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The Fleeing Freedom of American Expats

Article Summary:

The Foreign Account Tax Compliance Act (FATCA) was designed to catch American tax cheats living abroad, but its consequences have been considerably more far-reaching, leaving many U.S. expats feeling less than free.

Photo Credit: National Post

Original Article Text From National Post:

American expats feeling less free as draconian tax law kicks in

Full Comment’s Araminta Wordsworth brings you a daily round-up of quality punditry from across the globe. Today: It was designed to catch American tax cheats living abroad who were less than candid in the returns filed with Uncle Sam. But its consequences have been considerably more far-reaching.

In 2010, U.S. President Barack Obama signed into law the Foreign Tax Compliance Act (FATCA). The Bush administration legacy, which comes into force in January, adds extra muscle to longstanding legislation requiring expatriate Americans to file U.S. tax returns.

It also obliges foreign financial institutions to report offshore accounts held by Americans — or face a 30% withholding tax on some of their U.S. source income.

There’s no doubt there is a problem: Congress estimates the value of lost taxes overseas at US$100-billion a year. However, FATCA will do little to close the gap. It is expected to raise only $8-billion over 10 years.

Meanwhile, it’s causing a lot of grief, persuading expats to turn in their passports in unprecedented numbers (for the U.S., that is, which has had few people renouncing its citizenship ). The most high-profile is probably Eduardo Savarin, the billionaire Facebook co- founder, who is happily paying less tax in Singapore.

More damagingly, spooked foreign financial institutions are refusing to accept Americans living abroad as customers. Many also plan to pull back on their investments in the U.S. — which of course has serious implications for the country’s still-faltering economy.

As Tom Geoghegan reports for the BBC, the number of expatriate Americans saying goodbye has rocketed — to 1,131 in the second quarter, compared with only 189 in the same period in 2012.

Suddenly, some expats are waking up in a cold sweat. They have always had to file tax returns and disclose foreign accounts on a form called the FBAR, although in practice many didn’t. But now FATCA means they have to be more rigorous or face huge fines, in the knowledge that the U.S. authorities could know a lot more than they have in the past.

Many would say the IRS is only trying to get what it is owed, but critics say that in trying to track down the wealthy tax-dodgers, ordinary people are being dragged into an expensive and time-consuming form-filling nightmare. And for some, it’s become too much.

Not that leaving is cheap. A miffed Uncle Sam dings departing citizens with a hefty exit tax, say Muzaffar Chishti and Faye Hipsman at Migration Information Source.

Since 2008, a renouncing U.S. citizen must pay a $450 filing fee and an expatriation or exit tax. The expatriation tax applies, with limited exceptions, to those who earned at least $151,000 in 2012; have a net worth of $2-million or more on the date of their expatriation; or have failed to properly file taxes for any of the past five years. Their assets are treated as if liquidated at the time of expatriation, and any net unrealized gain over $651,000 is taxed as income. They must also pay a 30% withholding tax on any deferred compensation, which includes pension plans and stock options.

Writing for the Palm Beach, Fla.-based Biz Pac Review, John R. Smith says today’s federal government is as bad as the one ejected by the colonists in 1776.

Where does the U.S. government get the arrogance to think it has the right to any earnings produced by Americans anywhere else on the globe? Our federal government is the only [Organization for Economic Co-operation & Develoment] government that imposes such a burden on its citizens, and that includes undemocratic countries like China. …

Remember the American Revolution rallying cry, “No taxation without representation”? Taxing Americans who live abroad, most of whom do not vote in U.S. elections, violates that founding mantra. A just cause of the American Revolution was rebuking a British government that taxed American colonists overseas on the basis that they were British subjects … We have arrived at a point where citizens of many foreign countries have more freedoms than Americans.

Jason Van Steenwyck of Nerd Wallet Investing notes some other unintended consequences.

The second-order effects of the law, however, aren’t limited to fat cats hiding massive amounts of assets. Ordinary working class and middle-class Americans living abroad are getting caught up in a net intended to catch much bigger fish: Banks are refusing to take on American teachers, businessmen, engineers, doctors, au pairs and even American salespeople living overseas promoting the sale of American exports, say observers.

The rules create an incentive for foreign employers to cease investing in America, avoid hiring Americans, or both. And in some cases, Americans have been refused employment or promotions at foreign companies because the job description requires them to be signatories on the company’s account.

Link to Original Article:

From National Post

  • Robert in Vancouver

    In the good old days (medieval times) the king would send out tax collectors with a troop of soldiers. They would take money and property from peasants by force and kill anyone who argued.

    FATCA is just a modern variation of that brutal tax collection system which is required when taxes get unreasonably high.

    So I’m not surprised that Americans are turning in their pass-ports. If I was an American, I would too.

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