the American government. Regardless of whether any tax is due, however, U.S. law requires extensive financial and asset reporting. Failure to comply with these requirements potentially attracts significant penalties.
- The tax treaties between the U.S. and other countries do not help U.S. citizens, because of the many mismatches. Double tax over the same income is possible. Example: when U.S. persons resident in the Netherlands realize a capital gain on the sale of their personal residence (an event that is not taxable in the Netherlands, but is generally taxable in the United States), they can be exposed to significant tax liability to the U.S. tax authority. (In the Netherlands these gains are taxed in another way.)
- In addition to the obligations imposed on citizens under American income tax legislation, the U.S. Bank Secrecy Act requires that American citizens file reports with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department with respect to financial accounts held outside the U.S. that exceed $10,000 (USD) in aggregate. These reporting obligations pre-date FATCA. These reports are known as Foreign Bank Account Reports or “FBARs”. American citizens not only have to file their own information, they also have to report third party accounts when the U.S. person has signing authority on third party financial accounts (violating GDPR in the case of European data subjects). Read also this on FBAR.
- The root of the problem is the U.S. citizenship-based taxation system, that through FATCA and the treaties based on FATCA, is exported to the European Union. It has made financial institutions and the foreign tax authorities to unpaid assistants of the American government.
- Renouncing U.S. citizenship is expensive and difficult.
- The citizenship-based taxation system of the U.S. harms the fundamental rights of all American citizens resident in Europe.
It is peculiar that in the international systems regarding exchange of tax information there are no safeguards against harmful tax practices of third countries.
An interesting article on the subject: A Global Perspective on Citizenship-Based Taxation, by Allison Christians, September 2017.
Audio podcast on the Accidental Americans
The difficulties encountered by Accidental Americans are explained in an audio podcast by American Expat Financial New Journal where a Dutch Accidental American is interviewed
The interviewer is expressing admiration for the courage of the Dutch interviewee. Courage is indeed needed, for instance because many European governments, when concluding the FATCA-treaties (‘IGAs’) with the U.S. government already were aware of the significant problems their residents with American nationality were going to encounter.
Amended 27 May 2021
The article by Allison Christians was added.