The United States of America is the only country with an advanced economy that taxes its citizens and legal residents on their global incomes. If an American person lives in a foreign country and works for a foreign company, he/ she has to pay taxes twice: in the country where the income is made and in the USA as well. If an American businessperson opens a company in a foreign country and it brings him/ her an income, he/ she also has to pay taxes twice.
Not very inspiring if you are an American deriving income from abroad. Americans are well-known for their fiscal discipline: supposedly, every American firmly believes that taxes need to be paid if they are due. There are some facts, however, that suggest the opposite.
The Foreign Account Tax Compliance Act (FATCA) was passed in 2010 and it went into force in 2014. What was the reason for its passage? At that time, approximately 10 million Americans lived abroad. It is reasonable to assume that quite a few more million Americans living at home had foreign bank accounts. However, only a bit more than a million Americans reported having foreign bank accounts. All others concealed the information thus saving on taxes. So much for fiscal discipline.
The IRS claims that it collects a few billion dollars less in taxes every year that it should collect. Tax fraud is combated vigorously in America. Heavy fines are levied on tax evaders and Americans are advised to report suspected tax evaders. One in approximately 500 tax returns is scrutinized. Now when the IRS has received substantial additional funding, it is going to hire a few thousand more agents who will check a larger portion of tax returns.
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Americans with foreign bank accounts
In addition to that, the IRS monitors Americans’ foreign bank accounts closely. If you are an American citizen or a resident alien, you have to add a separate form to your tax return in case you have more than 50,000 dollars in your foreign bank account. If you have more than 50,000 dollars on aggregate in several foreign bank accounts, you have to report it too. It does not matter if you have a bank account in Western Europe or in an offshore jurisdiction: you have to report it anyway.
If you make a wire transfer exceeding 10,000 dollars from America to a foreign country, the American bank or payment system will report it for you. Speaking about money transfers to foreign countries, how much can you transfer? Uncle Sam does not impose any limits on international money transfers but your bank does. As far as payment systems (neobanks, online banks, digital banks – they go by different names) are concerned, their limits are most often even lower. Thus, the US administration does not mind your wiring money abroad. Just don’t forget to pay the taxes.
A curious legal precedent
Americans have to report their incomes derived from abroad and they have to report having foreign bank accounts. Interestingly, the latter requirement looks superfluous. Why? Because foreign banks also have to share their American account holders’ details with the IRS. They have been forced to do so by the US administration.
Why is this a curious legal precedent? Because now banks in foreign countries fall under the jurisdiction of the American IRS. Maybe the agency has to think about changing its name: Internal and External Revenue Service?
However ridiculous the situation may look from the legal viewpoint, a vast majority of countries have agreed to play by the American rules. Even China and Russia have consented! The only large economy that is trying to fight back is Canada. Please don’t be mistaken in thinking that it is the Canadian Government that opposes the US Government. It would not dare, would it? It’s citizens of Canada who have filed a lawsuit against the IRS claiming that it is illegal to impose the regulations on foreign countries.
At this point, we must admit that we are exaggerating a bit. Foreign banks have consented to report their American account holders’ information not for legal reasons. Indeed, how could the IRS impose legal requirements on foreign nations? It couldn’t. Rather, it has offered some economic ‘incentives’ to banks in foreign countries.
What is going to happen if a foreign bank refuses to cooperate with the IRS and disclose its American clients’ information? First, the bank is going to be fined but what is even worse, it will be denied access to the American financial system. Now, this is a serious threat without doubt. The USA is still the largest economy in the world and no other country has as much money as America does. Naturally, no bank wants to lose access to the American financial market and this is the most important reason why almost all countries have accepted the IRS requirements.
Implications of FATCA for foreign banks and for Americans
What implications does the FATCA have for foreign banks who have agreed to play by the rules laid down by the IRS? Additional reporting implies additional (electronic) paperwork. This, in turn, implies hiring more bank officers and they have to be paid. Ultimately, FATCA has raised foreign banks’ operational costs. Has the IRS ever suggested compensating for the increased costs? No, it must have forgotten to do that.
What implications does the FACTA have for Americans? First, they cannot hide money in offshore bank accounts any longer and this is fair. Second, it has become much more challenging for an American citizen to open an account with a foreign bank. He/ she is a costly customer and for this reason, many foreign banks are unwilling to take Americans onboard.
How to avoid being taxed twice if you are an American
There is only one way for you to stop paying taxes in the US if you are an American citizen and this is relinquishing your American citizenship. Otherwise, you will be taxed in the US wherever you earn money.
This may sound quite radical but this is a proposition to think about if you have substantial assets in other countries and if you earn money there. The number of Americans renouncing their citizenship has been growing over recent years and now a few thousand Americans cease to be Americans every year. They are not stripped of citizenship but they drop the status of their own free will. The opportunity to save on taxes is the primary reason for this move.
Now, living as a stateless person is not what you are looking for if you want to renounce your American citizenship. However, you don’t have to be a stateless person because you can ‘buy’ citizenship of a foreign country. Yes, some countries issue passports to foreigners making significant contributions to their economies. There are five such countries in the Caribbean, for example, and several more countries in other parts of the world too. How significant does the contribution have to be? A couple hundred thousand dollars if you want to ‘buy’ Caribbean citizenship. Not that much.