Issues in Citizenship-Based

Taxation - Part II:

The Transcript

Find here the transcript for Part II of our webinar on issues in citizenship-based taxation in the US

and beyond. Happy reading!

For the full transcript for Part I, please click HERE.

Our panelists were:

John Richardson, Lawyer, Citizenship Solutions, Toronto, Canada

Dr. Karen Alpert, Finance Lecturer, University of Queensland Business School, Australia

Larry Stern, Partner, Aboulafia Avital Shrensky & Co., Israel

Introductory Remarks

JOHN RICHARDSON: Let me put in a plug for the conference in Barcelona…I was in the one last year

in Cyprus. It was without a doubt one of the best, most educational, certainly most fun experiences

that I’ve had in one of these things, I think ever. I think Barcelona is a slightly better location than

Cyprus and, if anybody is on the fence or anything, I would hope that you’d get yourself over to

Barcelona… If I could begin by getting Larry to introduce himself.

LARRY STERN: My name is Larry Stern. I’m a US CPA with over 20 years of international experience. I

specialize in US tax issues for citizens abroad, which is primarily our discussion topic today, as well as

foreign investors, corporations that want to open up businesses in the US and so forth. I’m a Partner

at Aboulafia Avital Shrensky & Co., in Tel Aviv, Israel, and I’m very honored to be joining this

webinar.

JOHN: Thanks for that, Larry. What’s your prognosis with respect to continued US citizenship abroad

and all these problems?

Question 1: What is your prognosis with respect to continued US citizenship

abroad and all of these problems?

LARRY: It’s a huge challenge. There’ve been recently some changes for the better with the GILTI high

tax exception that has been proposed recently, so there’s a little bit more visibility to the issue of US

citizens abroad. But I’m not totally hopeful that there’s going to be a full-blown solution or major

change to the tax code any time in the immediate future.

JOHN: Do you consider the holding bill to be a major change?

LARRY: I think the current bill at least may provide a lot of relief, both from a compliance perspective

and a tax perspective to those individuals in what are called high tax countries where there is a tax

rate in excess of 18.9 percent of corporate tax. So under 962, which allows for a treatment of an

individual as a corporation and they are in a high tax country similar to subpart F where you have a

high tax exception, you may be entitled to a high tax exception as well without the need to comply

with the major aspects of GILTI. So that actually provides relief or can provide relief to individuals

that are coming from countries that have corporate tax rates or that are located in countries that

have tax rates in excess of 18.9 percent. So there’s definitely some benefit to this proposed

legislation. It’s not the solution any of us probably would want, it would make more sense to move

over to residency-based taxation like 99 percent of the rest of the world. I will take what we can get

in the meantime to help our clients.

JOHN: Since this is very timely and you opened the door to the high tax GILTI exclusion, I thought I

just understood you to say that that would apply in conjunction with the 962 election. Because my

reading of that is that what it does, see, the 962 election would apply if you had GILTI income, I

think. Do we need a 962 election to take advantage of this new proposed high tax kick out?

KAREN ALPERT: I don’t think you do. I think it just says it’s not considered GILTI income if you pay

more than 18.9 percent. And if it’s not GILTI income, then I don’t see the need to do the 962 as well.

JOHN: That’s my impression of it as well. This has been very interesting to me because, I really have

to take my hat off to Treasury this year for creativity on how to mitigate the GILTI problem for

individual shareholders of CFCs because in March we have the unbelievably creative and interesting

interpretation of 962 in conjunction with subpart F, which they say compels the conclusion that

individuals get 50 percent discount on GILTI, notwithstanding that it doesn’t say that in the Internal

Revenue Code. So, in other words, in March they say: “If this is GILTI, we’ll give you 50 percent

discount,” and then in June, they say, “You know what? If your tax rate in your country where you’re

living is over 18.9 percent, then it’s not going to be GILTI at all,” making it even easier.

KAREN: It’s interesting how much discretion they’ve taken in both of those things, and I would like

them to take the same level of discretion and initiative in a lot of other areas where there is maybe

some arguable discretion on the part of the IRS. They manufactured a higher threshold for the 8938

if you’re living outside the US, they could manufacture a same country exception, I think, just as

easily.

JOHN: We’re bound by the statute, that’s the problem.

KAREN: But the 18.9 percent is not on the statute either.

JOHN: It is in the statute.

LARRY: It’s based on the subpart F rules when you’re talking about 90 percent of the maximum US

rate.

KAREN: But that’s not how anyone read the 851A provision about high tax. 851A doesn’t really say

that you can use that high tax exception.

JOHN: After the initial “what just happened,” my feeling is that that was really a direct response to

that Arnold Porter submission to Treasury that came actually from the government of Israel. But in

any case, I think we should better move back to the agenda here a little bit.

I have a list of questions here, you can look at them in one sense as overflow of the last webinar, and

this got started with the title citizenship-based taxation yet there are all these questions having to

do with FATCA. I find this fascinating because I’m not sure that talking about FATCA is not necessarily

responsive to the citizenship taxation issue at all. Karen?

Question 2: What does FATCA have to do with citizenship-based taxation anyway?

KAREN: There was a very large proportion of Americans overseas who had no clue about their US tax

obligations until FATCA came along. The reason everyone is all worried about FATCA is because

that’s the first thing they heard about.

JOHN: Let me ask you a real simple question: What’s FATCA have to do with citizenship taxation

anyway? How would you answer that in its most simple terms?

KAREN: I’d basically say it’s the enforcement on it.

LARRY: Look, historically the whole idea of filing an FBAR started in the 1970s. The penalty for non-

filing was 200 dollars and it wasn’t anything of major consequence to anyone. Then 9-11 happened,

then the increase in penalties in 2004 from 200 dollars to 10 thousand dollars hoping that people

would become more compliant. That never happened. And then in 2009 we had the entire FATCA

legislation, which basically imposed the American will on non-US banks. Basically said, “You need to

give us information and if you don’t we’re going to withhold taxes, 30 percent.” Then came all the

IGAs for exchange of information and within those requirements, and we’ve seen it in Israel with a

number banks, and Switzerland as well, where banks have been penalized. The whole obligation of

these financial institutions to provide information to America at the risk of being penalized

substantial sums of money basically made these financial institutions become enforcers for the IRS.

JOHN: What they are enforcing now is this whole notion of citizenship-based taxation (CBT).

KAREN: What they are enforcing is actually reporting. Very few countries where they are actually

requiring that they see actual tax returns. In Australia, you give the bank your Social Security

number, your information goes to the IRS, but the IRS is not doing anything with it, not yet.

JOHN: I think that realistically what’s happening, at least the way I experience this vicariously

through people, is that through FATCA, the IGAs, what have you, potentially the US has downloaded

to the banks what I would call search and hunt for anybody the US in its sole discretion, it can be a

shifting definition, defines as a US citizen. You show up to the bank, and the bank says, “I sense US-

ness, are you or have you ever been an American citizen?” So what happens then when the person

goes out of their mind and panic, recognizing of course that the most frightening thing in the world

today is an accusation of US citizenship. Then what they will do is run to someone like Larry who

says, “Yes, it’s true, yes, I will help you comply with your US tax obligations.” Gross

oversimplification, but do you agree with this?

LARRY: Generally speaking, yes, but you try to give the clients all of the different options on how to

comply. It can be everything from giving up citizenship to filing tax returns. It’s not just a matter of

compliance, there are alternative options that they have available about how they can comply.

There are amnesty programs, non-amnesty programs, there’s no one set solution for each individual

or potential client. You have to look at each person’s individual circumstances and say what’s the

right thing for this client. It’s not something we can determine either but it’s something that we

need to give the clients their full range of possibilities. You cannot just say you have to comply, yes,

by law, you have to comply, but you might have other alternatives as well.

JOHN: What is going on is that they go to somebody who they consider knowledgeable, whether it’s

a CPA or your partner who’s an EA, as I understand. The bottom line is, “Oh my God, I’m a US

person, some kind of response to this situation is required.” Yes? So, Karen, would you agree that

this is what we mean by sort of the enforcement of citizenship taxation? What it really is, is using the

banks to hunt them down, the expectation on the part of the compliance people to generate some

kind of a response to the situation, which wouldn’t happen pre-FATCA because no one was hunting

them down pre-FATCA.

LARRY: Karen, are they asking for copies of tax returns?

KAREN: Not in Australia. People I’ve heard who have had that problem were in Switzerland and I

think in the Netherlands as well.

LARRY: It happens here in Israel as well, some of the banks are extremely aggressive. Paranoid is a

good word, and aggressive in making sure they view compliance. And we’ve been pushing back at

least from our end, if nothing else blacking out everything else that the individual has and providing

them with, say, a schedule B with the bank line entry showing the interest or whatever. Or the FBAR

with all the information blanked out except for the bearer account. Because certainly none of these

banks have the rights, first of all, to ask for the tax returns in my opinion.

JOHN: They absolutely have no right whatsoever; there’s no IGA with even hints of that sort of thing.

In my view, it’s an absolutely outrageous intrusion into the rights of these individuals.

But, in Israel, there are a number of banks that entered non-prosecution agreements, right?

LARRY: Correct. There are at least 3 or 4 that either have or are in discussion. And it’s primarily all

the major banks in Israel.

JOHN: Ok, so that’s a problem. I was reading an article in a UK publication a while ago that made the

following claim: really, what FATCA is doing in the IGAs is actually creating US taxpayers where they

didn’t exist before? What do you think about that? It’s like they are saying, “We just don’t have

enough taxpayers, let’s go get some more.”

Question 3: What FATCA is doing in the IGAs is actually creating US taxpayers

where they didn’t exist before. What do you think about that statement?

KAREN: When you take someone who has been in Australia for 20 or 30 years, may have grown up in

Australia, but been a US citizen either by birth or descent, and the banks are telling him, “You’re a

US citizen, we need a Social Security number.” And these are people who, number one, had they

know they were US taxpayers all along, they would have arranged their affairs so that they would

pay no US tax. Australian tax rates are high enough, they are higher than US tax rates. But if you do

not know that you have to arrange your affairs, it can be really messy for these people trying to

enter into compliance.

LARRY: I’m not sure FATCA creates US taxpayers because I think a lot people who are now coming

into compliance, I would say, statistically most of them don’t owe US tax. Israel also has extremely

high individual tax rates.

JOHN: Most people in the US don’t owe US tax either and they are still considered US taxpayers.

LARRY: I hear what you’re saying but the idea that they are creating taxpayers assumes that they are

paying tax, at least in my opinion. Putting aside transition tax and GILTI at least for the moment…

JOHN: Are they creating people that now understand they have an obligation to file some kind of

return?

LARRY: The need to be compliant, yes, but I’m not sure what they are gaining from this. Normally the

goal would be to collect taxes.

KAREN: But the problem is with these people who had no idea they were US taxpayers so they took

advantage of Australia’s superannuation, made extra contributions, and now the IRS says that’s a

foreign grant to our trust. We want to tax all this money that’s in your super that you cannot even

touch until you’re sixty-five. So how am I supposed to pay the tax on that when it’s all inside that

account that I cannot touch?

JOHN: That’s another example of what I call fake income, right?

KAREN: Or I sold a house, because that’s tax-free here in Australia. House prices in Sydney have been

going through the roof, you sell the house you get a million dollar gain.

LARRY: Here in Israel the house sale as an example is tax-free if it’s your sole property and the gross

proceeds are under a million and a quarter dollars. So the idea of causing somebody to pay tax on

something like that seems excessive. But again Australia and the US from a tax treaty perspective,

right. Remind me, do they have a tax treaty?

KAREN: Yeah.

JOHN: Actually, the answer is no.

KAREN: The last protocol was in 2001 and it did not include superannuation, which had been in the

books for nine years at that point.

LARRY: Exactly. A lot of the more recent treaties that have come into play address the local pension

treatment and something like that could be helpful at least to resolve some of the outstanding

issues. I believe there are some practitioners that basically will say, “Listen, under the OECD model

treaty, this is the position,” and even if the treaty itself doesn’t address it, they will take a more

aggressive position under those circumstances. I’m not sure I necessarily agree with them from that

perspective but I’ve heard some practitioners doing that.

KAREN: In Australia, it’s not common but there are a few who’ll say, “Superannuation is a substitute

for the age pension, we have a totalization agreement, it’s a privatized social security.” And there

are some practitioners who take that position and I’m not aware the IRS has pushed back.

JOHN: Quick diversion from that. But the Eshel case, the DC Court of Appeals handed down a

decision in 2016 and the IRS I think caved a week or so ago on the issue in France on whether certain

tax on income tax, social security tax. What was interesting about the decision was that it made it

very clear that this is not the IRS’s decision at all. These treaties are agreements between sovereign

countries and these things need to be interpreted in accordance with the expectations of both

parties. I agree is a bit of work but the point I’m making here is that it seems to me that the national

anthem of the tax compliance industry seems to be “What’s the IRS’s view of that?” You know, of

how someone should be treated under the agreement. It’s not irrelevant. But clearly that decision

reinforces that it’s not determinative either.

LARRY: The IRS is not a legislative body, it’s an interpretative body and there’s no reason why a tax

practitioner cannot have a different interpretation than the IRS. The question is, how far do you

want to take it or are we willing to take it? You need to have the right client who’s willing to take

that route. From Israeli perspective, Israeli social taxes, because we don’t have a totalization with

the US, in theory, it should be creditable under the 1116 rules as an income tax.

JOHN: Are they not?

LARRY: The IRS has definitely pushed back at times. I’ve had clients where I’ve taken that position

and the IRS has disallowed it. But, you know, again, it depends on the amount of tax it’s going to

cause. Is it cost effective to try to fight the IRS on the matter? Unless you’re finding the right client to

take that further to the courts, I think it’s pretty clear in my professional opinion that Israeli social

taxes, because there’s no totalization agreement, is creditable as a foreign tax credit. It’s a matter of

how far you take it.

JOHN: Well, they are taxes based on income, correct?

LARRY: It is based on a percentage of income.

JOHN: That seems to be a very good start to me. The US is the only country in the world where this

is a problem. Don’t say Eritrea, Eritrea is a stupid excise tax. Why should other countries put up with

this at all? Now, three weeks ago I asked your partner this question, Larry, I think I will ask you this

question. Would you agree that things like the transition tax, exit tax are not based on realization

events?

Question 4: Would you agree that things like the transition and exit tax are not

based on realization events? Would you then agree that, since they are not based

on realization events, there is normally under most circumstances, without

creativity, no Israeli tax to use to offset these as tax credits? Would you then not

agree that these kinds of taxes, which are basically fake income, are syphoning

Israeli capital out of the country to the US? Why is that not stealing from another

economy?

LARRY: Correct.

JOHN: Would you then agree that, since they are not based on realization events, that there is

normally under most circumstances, without creativity, no Israeli tax to use to offset these things as

tax credits?

LARRY: Correct.

JOHN: Would you then not agree that these kinds of taxes, which are basically fake income, are

syphoning Israeli capital out of the country to the US?

LARRY: Yes.

JOHN: Why is that not stealing from another economy?

LARRY: Oh, it is. There’s no other way of explaining it. I wouldn’t necessarily look at it… yes, it’s

stealing in one sense, in my opinion, it’s overreach. The US can have its laws and each country is

entitled to its own tax code and everything else, but it goes back to the basic question of our

webinar today: from a fairness perspective, citizenship-based taxation when it is inconsistent with

the rest of the world, is truly…

JOHN: It’s obscene.

LARRY: It’s obscene, it’s insane and it’s…

JOHN: Is it immoral?

LARRY: I think so.

JOHN: You’re the first CPA who I’ve ever heard have a sense of morality. I thought the requirement

to be a tax professional was to be completely amoral.

LARRY: With all due respect, as much as it may impact my business. First, I’m subject to the same

rules, I’m a US citizen living abroad so I have a mindset that I try to look at it from both sides. I’m not

worried about my business, thankfully we have corporations and other businesses, but from an

individual perspective, I try to look at it and say, “This is not the way it should be.” I’m all for a move

to a residency-based taxation, it’s the right thing to do worldwide.

KAREN: I think the principle should be that an individual should be tax resident in one country at the

time.

LARRY: And the treaties are built like that, you have a residency article in the treaty that is meant to

determine where you are resident. The fact that we have a savings clause in treaties, you know, kind

of defeats the purpose of determining residency.

JOHN: The savings clause applies, of course, to US citizens. Do you think that the view of the US is

that US citizens are not people and are therefore not entitled?

LARRY: I don’t think it’s that they look at it that they are not equal, I just think they want to keep

their hands on individuals and maintain their right to taxation. Citizenship-based taxation started

after the Civil War when people were moving abroad and basically created a situation in which they

were looking to penalize these people that abandoned the country. And that penalty has been

maintained for centuries. And it’s got to the point, especially when you’re dealing with international

business and the mobility of the world today, that it has become even more extreme than it had

been previously.

KAREN: It’s worse now because when it first came in you were the citizen of one country and one

country only. You became a citizen of another country and you lost your first citizenship. So there

weren’t dual citizens all over the place. You want to do citizenship-based taxation, you have people

with 3, 4 or 5 passports. Who are they going to pay tax to?

JOHN: You think that other countries want to jump on the CBT bandwagon?

KAREN: I don’t think it’s workable and I think everybody else who tried it has given it up.

JOHN: Winston Churchill once said, and this is why I’m hopeful there will be change, he said, “The

thing about the Americans is you can always count on them to do the right thing once they’ve tried

everything else.”

We’re still talking about this as citizenship taxation but I think that’s a horrible way of putting it. This

is about the US imposing worldwide taxation according to US tax rules on people who are tax

residents of other countries.

LARRY: That’s what citizenship-based taxation is. It’s irrelevant where you’re living, it’s just a matter

that your citizenship overrides.

JOHN: Is it citizenship or a form of ownership? I’m looking at the list of questions. Is citizenship-

based taxation equivalent, well, we know it’s taxation without representation but many kinds of

taxation is, equivalent to a modern day serfdom?

Question 5: Is citizenship-based taxation equivalent to modern day serfdom?

LARRY: I don’t know if I want to go that far. Serfdom, I don’t know if it’s more of an insult to the

historical aspects that America has dealt with, whether it’s slavery or otherwise. That has been

about the person, taxation is about the money, it is a bit of a different circumstance than I would call

serfdom, you don’t have to give 100 percent of your money to the US, you are entitled to foreign tax

credits.

JOHN: Would that apply to the transition tax? People have been using their corporations as pension

plans, they don’t give 100 percent of their money, they lose 100 percent of their pension, one way

or the other because they have no other way of paying, they have to liquidate it.

LARRY: There are some ways to plan it. My experience has been that over 90 percent of my clients

haven’t had to pay transition tax. People in Israel, which is a high tax country and the foreign tax

credit carryovers that they have and so on, they haven’t really been subject for the most part to

paying transition tax.

JOHN: Let’s unpack that a little bit here. You’re right, I’m not disagreeing with you, but I think it’s

important, you put it that way and you make it seem like there was not transition tax assessed. Why

don’t we say the way they paid the transition tax was because they were lucky enough to have

foreign tax credits, reach into their back pocket as a mechanism to pay that tax?

LARRY: Oh, I completely agree. It’s dumb luck that we were able to get most of these people out of, I

mean, professional knowledge as well.

JOHN: It’s not dumb luck at all. It’s taking advantage of circumstance, I mean, you obviously used the

foreign earned income exclusion or you wouldn’t have had those foreign tax carryovers.

LARRY: No, exactly, that’s tax planning among the professionals, for those professionals that have

been using exclusions, for the most part, their clients were more at risk to actually have to pay the

transition tax.

KAREN: But now you don't have the credits for something else that comes along that’s taxable in the

US and not in Israel.

LARRY: I agree. There’s definitely a risk associated with that. Where it did become dumb luck is that

the Israeli tax authorities in 2017 basically provided a one-time, not one-time because it happens

every few years, a reduced tax rate on dividend distributions. So a lot of people took advantage of

dividend distributions from their corporations at a reduced tax rate that created additional foreign

tax credit that they wouldn’t have otherwise had to be able offset against the transition tax. Maybe

that’s dumb luck.

JOHN: One of the things I find interesting about the transition is how differently it affects people in

different countries. This seems to be another problem with this so-called citizenship-based taxation.

How does it work? Well, I don’t know, depends on what country you’re going to. That seems to be a

rather questionable underpinning for this.

Moving back to FATCA and information reporting, most of the theme today is this FATCA stuff. I’m

going to say something and I’d like each of you to comment, agree, disagree, modify, etc. What

seems to me that what FATCA does, the effect of FATCA is to enhance, discourage money from

leaving the US and largely encourage money to come into the US. So, clearly, by going after US

citizens and gently ushering them into the US tax system, that would encourage money to come into

the US, wouldn’t it?

Question 6: What seems to me that FATCA does, is to discourage money from

leaving the US and encourage money to come into the US. By going after US

citizens and gently ushering them back into the US tax system, it would

encourage money to come into the US. What are your thoughts on this premise?

LARRY: I want to disagree with the premise. I’m not sure FATCA is meant to bring money in.

Transition tax is meant to bring money in, and so is GILTI. FATCA, in my opinion, is making sure,

because the US has citizenship-based taxation, that the US has their hands in what is occurring

outside. I’m not sure that bringing the money into the US creates a different circumstance or creates

money coming into America, because either way, whether the money were sitting in America or

Israel or France or wherever it is, it is still subject to taxation so FATCA does not change, taxation

would have happened anyway because of citizenship-based taxation. FATCA is not a reason why

somebody would actually physically bring money back into America.

KAREN: There’s one place where I think it would is people who are trying to save for their retirement

because it’s very hard to save outside of the US in a way that it tax effective, both where you live and

in the US. So, therefore, if you want to save for your retirement and you’re not going to be picking

individual stocks because you don’t have enough money to make a diversified portfolio, best

diversified portfolio is a mutual fund, you better buy that mutual fund in the US if you’re a US citizen.

LARRY: But nowadays most of these brokers in the US, and maybe it’s because of SEC regulations,

but don’t allow US citizens abroad to invest in mutual funds.

KAREN: So you’re stuck between a rock and hard place.

JOHN: Therefore, US citizens abroad are disabled from effective retirement planning, correct?

KAREN: Absolutely.

LARRY: 1000 percent.

JOHN: Any responsible person at this point should get rid of their US citizenship. It’s sad, very

unfortunate, but that’s basically were it is now.

LARRY: I think it’s something that happens more as people get older. It has to become a more viable

option for people at this point. If you’re in your 20s or 30s where you should be starting to plan for

your retirement and maybe aren’t, there are other considerations about potentially relocating to the

US, wanting to open a business, working in the US, giving up citizenship is not so much on the table.

JOHN: I think it’s a bad idea for that age group.

LARRY: After your 50s and 60s where you’re expecting to live the rest of your life outside the US, it

definitely needs to be. But then you get back to the issue of the exit tax, the expatriation tax, the US

gets you in any way, shape or form. Forget a person’s value. A 2 million dollar threshold in today’s

world is nothing especially if you look at retirement funds.

JOHN: I presume a house in Tel Aviv costs a good chunk of change. All you have to do, where I live, I

know where Karen lives, all you have to do is own a house and a pension plan and you’re there. Plus,

you feel poor, that’s the interesting thing.

LARRY: You might still have a mortgage!

JOHN: All these people I help renounce, on paper, you look at page 5 of the 8854, it makes it seem

like they got something going on but the reality is they have no cash flow at all. There are so many

things that are pure evil, one of them is the inclusion of pensions at all. We can go on and on about

that. What it means practically for people who are listening is that… you know, it’s funny, I was

working with someone over the weekend, exactly this kind of language and this sort of deal. This

guy, you know, he’s making decent money, his view of it was, “I am not paying any US tax so why

should I renounce?” And I said to him, “You know something? You’re below $2 million right now.

Ten years from now, you’re not going to be below $2 million. Ten years from now, you’re really

going to have to dig in and worry about this retirement pension kind of stuff. If you do not renounce

before you hit that $2 million, this is your last chance to get out of this before you’re not going to be

able to afford to get out of it.”

LARRY: Actually, it really depends. In Israel, it’s interesting. There are a quarter of a million US

citizens living in Israel currently. And a lot of those are still not aware of their filing obligations

because they were born in Israel. The banks basically started, going back to FATCA for a second,

looking at the higher risk people—those people that have on their ID cards that they were born in

America, people who sound like they’re American, and you have these second and third generation

Americans who have dual citizenship from birth and, at least for those individuals, the idea of giving

up citizenship, they don’t have to worry about the $2 million threshold because they have the dual

country exception. For those people who moved out of the US like me, I moved to Israel ten years

ago, they are the ones that have this concern. If you move abroad with assets, buy a house, we’re

the ones who’re going to get screwed, pardon the expression.

JOHN: Absolutely. What’s very interesting about this, there are very few things in life that I think are

as unfair as those 877A exit tax rules. The example I often use is, say, you’ve got someone born in

America who moved to Canada at the age of ten and later became a Canadian citizen, so no dual

citizenship at birth, whole life in Canada, they want to renounce, they’re going to lose it all. Compare

that to somebody who was born in America to Canadian parents, makes all his fortune in the US,

he’s born a dual citizen, decides he doesn’t want to pay the exit tax, just moves back to Canada and

avoids the whole thing. It’s so indescribably unjust, it’s unbelievable.

Going back here, as I was telling Mateo we could do a weekly show on this, there are so many issues,

going back to FATCA, now there’s a lot of discussion on FATCA, CRS, the combination of the two,

making the US at the very least evolve into a major tax haven. I think it’s well on its way. What are

your views on this?

Question 7: Is the US a major tax haven?

KAREN: Definitely, the US is a tax haven. As long as they are not going to follow CRS, then for non-

resident aliens this is the place to put your money because your home government will never find

out about it.

LARRY: I think it’s been like this for decades. If you think before the whole IGAs came into place,

there was never any internal US reporting of tax free income, interest, capital gains, for a foreigner

in the US is tax free.

JOHN: In other words, leaving aside information exchange, the point you’re making, which is

absolutely correct, is that the rules under the Internal Revenue Code very much track foreign capital

to the US, right?

LARRY: No question. Although, on the one hand, it attracts investments, on the other hand, I have

couple of clients who unfortunately passed away while they maintained assets in America and they

have a non-adjusted 60 thousand dollar estate tax exception. Talk about unfair. Granted they are not

Americans and you want to say, “Let’s get our hands on whatever we can of the non-Americans,”

but putting that aside for the moment, the idea that there’s anyone who buys a house to rent out, a

non-American who buys a house to rent out and passes away, there’s no one who’s not going to be

subject… if America wants to bring investment into America, that’s where they should be looking to

change. Have people come and invest in America without having to be subject to or at least put a

similar or much more reasonable threshold for avoiding estate tax, you could get so much more

capital in America with that than you can with the Americans living abroad, at least those living in

higher tax countries.

JOHN: Couple points on that. I’d like to break that down as I think it’s such an important contribution

to the discussion, you talk about so many things at once, which are such valuable points, but I’d like

to break them down a little bit.

The US probably has more different kinds of tax than any country in the history of the world but at a

minimum we have income taxes and estate and gift taxes. Now, the income tax rules essentially

attract capital from non-resident aliens to the country by taxing that capital very favorably or largely

not at all. That’s great as long as you’re alive and well. I think a lot of people don’t know about these

rules. This is unbelievable that it’s okay to invest in America, put your assets in America, but for

God’s sake, don’t die leaving your assets in America because if you do that, they are basically going

to confiscate a significant share of those assets. Now, subject to certain tax treaties, etc., I agree

with that. But there are a lot of countries that have estate and gift tax treaties with the US.

KAREN: Australia does.

JOHN: Canada does. Does Israel?

LARRY: They don’t. Yeah, no totalization agreement, no estate tax treaty, it’s really damaging.

JOHN: I think the moral of the story is this, all physicians, all hospital admission people throughout

the world, when somebody is admitted to the hospital and it looks like they might die, I think they

need to ask, “Do you have any assets in the US? We need to get them out before you die.”

LARRY: It reminds of the story back in 2010 when they had the one-year no estate tax because of the

ten year… you’re on December 31st and someone is on life support, the question is: do you pull the

plug? To have him die in 2010 with no estate tax compared to 2011 when you do have the estate

tax. It was a moral and ethical question that came up under those circumstances.

JOHN: And now Larry that we’ve established that you’re a CPA with a conscience, which I

congratulate you on, we’ve already established that earlier on the call, what would your advice be?

LARRY: I’d have to separate my financial background to my religious backgrounds. I think I plead the

fifth.

JOHN: There’s a lot of criticism of the whole FATCA issue. One of the issues is the IGAs, which

essentially obligate countries to turn over everything including the kitchen sink, but there’s no

reciprocity in any meaningful sense. I know that France and I think the Netherlands to a lesser extent

have started pushing back on that. Do you think that FATCA is sustainable with this one-way, you

send this information over but we’re not going to reciprocate?

Question 8: Do you think that FATCA is sustainable with this one-way, you send

this information over but we’re not going to reciprocate?

LARRY: I don’t know if there’s no reciprocation to be perfectly honest. We’ve seen here in Israel at

least, the Israeli tax authorities have received a data dump from America, at least 30 thousand files

sent from America to Israel about Israeli residents.

KAREN: But it’s so asymmetrical that it’s not funny. What the US sends is individual accounts only

and only if they have got the foreign residence. So if you have your account with your mother’s

address in the US, the IRS has no clue that’s a foreign account so that would never be sent. And they

do not look through entity accounts.

LARRY: Well, that’s actually what’s interesting about the look through entities. I think some of the

things that the IRS has done during the past couple of years is geared towards gathering some of

that information. What I mean by that is one example is the disregarded entity filing requirements

owned by foreigners, the idea to have to file an 1120 pro forma with a 5472 for information

purposes with the IRS. Putting aside the penalty level for non-compliance with, which is absurd, but

the idea of putting that process into play that is an area where the US could not have any

information about who the owners are, and the idea of having accounts or transactions being

reported between US disregarded entities such as LLCs and their foreign owners actually moves the

dial to give the US more information to be able to report. Does that mean they will report? No, but I

think between that and the greater enforcement on filing 1042s and of that nature, maybe the

intent is right to try to get more information to be able to report but practically we don’t see a lot of

the cross-reporting at the moment.

KAREN: The IGAs don’t require them to report beneficial ownership or anything. The IGAs require

the individuals and that’s pretty much it. The US would move towards having some of the other

information but there’s no requirement that the IRS send anything.

JOHN: What Larry is saying, to paraphrase, whether you agree or disagree, I think what you’re saying

is that the longer-term prognosis for reciprocity is towards more reporting by the US.

KAREN: I’d agree with that. But we’ll never get to the level of what the US is demanding from the

rest of the world.

JOHN: But the reason for that is the difference between citizenship-based taxation and residency-

based taxation. If citizenship-based taxation were to go, then presumably the whole IGA thing would

have to change because all of a sudden tax residency would be based on something having to do

with residency instead of citizenship.

LARRY: I think the scope would be limited in that respect. If the US were to ever and hopefully they

will move to residency-based taxation, I don’t think it would basically remove FATCA because there

are enough homeland Americans, if you want to call them that, that have assets outside the US that

they want to ensure they have access to. And that would still apply within residency-based taxation

so the idea of FATCA going away in total with the removal of citizenship-based taxation I think would

be hard to believe but on the other hand it would be significantly less problematic for those non-US

based American citizens.

JOHN: We’re coming full circle here. What you’re saying is the problem is the citizenship-based

taxation more than FATCA, agreed?

LARRY: One thousand percent.

JOHN: I think this is very important. I think it’s important that all of us work to modify the language

here, right? About where the real problems are, because I think a lot of people use the word FATCA

as catchall for all the problems. I think that masks the extent to which it really is the US tax policy to

impose worldwide taxation on people living in other countries that is the problem. So I think

everybody in the discussion has a role to play, saying, “Yeah, FATCA is bad, I agree, but it’s not really

the root of the problem, the root of the problem are the tax policies.” Although, on the one hand,

they might have always existed but there’s no doubt that FATCA has enhanced knowledge of them

and has therefore created a lot of US taxpayers.

KAREN: The problem with FATCA is not really its existence but the way it’s being imposed on the

residents of other countries, people who aren’t resident in the US.

LARRY: Which is ultimately the issue of citizenship-based taxation.

JOHN: Yeah, all roads lead to citizenship-based taxation as the problem so, therefore, all roads lead

to renunciation of US citizenship for people who expect to survive and do financial and retirement

planning throughout their lives. My view on this is that we’re looking right now, without change on

this, at the last generation of US citizens who’re going to be living abroad and they wouldn’t be

moving abroad if they knew about these rules. That’s my guess here. Do you agree with this, Larry?

LARRY: I agree. It’s a major discussion among my clients of whether, say, an American married to an

Israeli, their children by default might not be US citizens, I say to them, “Listen, ten years ago, it

wouldn’t be a question, you’d get your kids US citizenship.” Nowadays we get into the depths of the

discussion and say, “Is it worth the 1400 dollar child tax credit to require your child over their

lifetime to spend many times over that…?”

JOHN: Obviously, the answer is no. Plus, doesn’t that give you an increased risk of audit?

LARRY: The child tax credit? I don’t see it. There was a period about five years ago when because of

some fraudulent submissions with some people claiming the credit for years prior to the kids having

US citizenship, that it became a hot button topic in particular with Israeli claims of credit, but

nowadays it’s no different than any other tax filing in my experience.

JOHN: You say something that’s very interesting to me. I’m going to ask you a direct question here

and we’ll start with a yes or no answer and then you can explain.

Is it your view that somebody born in Israel to one US citizen parent and that US citizen parent has

met the connection requirements to the US to transmit citizenship, is it your view that person is

automatically a US citizen or does that person have a right to US citizenship but not automatically?

LARRY: To be perfectly honest, and maybe this is an accountant’s answer, it’s more of a lawyer

question. We basically tell people that they need to speak to an immigration lawyer.

JOHN: What if one was not available? They say, “I don’t want to pay the fees, I trust you, Larry,

you’re a smart guy.”

LARRY: I wouldn’t give them a definitive answer. I think if they meet the residency requirements,

they definitively have the right to pass on the citizenship, but I don’t think by default they are

deemed US citizens based on my understanding of the law. They won’t need to go to the

grandparents to get citizenship.

JOHN: Forget the grandparents. That’s a separate statute, separate issue.

LARRY: But my understanding is that unless both parents are US citizens, it’s a choice. Then if it’s a

choice, then that is a discussion to have with all of the implications of that, both from a tax and

compliance perspective and the difficulties of being a US citizen living abroad.

JOHN: Now you’re talking like an accountant again. You mean the horrifying consequences of not

being able to ever plan for retirement and being subject to worldwide taxation and potential

penalties in two countries. Is that what you mean?

LARRY: That’s exactly what I mean. And not only that, the idea that they may not be considered US

citizens from birth for purposes of expatriation tax. They chose to be US citizens, not by default, so

they may not have the expatriation tax exception of living abroad with dual citizenship.

JOHN: Very interesting point. Karen, what’s your view on this issue?

KAREN: Just to be pragmatic, I don’t think the IRS is forcing people to acknowledge US citizenship

when it hasn’t been claimed.

JOHN: I think that’s probably true. Can we all agree that it would be a very bad thing indeed to

register your kid as a US citizen?

Question 9: Can we all agree that it would be a very bad thing indeed to register

your kid as a US citizen?

KAREN: If you’re not going to be living in the US, then yes. If you have plans to move back, then

that’s a total different thing. It’s an option.

LARRY: I think it is person-specific. If you have significant family in the US and you plan to travel

there on a regular basis, unlike in some European countries where you have freedom to travel on a

European passport to America, you’d need a visa for a non-US citizen to travel to America from

Israel. I think there are a number of different considerations that need to be taken into account and

it’s not a one-size fit-all.

JOHN: Let’s not run away with this. Whose decision should it ultimately be—the kids or the parents?

LARRY: It should be the kid’s but if it impacts the parents while the kids are minors, then I really think

it’s the parents’ decision up front. But that’s also part of the reason why when you talk about

expatriation, the IRS gives between 18 and 18 and a half the right without implications for a child to

renounce.

JOHN: Now this is interesting because there have been some amendments to the State Department

rules recently where they are getting much more aggressive on the issuing of visas to enter the US.

Two more things that I’d like you to comment, I’ll pitch one to each one of you.

Karen, what’s up with this marriage filing separately a $5 threshold? Are you kidding me?

Question 10: What’s up with this marriage filing separately a $5 threshold?

KAREN: That’s ridiculous, isn’t it? First of all, it’s in the statute. The reason is it’s in the statute is if

you have got two US residents that are filing married filings separately, then they both have to make

the same decision with regards to the standard deduction. So therefore if you’ve got one of them,

you don’t know if the other has made the standard deduction election or not, so you need to cover

your bases and make sure everybody files. Whereas when you have a US citizen married to a non-

resident alien, they have to file separately and they’re spouses in filing. So they are not precluded

from using the standard deduction so they might as well have a filing threshold equal to the

standard deduction but the code is just not written that way. More unintended consequences.

JOHN: Larry, you know about this Mr. FBAR guy? So this guy at his birth in 1970, the threshold for

compliance on this was $10 thousand and it’s still $10 thousand. The penalties for not complying

with Mr. FBAR are indexed to inflation but the $10 thousand reporting threshold is not indexed to

inflation. What’s going on? I think Mr. FBAR must have huge influence in Congress.

Question 11: The penalties for not complying with the FBAR are indexed to

inflation but the $10 thousand reporting threshold is not indexed to inflation.

What’s going on?

LARRY: If I was thinking about it I wouldn’t be surprised if members of Congress actually have

accounts abroad, the question is are they actually filing Mr. FBAR. I think it’s ridiculous, goes back to

the same question about estate tax for foreigners. There are certain things that for whatever reason

are not on the radar nor are they important to members of Congress, to have to deal with adjusting

them, they don’t see the consequences. There has been a lot more activity to try to get members of

Congress to understand some of these issues but it's slow going. It’s like hitting your head on a rock,

sooner or later the rock is going to break, the question is will the head break first.

JOHN: Absolutely right, I’ve got a message from Mateo that we’re running out of time. It’s probably

a good moment to end exactly the way we did the last one. Things are not good at all for tax

compliant Americans abroad out there, and all roads lead to renunciation, yes?