Republicans Overseas has worked hard to bring the issue of citizenship-based taxation and tax fairness to the attention of Republican legislators. We were able to find a wonderful champion in Congressman George Holding, who introduced the Tax Fairness For Americans Abroad Act of 2018. This bill would have treated overseas Americans like non-resident foreigners and eliminated all foreign income from taxation during the period of overseas residency.
However, when the Democrats won back the House in 2018, forward movement on the tax fairness bill died.
Republicans Overseas will find a new champion to carry this bill forward.
You can read the full bill here.
You can read a summary of what it is intended to do here.
Republicans Overseas drafted a statement of principles around territorial taxation in 2017. A partial excerpt follows.
Statement of Principles:
- The U.S. should tax individuals and corporations on a consistent basis so as to minimize complexity and minimize opportunity for taxpayers to take advantage of differences between individual income tax and corporate income tax.
- The U.S. should tax on the basis of revenue and income derived within the physical boundaries of the U.S. and its possessions (“Territorial Taxation”).
- The U.S. should tax on a basis of information within the control of the U.S. and its territories and which does not require information sharing with other countries around the world.
Current Tax System as it Relates to Individuals
- U.S. Citizens (“Citizens”) and permanent residents are taxed on worldwide income, regardless whether such income is earned in the U.S. or solely within a different country, with certain deductions and credits applicable based upon taxes paid in other countries and other permitted deductions (“Worldwide Taxation”).
- The U.S. is the only member of the G-7, the 35 member OECD and the only developed country in the world that uses Worldwide Taxation to tax its Citizens. The only other countries that use Worldwide Taxation are Eritrea and, potentially (based upon some reports), China and North Korea.
Rationale for Switch to Territorial Taxation
- Promote export of U.S. goods and services and increased employment for Americans. Americans residing abroad are the most effective advocates for (and exporters of) American made goods and services. Currently, due to Worldwide Taxation, outside the U.S., American workers are substantially more expensive to hire than workers from other countries due to Worldwide Taxation and the IRS compliance system in place due to Worldwide Taxation. Switching to Territorial Taxation would increase employment of Citizens which would be good for Citizens in general and would also increase exports of U.S. goods and services since it would be more economical to employ Citizens offshore in export industries.
- Increase the soft power and reach of the U.S. Citizens are the most effective ambassadors of the U.S., and encouraging Citizens to work and reside abroad substantially augments the influence and footprint of the U.S. by exposing large numbers of foreigners to our beliefs, values, thinking and ways of life.
- Encourage skilled immigration to the US. Worldwide Taxation discourages talented, successful entrepreneurs and others around the world to take up US citizenship because to do so will cause their income earned outside of the U.S. to be subject to US taxation. The U.S. should draw such skilled individuals to become US Citizens and to develop successful businesses in the U.S. (which would then be subject to US Territorial Taxation).
- Discourage expatriation of skilled US Citizens. The past 10 years has witnessed a substantial increase in US Citizens giving up their US citizenship. Many of these are individuals who are, or will be, contributing to the US economy and the export of US goods and services and whom the US should try to retain as Citizens. There is now a global market in citizenship for talented individuals and the U.S. should ensure it retains and attracts its fair share of such talented individuals who will contribute to the growth of the US.
- Eliminate unfair double taxation of Americans residing overseas. Under Worldwide Taxation, Citizens residing outside of the U.S. pay taxes both to their country of residence and, additionally, pay further taxes to the IRS. Double taxation treaties do not prevent Citizens from being subject to punitive double taxation because many countries tax their residents through mechanisms other than income tax (which are not creditable against U.S. income tax obligations) and America imposes additional taxes (such as capital gains tax and the 3.8% tax for the Affordable Care Act) for which no foreign taxes may be creditable.
- Territorial Taxation enhances U.S. national security by removing any necessity for information sharing with other countries. In order to effectively implement Worldwide Taxation, a multitude of information sharing and tax specific agreements are required between the US and most countries around the world. Sharing personal financial information of Citizens with countries around the world, particularly those that are not our allies, opens up such individuals (who may be government or private sector individuals) to hacking, espionage, blackmail and other attacks from foreign powers. Recent years have witnessed a significant increase in adoption of various financial information sharing regimes (including the anticipated implementation of Common Reporting Standards by the OECD in 2017) without any effective mechanism to ensure the information remains confidential once disclosed to another country or that such information would not be used, either individually or in aggregate, to harm or attack either the U.S. or its citizens.
- Encourage repatriation of wealth held overseas. Just like corporations, successful businesswomen and men have companies and enterprises overseas that have earned substantial profits but have not declared dividends to their US Citizen owners because such dividends would be taxable by the IRS even through taxes have been, or will be, paid to the country where such income was earned. Switching to territorial system would allow for such wealth to be repatriated and invested in the US.
- Substantially reduce size and cost of IRS. Switching to Territorial Taxation would allow for a substantial reduction of the international division of the IRS. Compliance costs would substantially be reduced because the IRS would automatically receive almost all of the information it requires to determine a person’s tax liability through the reporting structures in place within the U.S.