UNITED STATES TAX ISSUES
During 2011 approximately 1,758 Americans relinquished their U.S. citizenship, a dramatic rise from the 235 Americans who did so in 2008. Among the prominent names that did so is Eduardo Saverin, a Facebook co-founder, who now resides in Singapore. Mr. Saverin has received significant publicity regarding his renunciation which the media has linked to his doing so to save $67,000,000 in U.S. income tax prior the Facebook IPO this month.
Proposed Legislation
A bill was introduced in Congress last week that would impose a 30% income tax on US source capital gains on certain expatriates as well as barring these individuals from ever again entering the United States. If passed, this legislation could be retroactive to 2002.
Current Law
Under current law if an individual has a net worth of $2,000,000 or more or has an average income tax liability of at least $151,000 over the past 5 years and who renounces their citizenship or relinquishes their green card is deemed to have done so for tax avoidance purposes. Such individual is deemed to have sold all their assets on the day before their repudiation and either must pay income tax on their appreciated assets or post a bond and pay income tax when the assets are sold.
Thereafter such person is treated as a nonresident for US tax purposes, pays a flat 30% income tax on US source dividends, or a lower rate if they live in a treaty country, interest income from a US bank account is not taxed nor are capital gains from the sale of a US source asset taxed.
The proposed legislation would impose a flat 30% income tax on all capital gains derived from US sources. The 30% tax would be withheld from the gross sales price requiring the individual to file a TAX return to prove their actual gain or loss and to claim a refund.
Don’t Come Back
In 1996 the Illegal Immigration Reform and Immigration Responsibility Act of 1996 contained the so called “Reed Amendment” which barred US citizens who relinquished their citizenship for tax avoidance purposes from ever entering the United States. As with the current legislation, the amendment was politically motivated. Prior to the election of President Clinton a group of Republicans tried their best not to allow this to happen. After the election they renounced their US citizenship with one person supposedly purchasing an Island in the Bahamas and using a helicopter to come to work in Miami. A change was made to the tax law in an attempt to impose additional income taxes on this group and the modifications were readily circumvented. The above noted Immigration law barred US citizens who relinquished their citizenship for tax avoidance purposes from ever entering the United States. The effective date of this amendment was retroactive to two years prior to enactment and coincidently, the day before the above noted person relinquished their US citizenship.
Because the term “tax avoidance purposes” has never been defined for this specific law, no one, to our knowledge, has ever been barred from entering the United States. The sponsors of the proposed legislation acknowledge that the 1996 law was written in a manner that inhibits its enforcement.
Don’t Come Back – Proposed Legislation
The proposed legislation introduces the term “specified expatriate” that cross references to the term “covered expatriate” under current tax law. Under the proposed change to the immigration law any alien who is determined by the Secretary of the Treasury to be a “specified expatriate” will be barred from entering the United States.
This proposed law will require the Internal Revenue Service Commissioner to make a determination regarding every US citizen who renounces or who has renounced their US citizenship for the past 10 years as to whether they have done so for tax avoidance purposes. Consequently, all “covered expatriates” will be required to prove that their relinquishment of their U.S. citizenship will not result in a substantial reduction in future income taxes to the United States.
Effective Date
If passed, this legislation will become effective retroactive to 10 years prior to enactment or 2002 if passed this year. However, it will only tax capital gains after the date of enactment.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.
James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com