Expats Press Capitol Hill for Tax Reforms

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A nonprofit group representing the interests of U.S. citizens living overseas met with congressional staffers to push for a residence-based taxation system.

The group, American Citizens Abroad, met with Democratic and Republican staff members of the main tax-writing committees in Congress, the Senate Finance Committee and the House Ways and Means Committee, along with the Joint Committee on Taxation. The ACA’s new proposal advocates residence-based taxation instead of the present system of citizenship-based taxation, along with other reforms aimed at increasing America’s global competitiveness.

“There is already a strong movement in Congress to shift corporate taxation from worldwide to residence-based taxation in order to level the playing field for U.S. companies competing in the world economy,” said ACA director Jackie Bugnion in a statement. “Following the same logic, I met with Members of Congress to convince them that the U.S. should make this move for individuals as well, to allow Americans to compete on that same level playing field.”

Other proposals from the group include eliminating the cap on the foreign earned income exclusion to return the law to the situation prior to 1962. The group argues that eliminating the cap would allow Americans to seek employment opportunities throughout the world, particularly in high-growth developing economies.

It also advocates allowing overseas residents the right to use the currency of their residence as their functional currency instead of the U.S. dollar, and to allow foreign net wealth taxes to be creditable against U.S. taxes.

“ACA will be systematically contacting all Congressional offices on the Senate Finance and House Ways and Means Committee to get issues concerning Americans residing overseas included in legislation on fundamental tax reform,” said ACA executive director Marylouise Serrato. “Changing to residence-based taxation would be good for Americans overseas, but also good for the entire U.S. economy.”

The group has also been pushing for repeal of the Foreign Account Tax Compliance Act, which was included in the HIRE Act of 2010. FATCA imposes extensive reporting requirements on banks worldwide on the holdings of U.S. citizens. The final regulations have still not been issued by the IRS, although the IRS and the Treasury Department have proposed to soften and phase in some of the requirements (see IRS and Treasury Propose New FATCA Rules).

IRS Commissioner Doug Shulman defended the IRS’s approach to FATCA compliance in a speech last week before the Financial Accounting Foundation in New York “As we devised the regulations which would enumerate the details of the implementation, we tried very hard to listen to those concerns. I met with CEOs and CFOs of foreign financial institutions on multiple occasions,” he said. “After nearly two years of back and forth, last week we put out detailed regulations for implementation of FATCA—with the goal of achieving the policy goals of the legislation by focusing on the accounts with the highest risk of non-compliance, and trying to minimize burden. For instance, we piggy-backed on know-your-customer rules for most of the due diligence that needs to be performed on existing accounts, delayed difficult withholding provisions for a minimum of five years while implementing the core withholding provisions sooner, and allowed global financial institutions to avoid withholding even if all their affiliates could not meet the strict requirements of participation from day one.”

Shulman added that while the IRS runs the risk of criticism whenever it uses its administrative authority, the IRS needs to listen to affected stakeholders and refine its policies over time as it learns more. “My colleagues and I have an obligation to call it as we see it and make the best principled decision based on the information available,” he said. “So while not everyone will always agree with our decisions, our job is to implement the statute with an eye towards the best policy. In this case, we tried to maximize offshore tax compliance, while minimizing burden on market participants. And a transparent, open process led us to a better ultimate product.”

However, banks overseas are already closing legitimate bank accounts of American living abroad in order to avoid the potential penalties of this onerous and complicated legislation, the ACA pointed out. “It is impossible for Americans living and working overseas to survive without normal banking relationships, and fewer Americans overseas means less U.S. exports and fewer American jobs,” said the group.

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